Guide to superannuation threshold changes

Guide to superannuation threshold changes

Changes to superannuation thresholds from 1 July 2021 to 30 June 2022

Transfer Balance Cap

The transfer balance cap rules commenced on 1 July 2017. It is a limit on the amount of superannuation a member may use to commence a tax free pension in retirement phase. It is also the level at which you may not make any further non-concessional superannuation contributions. From 1 July 2021, this transfer balance cap will increase from $1.6 million to $1.7 million.

Non-Concessional Contribution Cap

The non-concessional superannuation contribution cap will also be indexed up from $100,000pa to $110,000pa and so the 3 year bring forward rules will enable you to make a $330,000 non-concessional contribution.

Concessional Contribution Cap

The concessional superannuation contribution cap will also be index up from $25,000pa to $27,500pa. Concessional contributions include employer SG (super guarantee), salary sacrifice or deductible super contributions.

Superannuation Guarantee (SG)

The contributions you will receive from your employer will rise to 10%pa from 1 July 2021. Employers will need to pay this on salaries of up to $58,920 per quarter.

The increase in contribution limits is always a noteworthy event, given it tends to only occur every 4-5 years. For those considering utilising the 3 year bring forward provisions, it may be worth considering deferring these payments for 6 weeks. This also applies to those who were considering using their superannuation to purchase a retirement income stream prior to 1 July 2021. If you would like to discuss these changes and how to best take advantage of them, please feel free to contact us. We will be more than happy to assist.

2021 tax tips – How to avoid overpaying

2021 tax tips – How to avoid overpaying

I’m sure we can all agree that tax is something we would prefer to not pay; or at least not pay any more than we need to.

The ATO provides us with the ability to claim a tax deduction for personal expenses we incur in the quest to generate assessable income. It also incentivises through tax concessions, to reward certain practices such as funding for our retirement through superannuation.

So, rather than leaving it late, we have listed a few general tax tips for individuals which you may consider to either reduce your potential tax liabilities for the 2020/2021 financial year, or even to maximise your tax refund. But remember, you should always receive professional advice to determine which of these tips are appropriate for you.

Tax Tips 2021

Superannuation contributions

A ‘concessional’ contribution of $25,000pa may be made and a full tax deduction claimed for the 2020/2021 financial year. It’s important you don’t exceed this amount and remember your employer contributions are included in this limit. So, check-in again in June at what level your contributions sit at for the year, and if it makes sense it may be worthwhile adding while under the $25,000 limit.

And if you qualify under the ‘catch-up’ super provisions (detailed in our previous blog) your concessional contribution could be significantly higher.

General working deductions

Generally you can claim a deduction for work-related expenses (including educational costs). In order for the expense to qualify, you must not have been reimbursed by your employer and the expense must relate directly to your occupation and the earning of income. You must always keep your receipts.

The ATO has a list of occupation specific expenses which is helpful here.

Home office deductions

Many of us are continuing to spend more time working from home. If you are, you may be able to claim a deduction for expenses you incur relating to work.

For 2020/2021, the ATO will allow you to continue to use the ‘Short-cut’ method in determining your home office expenses. This basically involves maintaining a diary for 4 weeks noting the hours you work from home. An amount of $0.80 per hour may then be claimable.

The second method is the ‘Actual’ method, whereby you retain receipts and claim work related expenses (including depreciation on equipment), for which your employer has not reimbursed you. If you have a dedicated office, you may also claim utility expenses.

It’s actually worth considering both methods and to compare which is more appropriate for you.

Pre-payment of expenses and interest

Bringing forward deductible expenses is a great way to help manage your tax position.

If you have borrowings on an investment, such as property or shares, you may pre-pay the next 12 months worth of interest in June.

Capital gains tax deferral & the 12 month rule

If you are contemplating the sale of an asset, and expect to generate a capital gain, you may want to consider selling after 30th June to defer your tax liability.

Also, if you can hold on to an asset for 12 months before selling it, you will qualify for a capital gains discount of up to 50% (except for an asset held in the name of a company).

Offsetting capital gains with capital losses

If you have a capital gain for the year, one way to reduce it is to sell down any asset which may be trading at a loss. Just remember that any capital losses will reduce the gross capital gain (ie. The gain before any discount is applied).

It’s also worth noting that any capital loss which is not used may be offset against future capital gains.

Income protection insurance

Income Protection insurance protects up to 75% of your salary, if you can’t work due to injury or illness.

Not only is income protection imperative for many people, the premium is also tax deductible.

If you haven’t had you insurance needs reviewed, this may well be a trigger to get it done and possibly benefit from a tax deduction.

With the end of the financial year approaching, careful planning now may help to minimise any tax liability you may incur. So, don’t wait until it’s too late.

