Continuing on from our earlier blog in relation to small business obligations for payroll tax (“Payroll Tax – Payments to Contractors, Sep 23^rd 2011”), it is important to consider whether the Superannuation Guarantee Charge (SGC) is payable for the work performed by these ‘contractor workers’ for the business.

In making this assessment as to whether SGC is payable it is necessary to first identify whether the worker is in fact an employee or a contractor.

The first link below refers to a helpful ATO publication which provides a detailed summary of the factors to consider in identifying the appropriate category. Based on the overview of the summary, the ATO stresses that the key factors are;

• whether a significant degree of control can be exercised over the worker in relation to their work performance
• whether the worker is paid for the time worked rather than the achievement of a result.

Where these conditions exist, the worker is generally more likely to be viewed as an employee rather than an independent contractor, and as such 9% SGC will be payable on behalf of the employee for the work performed.

Even after reviewing the various factors specified in the linked table summary, it can still be difficult to practically identify the category the relevant worker belongs. To overcome this problem, the ATO has also created a decision making tool, which for your convenience, we have linked below. Based on the practical information provided, this online decision making tool is able to formulate a decision whether a worker is a contractor or employee, and provides a full report on the basis of this decision.

If you are interested in exploring this topic further, please refer to the ATO links below. Alternatively if you have any additional enquiries, please don’t hesitate to contact Michael Fraser on (03) 9832 8441.

http://www.ato.gov.au/businesses/content.aspx?doc=/content/4540.htm

http://www.ato.gov.au/businesses/content.aspx?doc=/content/00095062.htm

Our firm continually strives to ensure our clients are maintaining good records for Capital Gains Tax purposes.

Did you know that if you inherit shares there are certain tax consequences?

Inherited shares are treated the same as any share.

Where the deceased acquired the shares before 20 September 1985 you use the market value of the shares on the day the person died as your cost base.

If the deceased acquired the shares after the 19 September 1985 then you are deemed to have acquired them for the amount the person who died paid for them, including any adjustments that may have occurred since.

If you need further information in this regard or wish to ensure that you are maintaining appropriate capital gains tax records please contact Mark Trevaskis on (03) 9832 8424.

Don’t let a knowledge gap prevent you from taking advantage of these money-saving tax deductions. Have you considered the top 5 deductions that most landlords are missing out on?

There are three categories of rental expenses, those you can claim an immediate deduction for, those you can claim deductions for over a number of income years and those you cannot claim a deduction for at all. In recent times, the ATO have identified common mistakes that many rental property owners are continually making in relation to the expenses they are claiming. If you own a rental property, that is currently rented or is available for rent here are some tips we have compiled to avoid the common mistakes.

TOP 5 MISSED RENTAL DEDUCTIONS

Remember, these deductions are available ONLY if the property is rented or available for rent:

1.) Capital Allowances - in acquiring a property there may be capital items that can be deducted over a number of years. These can be quantified by having a quantity surveyor inspect and prepare a depreciation report. Examples of items that are included in this report are – curtains, blinds, carpets, dishwashers, stoves, hot water systems etc. which are claimed over the life of the asset. In addition, the associated costs in preparing this report are eligible for immediate deduction.

2.) Interest deductions – interest is deductible where the purpose of the borrowing is primarily incurred in gaining income. Therefore examples of interest that are deductible include interest on the rental property mortgage and credit card interest where the card is primarily used to pay rental expenses or repairs and maintenance. In addition you may also deduct the associated bank charges on these accounts. Please note that it is important to keep your loan facility for investing and private purposes separate, as it can make it impossible to demonstrate the deductible portions.

3.) Travel Expenses – these include car travel expenses to meet tenants, inspect and maintain property, perform property repairs, etc. and can all be deducted through a mileage deduction for your vehicle. Therefore appropriate records will need to be maintained.

4.) Legal Fees – such as fees incurred in preparing and registering lease documentation, dealing with tenant problems such as evicting a non-paying tenant. Please note that some legal fees such as those incurred in purchasing or selling your property are capital in nature and are therefore non-deductible.

5.) Borrowing Costs – these include those fees in establishing a loan facility such as title search fees, mortgage broker fees and the cost of preparing and filing mortgage documents. In relation to borrowing costs if the sum of these expenses is more than $100 the deduction is spread over the lesser of five years or the term of the loan.

EXPENSES YOU CANNOT CLAIM A FULL DEDUCTION FOR

Contrary to popular belief there are some expenses that are not deductible. These include acquisitions and disposal costs of the property which consequently form part of what is referred to as your ‘cost base’ and are taken into account in determining your capital gain/loss of your property. Expenses that are connected to your private use are also not deductible.

