Window of Opportunity Transition to Retirement Strategy (“TTR”) for people 55 and over

LEGISLATIVE RISK – Will the ATO close the TTR window of opportunity?
There has been some talk of restricting the TTR strategy as it can provide a significant benefit and is reducing the Governments tax take. Therefore, if you are 55 or over, it would be wise to consider the TTR strategy as soon as possible to see if it could benefit you personally. Once your TTR is commenced it would be unlikely that any ATO changes would be retrospective.

CONCESSIONAL CONTRIBUTIONS REDUCED TO $25,000
From the 1st July 2012 the maximum concessional contribution into Superannuation has been reduced from $50,000 down to $25,000 for people aged 50 and over.  The TTR strategy is most effective when combined with maximizing concessional superannuation contributions.

With the limit now $25,000 is TTR still viable? - Definitely

• From our analysis the TTR strategy is still a great idea as it helps reduce tax on salary sacrifice contributions up to a maximum of $25,000 (including employer contributions).

• In addition the tax rate on superannuation accumulation account is 15% (on income and realized capital gains) and for a TTR pension account the tax rate is reduced to zero.

• Paying no tax on the returns generated by your super pension account could be a significant benefit. This will effectively mean higher net returns in the pension account when compared with the same investments in a superannuation accumulation account.

Who can benefit from the TTR Strategy?
• People 55 and over can commence a TTR pension.

• People with higher superannuation account balances can generally benefit more as once their accumulation account is converted to pension account the tax rate is reduced from 15% on the account earnings down to zero percent.

• People who may be selling assets owned in Superannuation and may pay capital gains tax in accumulation account – would pay no tax in pension account.

• People considering working part time on a reduced salary can top up their income with tax effective superannuation pension payments and tax free from aged 60.

Are Trusts still relevant for the Medical Professional?

Trust Law has been around for many hundreds of years and dates as far back as the early 1500’s when Knights going off to battle would entrust estates with Trustees for the benefit of beneficiaries in the Court of Chancery, England.

It was Henry VIII who passed legislation known as the Statute of Uses in 1535 that attempted to abolish trusts due to the fact that lawyers where using them as a means to evade tax.  Ironically, after all these years it would seem that not much has changed today, although it is getting harder.

Historically, having a trust that earns income and holds assets has proven to be an extremely popular vehicle for a business or investment portfolio due to their asset protection properties and ability to stream or allocate income to different types of beneficiaries.  From the perspective of a medical professional, trusts have been a very attractive proposition, particularly in the areas of protecting hard earned assets from ‘would be’ suitors and creditors in our ever growing litigious society.  They have also provided opportunities to channel or direct income to lower income tax beneficiaries, while at the same time providing for schooling, university and other associated family costs.

But is this all still the case?

In more recent times there have been quite a number of changes in the area of Trusts and Trust Law, from government legislative changes to decision outcomes tested in the courts that have drastically altered the way trusts are now administered.  This has resulted in the need to review the structure regularly to ensure it is complying with the new laws.

Some major changes include:

Minor Beneficiaries

Previously beneficiaries under the age of 18 could be distributed up to $3,333 each from a discretionary trust without any penalty tax implications.  For a family with four children this could be quite a tax saving! However, it was announced in the 2011 Federal Budget that the maximum distribution was to be reduced to $416 per Minor Beneficiary, leaving a big question-mark for the trustees of such a trust.

Bamford’s Case

A much talked about High Court case known as “Bamford's Case” tested the way in which a trustee of a trust could distribute income to its beneficiaries and how this income was to be determined.  This decision means that every care should be taken when determining and distributing income to beneficiaries of trusts to ensure the income of the trust ultimately ends up where it is intended.

Richstar’s Case

In 2006 the Federal Court case of Richstar went against conventional asset protection and trust law.  It effectively ignored the trust that was in place, and looked at the Trustee and the beneficiary as one and the same.