Review your personal situation now, and if you need clarification on what you can do to improve your situation, please get in touch.

Call Steward Wealth today on (03) 9975 7070.

An offset account, do I really need one?

An offset account, do I really need one?

When searching for a property loan the first thing people tend to look for is a low interest rate but getting the right features with your loan can be just as important. Most people have heard of an offset account, but do you really need one and, if so, are you getting the most out of it?

How does an offset account work?

An offset account is an everyday transaction account that you can deposit all your spare money into and is linked to your mortgage. When interest on your loan is calculated, the balance of this account is combined with your loan to ‘offset’ the amount charged. For instance, if your mortgage was $500,000 and you had a balance of $100,000 in your offset account, interest would be calculated based on a balance of $400,000. Over the life of your home loan, placing any additional savings into your offset account can significantly reduce the time taken to pay off your loan.

There are generally two types of offset account, partial and 100%, which, as the names imply, offset different proportions of the mortgage balance. Also, the majority of offset accounts are linked to variable home loans with only a small number of lenders offering this feature with a fixed rate.

Offset account vs redraw facility?

While each lender tends to label them differently, most lenders offer you the choice of loans. A ‘basic loan with a redraw facility’ allows you to make extra repayments towards your loan which you are then able to withdraw at any time. It is important to read the fine print as some redraw facilities limit the amount or frequency you are able to access these funds and some even charge a fee for the privilege.

‘Packaged loans’ generally include an offset account together with other features such as a credit card and provide more flexibility around making changes to your loan without additional cost, for example fixing your rate at a future date. This usually attracts a flat annual fee of between $200-$400 and some lenders even offer a reduced interest rate compared to their basic product.

If both an offset account and unlimited redraw facility allow you to make extra repayments, whilst maintaining access to the funds, then which one do you need?

Home loan offset accounts

If you are purchasing the property to live in, or a holiday house that you do not intend to rent out, then applying for a ‘basic’ loan with a redraw facility may be appropriate for you. It will save you any ongoing fees associated with a packaged loan and in some cases you may even receive a better rate.

An offset account becomes attractive if you prefer instant transaction access to the funds, including BPAY and EFT, rather than being limited to the terms of the redraw. This works well for people who receive higher levels of income who can pay their salary, and any commissions or bonuses, directly to the account offsetting interest whilst expenses are then periodically paid from the facility.

Remember that you generally receive a credit card with the packaged loan so cancelling your current one, and the annual fee often associated with it, could net the extra cost. A common strategy is to select a credit card that provides an interest free period on your purchases and use this to pay your everyday expenses. The credit card is then paid down in one monthly payment thus maximizing the balance of the offset account whilst not accumulating any interest on your expenses. This approach requires discipline to ensure credit card repayments are made on time and may not be for everyone.

Several lenders also offer the ability to have more than one, often up to 8-10, offset accounts linked to the same home loan. The cumulative balance of all offset accounts then acts to reduce the interest accrued. This can be a useful budgeting tool where you separate your income into different categories or ‘buckets’, helping you to save while still reducing interest and paying off your loan more quickly.

 Investment loan offset accounts

 Offset accounts attached to Investment loans are where the real benefits become apparent. Investment loans are lending for properties, or other investments, from which you draw an income usually in the form of rent. Due to the transaction capabilities of an offset account, it provides a great way to keep all your investment property-related income and expenses together in the same account.

The interest on the loan, and other related expenses, are generally tax deductible, which is one of the significant benefits of owning an investment property. If you access the extra repayments from a redraw facility, the redrawn amount is treated as a separate loan to you and would prevent you from claiming this as a tax deduction, unless you can demonstrate that you are using those funds for investment purposes. Issues can arise, for example, when you withdraw money to take the family on a holiday or buy a new car. If your extra repayments are accessed directly through an offset account, the ‘fund purpose’ test would not apply, and all interest accrued on the loan would continue to be deductible.

This benefit can be significant when you purchase a second property to move into and convert your current one to an investment. In most cases you would benefit from reducing the loan on the new owner-occupied property and maximise the investment loan for tax purposes. If you transferred extra repayments to the new loan from a redraw facility, those repayments would fail the ‘fund purpose’ test and would not be deductible. By accessing the funds from an offset account, you can therefore maximise your deductions. Its important to note that these examples can significantly vary depending on your personal circumstances and you should always consult an accountant for personal tax advice.

Finding the best rate combined with the most appropriate loan features can be a complex, time consuming task that Steward Wealth can help you with. Feel free to get in touch.

Massive international tax scam

Massive international tax scam

The ACCC recently told Google and Facebook they have to negotiate with Australian media sources to effectively pay them for their news. This has sparked a furious response from both companies because they are conscious governments all over the world are watching very carefully, and if they give in to Australia it could well open the proverbial floodgates – much like the fight over plain paper packaging for cigarettes.