In some situations, you may be eligible to claim a deduction for a portion of an expense. Examples where this may occur are:

• The  property is available for rent for only part year
• A portion  of the property is used for income producing purposes whilst the other portion is used for a private purpose
• You rent your property at non-commercial rates
• There is  more than one legal owner

If you find that you are in one of the above situations you will need to apportion the deduction accordingly.

If you would like more information on claiming deductions for your rental property, please contact Christina Pappalardo on (03) 9832 8458.

An audit is no different to any other purchase. In terms of quality, you generally get what you pay for. It may not be in the best interests of your organisation to have an audit which is not well planned and does not adequately address the risks specific to your organisation. It may not be in the best interests of the directors to rely on an audit if it is not thorough. It is also not in the best interests of the members and other stakeholders to have a poor quality audit as they may be relying on financial statements which could include material misstatements if the audit is inadequate.

How do you know if you are receiving a quality audit? What does a quality audit entail? The Institute of Chartered Accountants in Australia (‘ICAA’) published a guide in 2009 titled “The benefit of audit – A guide to audit quality” (http://www.charteredaccountants.com.au/Industry-Topics/Audit-and-assurance/Resources-and-toolkits/Resources-and-toolkits/The-benefit-of-audit-A-guide-to-audit-quality) which outlines what a quality audit should include.

‘A Guide to Audit Quality’ is designed to help businesses to understand the quality of the audit service being provided to them. The ICAA recommends that you have a discussion about the important drivers of audit quality with your auditor. The 5 drivers of audit quality are:

1. The culture within an audit firm

2. The skills and personal qualities of audit partners and staff

3. The effectiveness of the audit process

4. Factors outside the control of auditors

5. The reliability and usefulness of audit reporting

Next time you assess your auditor or put your audit out to tender consider what you are really getting from your auditor. You may be paying a relatively low audit fee but you may be exposing yourself, your fellow directors, your shareholders or other stakeholders to unnecessary risk by engaging an auditor that does not perform a quality audit.

If you would like to discuss this article or any other matter in relation to audit and assurance or financial reporting please contact Ryan Dummett on +61 3 9832 8408 or ryan.dummett@bellp.com.au or Anthony Steer on +61 3 9832 8411 or anthony.steer@bellp.com.au.

Justice Middleton summed up as follows.  “The directors are intelligent, experienced and conscientious people.  There has been no suggestion that each director did not honestly carry out his responsibilities as a director.  However, I have found, in the specific circumstances the subject of this proceeding, that the directors failed to take all reasonable steps required of them, and acted in the performance of their duties as directors without exercising the degree of care and diligence the law requires of them.” [i]

“Each director relied completely on the processes in place and their advisors.  All the directors failed to see the ‘obvious errors’ because they all took the same approach in relying exclusively upon those processes and advisors.  No director stood back, armed with his own knowledge, and looked at and considered for himself the financial statements.” [i]

In his judgement, Justice Middleton, outlined the steps that the directors of Centro should have taken. Based on the judgement, we have summarised below the steps that directors must take to avoid a similar fate to the directors of Centro:

1. Have a good understanding of your obligations as a director for every company that you act as a director. Refer to information on the ASIC website (www.asic.gov.au) or refer to publications such as “How to Review a Company’s Financial Reports – A Guide for Boards” by the Australian Institute of Company Directors for details of your responsibilities.

2. Have a good understanding of significant issues in your business and how they are disclosed in your financial statements, including items that may be incorrectly omitted from your financial statements, even if you are not an expert in financial reporting. Make sure that your financial statements are consistent with your understanding and knowledge of the entity’s financial position.  To do this each director should:

a. acquire at least a rudimentary understanding of your business and become familiar with the fundamentals of your business;

b. maintain sufficient knowledge of conventional accounting practice and the requirements of the Corporations Act. A director is not required to be familiar with every accounting standard, but be sufficiently aware and knowledgeable to understand what is being approved or adopted;

c. keep informed about the activities of your entity;

d. whilst you are not required to have a detailed awareness of day-to-day activities, monitor the affairs and policies of your entity;

e. maintain familiarity with the financial status of your entity by a regular review and understanding of the financial statements;

f. whilst not an auditor, you should still have a questioning mind when reviewing the financial statements; and

g. form your own opinion about the truth and fairness of the financial statements.