Legislative Change

Until recently, a trust distribution could be made whilst completing your annual trust tax return.  Now, the ATO has introduced laws that require all trust distributions to be made prior to 30 June each year, ie. for a trust distribution to be valid in your current trust tax return (year ended 30 June 2012) the distribution would have needed to be made before June 30 2012. The ATO are even issuing request letters to Trustees asking them to forward copies of resolutions to prove their validity.

In addition, the ATO has introduced new ‘Beneficiary Tax File Number Reporting Rules’ that, if not adhered to, will result in penalties of $2,200 to trustees who fail to comply… more red tap, and many professionals are not aware of this.

So the question is, with all this complexity and constant change, does there remain any benefit for the medical professional in either establishing or maintaining a family trust?

The short answer is, "Yes!"  There are still many valid and effective reasons for establishing a trust as part of your portfolio.  It is not, however, a one size fits all approach and depends very much on the family structure and the type of assets & property in the trust… and getting it wrong can be likened to using a band aid for a broken leg… it can hurt for a very long time.

If you have a trust structure already in place it is our strong recommendation that you have it reviewed by a professional to ensure you fully understand and are meeting your obligations with the workings of the trust.

If you are thinking of establishing a trust or wonder whether a trust would be beneficial to your particular circumstance, please seek appropriate advice from a specialist firm who understand the medical profession to avoid future headaches.

2012 Federal Budget Summary

The Federal Budget for the 2012-13 year was handed down on 8 May and while a surplus has been forecast by the Treasurer, the budget provides little to no confidence or optimism for business and the enterprising sectors of the economy that ironically derive the tax revenues that boost the economy, provide monetary reserves for our economy and reduce our borrowings.

In short, this budget strangles the goose that lays the golden eggs and provides a short term cash stimulus at the expense of long term economic sustainability and economic health.

The Treasurer has forecast that they will be taking the current $44.4 billion deficit to a $1.5 billion dollar surplus (this represents a $45.5 Billion dollar turn around in government profitability) while at the same time increasing the countrys' borrowings from $250 billion to $300 billion, costing Australians $12 billion in interest this year alone.

It’s the equivalent of a small business making a massive loss in one year, then turning it around to a profit in 12 months while spending more on the company credit card and taking on debt to pay its way. This is a one hit, unsustainable strategy that will leave a debt legacy for many, many years to come.

The following is a summary of the major changes announced on Tuesday night.

Individual Tax Payers

The individual Tax Rates will change form 1 July 2012 to the following rates.

Increased Medicare levy low income thresholds from 1 July 2011
The Government will increase the Medicare Levy low income threshold to $19,404 for individuals and $32,743 for families for 2011-12. The additional amount of threshold for each dependent child or student will also increase to $3,007.

The Medicare levy threshold for single pensioners below age pension age will also increase to $30,451.

Net Medical Expenses now to be means tested
From 1 July 2012 the government will begin means testing eligibility to the Medical Tax Offset. This means that for people with adjusted taxable income above the Medicare levy surcharge (MLS) thresholds ($84,000 for singles and $168,000 for couples or families in 2012-13), the threshold above which a taxpayer may claim an offset will be increased to $5,000 (indexed annually thereafter) and the rate of reimbursement will be reduced to 10% for eligible out of pocket expenses incurred. Taxpayers with income below the MLS thresholds will be unaffected.

The School Kids Bonus
From 1 January 2013, the Government will replace the current Education Tax Refund with the School Kids Bonus. Qualifying families will receive $410 each year for primary school children and $820 for high school children, with payments made at the start of term 1 and term 3 each year.

The payment will be available to those families that currently qualify for the Education Tax Refund (families that receive the Part A tax benefit) as well as those families that receive income support such as Youth Allowance or Veterans Assistance.

In addition, as the Education Tax Refund is to be replaced, the Government will pay to families that qualify for the Education Tax Refund their full 2012 entitlement to the refund. This payment will be made in June 2012, with families not being required to lodge their claim through their income tax returns - the payment will be made automatically.

Consolidation of Current Dependent Tax Offsets
The Government will move to consolidate eight dependent non-refundable tax offsets for taxpayers who maintain a dependent that is genuinely unable to work due to a carer obligation of disability from 1 July 2012.