As well as sucking a huge amount of advertising revenue out of domestic media franchises, these transnational companies are renowned for utilising every legal loophole they can to avoid paying tax, especially the tactic of attributing revenue to low tax, offshore locations like Ireland, the Netherlands or Cayman Islands.

According to Neil Chenoweth of the AFR, Google’s CY2019 Australian ‘customer receipts’ were reported as $5.2 billion, but ‘revenue’ was $1.2 billion, so $4 billion of sales made in this country were somehow attributed to offshore offices.

Google reported pre-tax earnings of $134 million and ended up paying tax of $49 million. Chenoweth writes that if its Australian division is as profitable as the rest of the company’s non-US businesses, pre-tax earnings would have been $2.2 billion, which means Australian tax should have been more like $660 million, or 13 times more than what it paid.

Facebook reported CY2019 Australian revenue of $167 million and paid tax of $14 million. Chenoweth calculates revenue was probably more like $2.2 billion. Again, using average non-US earnings rates, pre-tax profit should have been $1.1 billion, which should have resulted in tax of $330 million, or 24 times more than what it paid.

Massive international tax scam

Michael West compiles an annual list of the worst tax dodging companies, and interestingly neither Google nor Facebook make the top 40.

These are but two example of what is a farcical international tax regime. A classic example of just because it’s legal doesn’t mean it’s right.

P.S. For anyone curious about the ramifications of social media, The Social Dilemma on Netflix is an interesting take on it.

Make sure you claim your working from home tax deductions

Make sure you claim your working from home tax deductions

While it’s difficult to find any real positives during COVID-19, as a result of the quarantine requirements forcing so many people to work from home the ATO has introduced a new shortcut method for calculating related tax deductions.

The method is very straightforward. All you do is calculate the total number of hours you’ve worked from home during the COVID-19 period and multiply those hours by $0.80. The final amount is your tax-deductible expense claim. If there are two people working from home, you can both claim the $0.80 per hour. Record keeping is fairly basic, all you need to do is keep a record of the hours you have worked from home.

Ian Alabakis, of Alabakis Chartered Accountants, told us the shortcut method is a special arrangement for COVID that was originally due to finish in June, but it can now be applied up until 30 September 2020.

This means, you will be able to use the shortcut method to calculate your working at home expenses for the period from:

  • 1 March 2020 to 30 June 2020 in the 2019–20 income year, and
  • 1 July 2020 to 30 September 2020 in the 2020–21 income year

Ian says the ATO may extend this period, depending on when work patterns return to normal and added that in most cases, if you are working from home as an employee, there will be no capital gains tax (CGT) implications for your home.

What you can’t claim

If you’re working from home because of the COVID-19 lockdown, you generally can’t claim:

  • Expenses such as mortgage interest, rent, insurance and rates
  • Coffee and other general household items
  • Costs related to children’s education

More details are available from the ATO.

How governments can pay for the COVID19 rescue packages

How governments can pay for the COVID19 rescue packages

Governments around the world have pledged trillions of dollars in support packages in response to the enforced closure of great swathes of their economies, and without that support the economic impact of the COVID19 crisis could be potentially catastrophic. The Australian government alone has pledged more than $200 billion so far with the promise there’ll be more to come if necessary. All this spending raises an obvious question: how on earth are governments going to pay for it?

The conventional narrative is that governments will issue piles and piles of bonds to fund these packages, and they’ll just have to hope there will be sufficient buyers for those bonds, most likely from overseas. And even with very low interest rates the government will have to dedicate higher and higher proportions of the revenue it collects in taxes to pay the interest on those bonds. The inevitable result will be a crushing amount of debt that will burden future generations, and governments will be forced to raise taxes and cut spending programs as they battle to restore a prudent fiscal position.

Believe it or not, that whole narrative is flawed. While it’s true governments always have to be prudent with their resources, the fact is there is technically no limit to how much the Australian government can spend of its own currency and there will always be buyers of any bonds it decides to issue. It is, however, constrained by the resources available in the economy, so while it can never be insolvent (run out of cash) a government can go bankrupt (run out of resources to back its spending). Nor does the interest accumulate to burden future generations.

Right now, anyone who reads, watches or listens to the news will think that is utter madness. After all, it’s been drilled into us for years that it’s basic economics that a government can’t just spend money it doesn’t have – the bills have to be paid somehow and at some point. These concepts are unquestionably challenging, so it may be helpful to approach them with a ‘clean slate’, in other words, holding no pre-conceived ideas.

A government that controls its currency is never financially constrained

If a government has sovereignty over its own currency, that is, it controls how much is issued and when, there is literally nothing stopping it from issuing as much of that currency as it wants. The US government can issue US dollars, the Japanese government can issue Yen and the Australian government can issue Australian dollars.