3. Thoroughly read the contents of your financial report to ensure that you understand the information being disclosed and to assess the accuracy of the information contained in the financial report before resolving to approve it.  “A reading of the financial statements by the directors is not merely undertaken for the purposes of correcting typographical or grammatical errors or even immaterial errors of arithmetic.  The reading of financial statements by a director is for a higher and more important purpose: to ensure, as far as possible and reasonable, that the information included therein is accurate.  The scrutiny by the directors of the financial statements involves understanding their content.  The director should then bring the information known or available to him or her in the normal discharge of the director’s responsibilities to the task of focussing upon the financial statements.” [i]

4. Enquire of management and your Audit Committee about any concerns that you may have over the accuracy of the financial statements.

5. Ensure that the board of directors has the ability to read and understand the financial statements, including understanding the basic accounting concepts such as the classification of assets and liabilities as current and non-current, and the disclosure of events after the reporting period. “It would not be possible for a director to form an opinion about the truth and fairness of the financial statements required in the annual directors’ declaration attached to the financial statements without such an understanding.” [i]

6. Do not delegate your own assessment of the accuracy of the financial statements to other parties such as management, the Audit Committee or your auditors as you are ultimately responsible for the accuracy of your financial statements. Even where you receive a declaration from management or your auditors that the financial statements are true and fair, your obligation to review the accuracy of the financial statements and approve them is not reduced.  Although it may be “rare” that the directors identify an error, you still have an obligation to review the financial statements.

7. Request further information from management, your Audit Committee or your auditor where you do not have sufficient information to adequately review the financial statements.

8. Take control of the volume and complexity of the financial information provided to the board.  In the Centro case the board papers for the relevant board meeting were 1,180 pages in length. “If you receive a huge amount of information, then more time must be taken to read and understand it.  The complexity and volume of information cannot be an excuse for failing to properly read and understand the financial statements.” [i]

9. Don’t just read the executive summary of the board papers as key issues may not be included in the executive summary as they may not be considered significant to management despite being significant to the directors.

10. Ensure that the current accounting policies for the entity are compliant with the relevant and up-to-date financial reporting requirements.

11. Don’t assume that the financial statements will be true and fair because the management or your auditors have sufficient financial reporting expertise and experience.

12. Understand the contents of the management representation letter provided to your auditor.

Although the Centro case related to a company the issues will generally also apply to the governing body of other types of entities e.g. incorporated associations or co-operatives.

If you wish to discuss your obligations as a director, or you require an explanation of certain financial reporting requirements please contact Ryan Dummett on +61 3 9832 8408 or ryan.dummett@bellp.com.au.

The government released draft regulations in May 2011 regarding the investment by self managed superannuation funds (SMSFs) in collectables and personal use assets. These regulations, which are contained in section 62A of the SIS Act, received royal assent in June 2011 and apply to all new investments from 1 July 2011. Transitional rules apply for existing investments until 30 June 2016.

These changes aim to support the sole purpose test that underpins the SMSF legislation, by attempting to ensure that investments are acquired with the aim of maximising retirement benefits, as opposed to providing current day benefits.

WHAT ARE COLLECTABLES AND PERSONAL USE ASSETS?

Amongst the collectables captured by these rules are memorabilia, artwork, jewellery, antiques, wines, coins and stamps. Personal use assets include cars, recreational boats, memberships of sporting or social clubs and other assets that may be used for personal benefit and enjoyment.

WHAT IS A RELATED PARTY?

A related party includes a member of the self managed superannuation fund, their relatives (including parents, siblings, lineal descendants and spouses of each of these relatives), and any partnerships (plus partners in that partnership), trusts and companies that they control.

THE RULES

1. Assets must not be leased to a related party. Many SMSFs have previously had arrangements with related parties to display artworks and memorabilia in business premises or similar facilities. Arrangements of this nature, including where no rental is paid, will be prohibited by the new rules. Depending on the quality of the assets held, some SMSFs may find it difficult to come to the same terms in a new arrangement with an unrelated party.
2. Assets must not be stored in private residence of related party. Previously related parties were able to store, but not display, collectables and personal use assets at private residences. The new rules require that assets be held by unrelated third parties, eg at a professional storage facility, or possibly stored, but not displayed, at non-residential properties of related parties.
3. Decisions regarding storage of assets must be documented. Trustees will be required to draw up minutes of meetings or similar documents outlining the basis for decisions made regarding the storage of assets. This requirement reflects the higher risks inherent in investing in and holding collectables and personal use assets relative to other investment classes.
4. Assets must be insured in fund’s name. This is clearly a very onerous requirement, as it can be very difficult and costly to obtain insurance for certain collectables. Some funds may decide that the costs of obtaining insurance outweigh the benefits of holding the assets. As the insurance must be in the fund’s name, it is not sufficient for assets to be listed on a personal or business contents insurance policy.
5. Assets must not be used by a related party. Incidental personal use of certain assets had previously been allowed, however are outlawed by the new rules. Usage includes the display of artworks or memorabilia at business premises, as well as the more obvious examples such as using a golf course membership or driving a vintage car.
6. Independent valuation is required for transfer of assets to related party. Where assets are to be transferred to related parties, the fund must utilise the services of a qualified, independent valuer to determine the market value. This ensures that the related party does not receive any undue benefit from the transaction.