This will see an amalgamation of the current invalid spouse, carer spouse, housekeeper, housekeeper (with child), child-housekeeper, child-housekeeper (with child), invalid relative and parent/parent-in-law tax offsets.

50% General Tax Discount to Be Removed For Non-Residents
Non-Residents acquiring property in Australia will be no longer entitled to the 50% General Discount For Capital Gains from 8 May 2012.

What is Not Proceeding?
The 50% discount for Interest Income previously announced by the government for interest amounts up to $1000 has been scrapped.

The $1000 automatic standard tax deduction for individuals lodging tax returns has been scrapped. This means that people will still need to incur taxation compliance costs to complete their taxation affairs each year.

The Mature Age Tax Offset that provides a $500 offset for people remaining in the work force past 55 years of age has been removed and will be phased out from 1 July 2012.

Companies and Business

Carry back of company losses
This is a new measure that has been announced that will start from 1 July 2012. Effectively companies will be able to carry back up to $1million in losses from up to 2 previous financial years where they had tax payable.

This means that if a company has a loss in the tax year of 2013-14 then they can claim this back if they were tax payable in any of the 2 preceding years. This is subject to certain restrictions, ie the Company has franking credits in their franking account.

Bad Debt Deductions
Bad Debt deductions will no longer be available where the debtor and creditor are related parties.  This will commence from 8 May 2012.

Small Business Instant Write Offs
From 1 July 2012 small business will be able to have an immediate asset write off for assets costing less than $6,500 for normal plant & equipment and $5,000 for motor vehicles.

More ATO Audits on the way
The government is pouring another $195 million dollars in to the Taxation Office to increase the level of GST Audit activity on small business.

What’s Not Proceeding for Companies & Small Business?
The government will not be proceeding with the 1% company tax rate and will not be proceeding.

Superannuation

Increased Contributions Tax
People who earn more than $300,000 income per year (including their concessional super contributions) will pay 30% contributions tax on amounts over this threshold up from 15%.

If your contributions push you over the $300,000 threshold it will only be the amount that has gone over the threshold that will be subject to the increased 30% amount.

The $50,000 Concessional cap for those over 50 has been deferred to 1 July 2014. This means that everybody from 1 July 2012 will be subject the $25,000 concessional contributions cap until 1 July 2014.

It is envisaged that from 1 July 2014 the caps will be as follows

Self-Managed Super Fund Levies To Increase
The self-managed super fund levy currently $180 per year will be increased. The amount of the increase is yet to be advised by the government.

This is the fee that all self-managed funds pay on an annual basis.

Catching up on some reading this morning I couldn't have said this better myself . Love it Joe

“Everything changes when you stop focusing on you and your business and start considering the one, all important question: how can I bring more value to this relationship? Whether it's with customers, employees, vendors, lenders, friends or family, if you always begin by understanding the value you bring to the equation, you create goodwill, profits, excellence and an amazing life!”

— Joe Wollenweber
Senior Coach, E-Myth

How One Client Found Profit & Cashflow Improvement in the Current Economy

There is no question clients are finding business increasingly tough in the current economy at present and for very good reason – It Is!

The good news is it doesn’t have to be a constant struggle.  Let me explain.

Many businesses are very good at what they do, but are not so good at understanding their business fundamentals.  Whilst they understand the technical side of their business, they don’t understand the management side and this often leads to disaster when the business environment is as tough as it currently is.

As an example, we saw a client recently who had a very good business and was desperately out successfully chasing more sales to assist in growing his bottom line.  The trouble was, his Working Capital % was higher than his Gross Profit Margin %.  This meant that for every new dollar of business he obtained, he required more working capital to fund it than margin he was making on it, and he couldn’t understand why he wasn’t seeing results.

By proactively working on his pricing and volume strategies we were able turn this equation around so that more profitable sales where achieved, so it became a question of what he was selling and at what price, not what quantity.  This improved his cash flow tremendously.