What about hyperinflation?

Conventional economics recoils at this idea, arguing if a government keeps issuing currency there will reach a point where the currency’s value is undermined, potentially causing hyperinflation, like we saw in the Weimar Republic, or Zimbabwe, or is happening right now in Venezuela. That’s absolutely correct, but the reason that happened in those examples is because the governments couldn’t back all the newly issued currency with real resources in the economy.

Consider an example: if the Australian government offered a construction company a $100 million contract to build some roads, that company would jump at the opportunity, because they know the government’s good for it. But if the government made the same offer to every construction company in the country, they could legitimately query if the government could command that many resources, especially if it was also spending huge amounts on other programs at the same time. In that case, a construction company may hedge its bets by asking for a higher price, and, voila, you have inflation.

A government is not constrained by its tax revenue

Since a government can create money at will, it follows it doesn’t have to work out how much it can spend based on how much tax revenue it raises. In fact, again perhaps counter-intuitively, it’s the government spending that comes first, and tax revenue follows after that.

Think of it like this: the Australian government requires you to pay tax in Australian dollars, it won’t accept anything else, and if you don’t pay your taxes you can go to jail – this is basically how a government legitimises its currency. Now imagine on day one of a brand new economy the government says you owe us $10,000 tax so we can build some schools. If there hasn’t been any money created yet, how can you possibly pay that tax?

Now imagine the government hands down its budget, with $100 billion of spending; things like pensions and benefits, infrastructure, public servants’ salaries, they’re all paid for by money that’s created by the government, effectively out of thin air, with the press of a computer key (you’re far better off not thinking about money being ‘printed’, there’s no great printing press pumping out notes, it’s all done with computerised transfers, much like paying a bill by BPay).

And let’s assume the government budgets to receive $90 billion in tax revenue. Since there’s already $100 billion in circulation, there is now money available for people and companies to pay those taxes.

So why do we pay tax at all?

If government spending isn’t constrained by how much tax revenue it collects, it’s reasonable to ask: why do we pay tax at all? Taxes are used to regulate demand. By taxing the private sector, the government makes sure there are resources left over for it to meet its own requirements, like hiring schoolteachers, or building hospitals, or funding an army.    

Rule #1: a government is not the same as a household

It’s intuitively appealing to anyone who’s run a household budget to think a government has to ‘live within its means’, and those means are usually considered the tax revenue it raises. However, a government is nothing like a normal household since there’s not a household on the planet that can create its own money that anybody would be willing to accept.

The popular conception is to talk about government debt as a percentage of GDP (which is, by the way, a thoroughly flawed measure of national income) again because it’s easier for us to think of a government being constrained by some concept of income just like we are. In fact, as we learned before, the government is constrained by the resources of the entire economy, and keep in mind, normally the economy is growing all the time, so it follows the government can increase its spending in line with that growth.

To extend the analogy, if a household wants to borrow money, a bank will work out how much debt it can service from its income, whether that’s from wages or dividends. Imagine though, a household that has $10 million of assets, that grow in value each year, but no income. It’s as if the bank says, ‘we know you’re able to back that money with real resources, so go ahead and spend’.

Where do these ideas come from?

All these ideas are courtesy of Modern Monetary Theory (MMT), which is simply an explanation, based on iron clad rules of accounting, of how money works in a modern economy where the government controls the currency. Given the explosion in the amount of government spending, there’s been a lot written and said about it recently, unfortunately though, much of it is plain wrong.

One of the most common mistakes is the suggestion ‘maybe it’s time to introduce MMT’. That’s like saying ‘how about tomorrow we introduce the law of gravity’; the truth is, it’s always been there.

What’s the evidence?

You don’t have to look far to find example after example of where conventional economics has been dead wrong. For instance, the argument a government that issues too much debt will see its currency debased and its bond yields skyrocket is plainly absurd given Japan has 240% government debt to GDP, equivalent to about US$10 trillion, an amount it will never ‘save up’ to pay back, yet its 10-year bond yield is 0%, inflation struggles to get positive and the currency is still considered a safe haven.

A common response is to argue Japan is somehow an exception because the Bank of Japan buys most of the government’s bonds. In fact, that’s kind of the point of MMT’s insights: a country’s central bank is effectively the government’s bank. Here in Australia the Reserve Bank is buying government bonds to help keep interest rates down. Consider the circularity of that: the government issues bonds that are bought by another branch of government, and if it hangs on to them until maturity it’s paying money to itself!

These explanations of how money actually works in modern economies is so radically different to what we’ve been taught, and to how we have to think of our own circumstances, that it’s no surprise at all that it causes a lot of controversy! Certainly, conventional economists really struggle with it, and so do most politicians. Hopefully they’ll have a better understanding before they go and hike taxes.