 TRANSITIONAL RULES

SMSFs holding collectables and personal use assets at 1 July 2011 have until 30 June 2016 to comply with the new rules. Funds electing to retain their existing assets may need to enter into new arrangements with unrelated parties to meet these obligations, and will certainly need to review their existing storage and insurance arrangements.

Many trustees will elect to dispose of the affected assets, rather than dealing with the relatively onerous new rules, particularly given that some will find it difficult to earn the same levels of income from unrelated parties as they have previously received from related parties. The five year transitional period will hopefully avoid the scenario whereby huge amounts of artworks and similar assets are sold en masse, resulting in SMSFs incurring significant losses upon disposal of these items.

Where an asset is owned prior to 1 July 2011 and sold during the transitional period, there is no requirement to have an independent valuer determine market value, but the assets must still be sold an arm’s length terms.

PENALTY REGIME

Each trustee commits an offence if any of these regulations are contravened. A fine of 10 penalty units ($1,100) may be imposed for each offence. The complying status of the fund may be jeopardised by significant breaches of these rules.

OTHER OBLIGATIONS

In addition to these regulations, trustees should ensure that any collectables or personal use assets acquired or held are done so in accordance with the fund’s trust deed and investment strategy.

FINAL WORD

The team at Bell Partners have substantial experience working with self managed superannuation funds of all shapes and sizes and can work with you to ensure that you meet your obligations under the new collectables rules.  Please contact Peter Child on (03) 9832 8415 for further information.

The main purpose in making this variation is to ensure that the amounts withheld from your salary and wages best meet your expected income tax liability at the end of the year. If you usually receive income tax refunds due to larger than normal tax deductions, you can elect for your employer to withhold less PAYG tax from your salary and wages, including any allowances, than they are otherwise required to withhold.

Examples of when you may elect to have less PAYG tax withheld from your salary and wages Include;

• If you have negatively geared investments such as real estate, managed funds or shares etc.
• If you receive an allowance from your employer that you also claim work related deductions for such as car, phone, parking or travel expenses, you can vary the amount of tax withheld from the allowance.
• If you meet the criteria to apply losses incurred in running a business as an individual, either as a sole trader or in partnership, against your salary and wage income.
• You have paid out your HELP debt but your employer continues to withhold amounts for this debt.

You can access an electronic version of the ‘PAYG withholding variation application’ via the ATO’s website – www.ato.gov.au. Alternatively a paper copy can be downloaded from their website or sent to you in the post.

VARYING PAYG INSTALLMENTS

The PAYG instalment amount or rate that the ATO advises you of is calculated based on your business and investment income tax from your last assessed income tax return. This amount can be varied if you believe your situation has changed and paying the advised amount would result in you paying significantly more than your expected tax payable on your business and investment income for the current year.

Examples of changes that may give you reason to vary your PAYG instalment amount include;

• A significant decrease in your share portfolio.
• A significant reduction in income from an investment property for example due to selling a property, receiving less rental income, or higher than expected tax deductions for the same amount of rent e.g. increased costs associated with maintaining the property.
• You cease to earn income from business or investment activities.
• Your Higher Education Loan Programme (HELP) debt has been paid out.

Varying your PAYG instalments is done by filling in boxes T8, T9 and T4 on your activity statement and reason codes can be found on the ATO’s website.

If you would like more information on whether varying your PAYG tax is appropriate for you, please contact Andrew Rumsey on (03) 9832 8407 or Jennie Grover on (03) 9832 8406.

TAXABLE VALUE

Statutory formula method – following the 2011 Budget, changes were made to the statutory formula method which has resulted in the old progressive statutory rates being replaced with a single statutory rate of 20% (subject to transitional rules), which applies regardless of kilometres travelled. This rate applies to all new car fringe benefits after 7.30pm AEST on 10 May 2011. The taxable value of the car fringe benefits is the statutory rate multiplied by the car’s base value.