It’s not enough in this environment for clients to be going to their accountant once a year to have a tax return or BAS done – they need strong financial advice and guidance.

When things are going well in business anyone can open a business and make money.  However its times like these when the economic tide runs out on the beach that you can see who’s been swimming with no swimmers.

Skinner Hamilton works extensively with our valued clients to ensure that they fully understand their business fundamentals and are kept accountable to achieve, no matter what the economy.

If you would like the gift of success and being different from the others, please feel free to contact me directly to arrange an obligation-free consultation.

Jason Skinner
Director/CEO

Phone 07 5594 3434
http://www.skinnerhamilton.com.au/

How am I treated for tax purposes as a VMO at a public hospital?

Visiting Medical Officers (VMO) are not employees of the public health system, however are classified as independent contractors for taxation purposes.

As an independent contractor you must have an Australian Business Number (ABN) in your own name and if your business turnover is over $75,000 a year, also be registered for the GST.

Most VMO’s already have their own specialty practice set up and trade as sole traders for taxation purposes. The ABN and GST registration set up for these practices may then also be used for this purpose. The VMO payments are then included in the Business Activity Statement with other business income.

Most of the State health authorities have a specific ‘timesheet’ format that must be completed by the VMO and is then submitted by the VMO to the health authority within 14 days of the end of month for payment. However, some of the State Health authorities require the VMO to provide a ‘Tax Invoice’ (if registered for GST) or an Invoice (if not registered for GST).

We recently found an error with a VMO’s payments made by a one of the State’s health authorities. For 6 months of a financial year our VMO client received payments with no GST included (so was paid Nett of GST), then for the remaining 6 months received the GST (so received his payments plus GST). On enquiry with the State health authority, it was found that their system had not adjusted itself for the VMO’s GST registration and as a result, the VMO was backpaid just over $5,000 in unpaid GST. Had this error not been found, the client could have been $5,000 out of pocket.

A Tale of Two Eateries

Imagine the scene – local restaurant district on a busy Sunday lunch time, people bustling on the footpaths, the diverse aromas distinctive as we pass each restaurant but gradually mingling into one delicious lunch time smell. Noisy chatter, clinking glasses, patrons busting out the seams of each eatery. And then we arrive at our restaurant of choice to fulfill our booking.

Not a single person seated. The Maître D and wait staff jump at the opportunity to seat us and attend to our every whim. Although we feel uncomfortable at the fact that we’re the only people in the restaurant and have to fight the urge to make a run for it, I find myself more and more delighted that we don’t – the prices are very reasonable, the food is delicious and the service is exemplary.

So what’s the problem? Why can you hear a pin drop in this particular bistro when all around it you’d have to wait for a seat? What sets it apart? I believe it’s that one thing that many businesses that are excellent in every other way often come up short on – marketing. Sure, you’ve got plump, succulent prawns, but how would I know that? Yes, your prices are wildly competitive, but I’m not going to find out if you don’t draw me in enough to even look at the menu.

Sometimes, even doing everything right just isn’t enough, especially for a start up business. If it’s a name that everyone knows and loves, chances are you might not have the same issues. And if you are a start up business who does everything right, you’re likely to win fans by people like me telling all of my friends how fantastic you are. But can you hold on long enough until the word gets out there without helping it along? Chances are, you can’t.

So what’s the solution then? Get serious about your marketing strategy. If you’re not sure where to start, take a look at what your competitors are doing. Get on board with technology and social media. Think about initiating a loyalty program. Introduce special offers, shake up your product offering, use traditional marketing methods if they work in your industry, get your website up and running finally… there is much that can be done.

In product related industries like retail and hospitality, social media can be a godsend. If referred, it gives you a warm introduction from existing friends and puts you in direct contact with the very people you are trying to sell to. Special offers are quick, easy and free to announce to people who already love what you do. Your audience has a chance to get to know you and importantly, for you to listen to what it is they want to buy, and then deliver on it. Yes, it takes time. Yes, it needs to be updated regularly and consistently. But the rewards can be great if used properly. You know you’re onto a good thing, you just need to let everyone else know.