DETERMINING THE STATUTORY PERCENTAGE

A flat statutory rate of 20% applies (subject to transitional rules), regardless of the distance travelled, to all car fringe benefits you provide after 7.30pm AEST on 10 May 2011.

The statutory percentages for car fringe benefits provided prior to 7.30pm AEST on 10 May 2011, are as follows: 

TRANSITIONAL ARRANGEMENT AND RATES

The move to one statutory rate of 20% will be phased in over four years. There will be transitional arrangements that apply to any new commitments entered into from 10 May 2011 to 31 March 2015. The following statutory rates should be used:

If you have any queries about this article please call Mark Trevaskis on (03) 9832 8424.

According to Section 52 of the Estate Agents Act 1980, the vendor of a business or a portion of that business that is being sold for $350,000 or less is required to provide the purchaser with a Vendor’s Statement, which is also known as a Section 52 Statement (the statement).

The statement must provide the purchaser with financial information of the last two operating years, with the financial data of the most recent year not being older than 3 months from the date of the statement’s preparation.

The statement shows the purchaser of the business information such as:

• details about the business, including address, trading hours, if the business premises are owned or leased, and business documents such as licences, permits and registrations;
• adjusted net profit figure, after deducting financing, depreciation, amortisation and personal expenses of the vendor; and
• statement by a certified practicing accountant declaring that the accounting and financial information is in accordance with the vendor’s books and is true and fair.

A solicitor should be appointed to help with the legal requirements of the sale of the business.

We can assist you in preparing the Section 52 Statement as well as determining a fair sale value for your business. To contact us please call Marcello Fratangeli on (03) 9832 8449.

A regular wage or salary provides a steady cash flow to pay bills, make mortgage repayments and lay the foundations of future wealth.

When we think of our most valuable assets, our home, super or other investments often spring to mind first. Yet our ability to earn a regular income is probably the most important asset of them all. Having that income cease due to illness or injury would severely impact most people’s lives. That makes income insurance a vital part of a sound wealth creation plan.

DOES EVERYONE NEED INCOME PROTECTION?

As long as you rely on your income to maintain your lifestyle and pay your expenses then there is always going to be a need to protect it regardless of what you earn.

• A 30-year old worker earning an annual income of $85,000 can expect to receive lifetime earnings of $2.2 million after tax by age 65.
• Every working Australian has a one in three chance of becoming disabled for more than three months before reaching retirement age.
• Workers Compensation will only cover you for accidents or injuries that occur during work hours or for an illness that is a direct result of your employment.
  Source: Lonsdale Financial Group, Rice Warner Actuaries May 2011, Zurich Financial Services Australia

PROTECTING YOUR ABILITY TO EARN AN INCOME CAN BE EASY

There is a cost effective and simple way to protect you and your family from the financial hardship that follows a loss of income. Income Protection Insurance replaces up to 75% of your income (and 100% of your superannuation contributions) while you are unable to work at your full capacity due to sickness or injury. This insurance enables you to continue to pay rent, make mortgage payments, cover living expenses, pay for vital medical expenses, as well as continue to save for retirement.

You can avoid the financial stress of drawing down on assets or taking on more debt simply by taking out income protection. Income protection can be easily purchased either inside or outside of superannuation. By purchasing income insurance through your super fund, the premiums are cost effective and the process of arranging cover is simple and streamlined.

CASE STUDY: INCOME INSURANCE SAFEGUARDS YOUR FUTURE

Annabelle was 40 and working in hospitality when she broke her leg in a skiing accident. Unfortunately Annabelle required surgery and was off work for nearly 3 months.

Despite her holiday and sick pay Annabelle still needed to fund the remaining 8 weeks that she was without income. With living expenses, medical bills and her mortgage, Annabelle was greatly out of pocket.

Although she had insured her car, house and furniture, Annabelle had failed to insure her most important asset – her ability to earn income.

Many of us take our income for granted. Your income may stop but the regular bills don’t and that’s where income insurance plays a vital role in your financial wellbeing. It offers protection from the financial hardship that may arise if your income were cut short.

If you don’t have income protection you could easily find yourself in serious financial distress like Annabelle. Source: BT Market Insights

Bell Partners Financial Services can help you get the cover you and your family need.For more information on income protection insurance or to make an appointment for a full risk review please phone Nick Thomas or Justine Hendry on 9832 8453.