Answered by a Hudson Adviser
MEMBER QUESTION: Recently my grandfather left my father some shares in his will. My father now wishes to gift some of these shares to me. What would be the most tax effective way to take ownership of these shares? Would having a family trust help?
It is most likely that your father would have inherited the shares from your grandfather along with the original cost base for Capital Gains (CG) purposes. This means that if your father passes those shares to you it will be deemed to be a disposal by him and CG Tax (CGT) may be liable to your father based on the disposal notional value (usually the share price on day of disposal) less the original cost base that your grandfather acquired them for. If these shares were purchased before 20 Sept 1985 it is possible they might be pre-CGT, however even if they are pre-CGT they may have had actions since that have made them liable for Capital Gains. I hope that explains the situation for you.
A family trust will not help with the tax issues relating to the disposal of these shares by your father. Whether he sells them, passes them to a person, or passes to an entity it is deemed a disposal, unless he is the sole trustee and the beneficiary of that trust which defeats the purpose of the trust. The ATO have all this pretty wrapped up.
Please give your adviser a call if you have any further questions relating to this topic but please note we are not tax advisers and this is general advise only relating to this topic.Read in full + comments 0 Comments
Written by Hudson Editor Hayley Mcleod
Ok so the budget was announced on Tuesday and to be honest there weren’t any major surprises. Dubbed the “Tony’s Tradies” Budget small business were definitely the big winners. We won’t write a full commentary this week as Opposition Leader Bill Shorten is yet to give his “budget reply” and until this takes place the measures outlined on Tuesday are still only proposals until they are passed through the Senate. Shorten’s reply should give us an idea of what and will not get passed.
Here is what we know so far:
Small business was the big winner. In an effort to stimulate the economy and grow small businesses into bigger businesses small businesses will be able to access tax write offs for all purchases of up to $20,000. This is an immediate deduction on each and every asset costing less than $20,000 purchased between Budget night and 30 June 2017. Sole traders and those starting a business will also enjoy tax breaks, less red tape and accelerated asset depreciation in a stimulus package worth $5.5 billion. Gerry Harvey, founder of Harvey Norman, believes that this is a better targeted strategy than that of the Rudd Government's stimulus packages during the GFC to boost retail spending and stimulate the economy as this "package is much more instantaneous".
Farmers still suffering from drought will be given $300 million in assistance. They will also enjoy tax breaks for spending on water facilities, fodder storage and new fencing.
The changes to childcare and families payments are the most controversial with stay-at-home parents with a household income of over $65,000 losing all childcare subsidies while families earning up to $65,000 are due to receive 85 per cent of the childcare cost per child. There will be no cap on subsidies for families with an income below $185,000, while those who earn beyond that will receive an increased cap of $10,000 per child, up from $7,500. The $3,5 billion package rests on cuts to Family Tax Benefit payments, which will be the sticking point.
While no new taxes on superannuation were introduced thousands of wealthy retirees will no longer receive the full pension with many seeing a reduction in their part-pension with the government dropping the eligibility threshold. 170,000 pensioners with modest assets will have their pensions increased by an average of $30 a fortnight provided they own their own home and have additional assets worth less than $250,000 for singles and $374,000 for couples. 235,000 will have their pension reduced and 91,000 will lose entitlement to the pension
The proposed new taper rates and Assets Test thresholds mean some pensioners will see the asset test taper rate (the amount by which a person’s pension entitlement decreases under the assets test) increase from $1.50pf to $3.00 pf per $1,000 of assets over the lower threshold.
However, pensioners who lose their pension entitlements will automatically be issued with a Commonwealth Seniors Health Card or a Health Care Card.
The table below outlines the changes:
A“Netflix tax” in which digital movies, TV, books and music delivered by overseas companies will cost 10 per cent more from July 2017 raising $350 million over the next four years.
$1.6 billion in new and expensive medicines will be funded by the PBS for the first time while The Medical Research Future Fund will receive $400 million over the next four years.
A $5 billion fund will provide loans to private enterprise to build major projects such as rail lines, ports, electricity and pipe lines, along with a $100 million to build better transport links for the cattle industry in a bid to stimulate growth in the top end.
We will of course be keeping a close eye in the coming weeks as to what becomes policy and what becomes a mere Government pipe dream. We will write a full reply as more information comes to hand or give your adviser a call if you have any questions or concerns.Read in full + comments 0 Comments
Written by Hudson Adviser Ivan Fletcher
A. STRATEGIES FOR CONSIDERATION PRE 30 JUNE 2015
1. Do you qualify for the government’s co-contribution scheme in 2015?
- The maximum matching rate is 50 cents for every $1 of eligible personal super contributions.
- The maximum benefit this year is $500 for a $1,000 personal contribution.
- The benefit cuts out if your income is above $49,488.
If you are under the age of 71 and your income (including fringe benefits and salary sacrifice etc) is under $34,488, and at least 10% of it is from employment, you may well qualify for the full benefit of a $500 co-contribution.
If your income is under $49,488 (but above $34,488), you may qualify for at least a partial government co-contribution. The benefit reduces from the maximum benefit of $500 by 3.33 cents for every dollar you earn over $34,488 until it cuts out at $49,488.How much do you need to put into Super as a personal contribution? The answer to this is double the amount of your potential co-contribution benefit.
This is made very easy for you by the following Government website which calculates your benefit for you and how much you need to put in. Remember to include any fringe benefits and any salary sacrificed income in your income figure.
Full Benefit - If you qualify for the maximum benefit of $500 (i.e. income under $34,488), you need to put in double that amount yourself (i.e. $1,000) to gain the benefit.
Partial Benefit - If you only qualify for a $200 benefit (because your income totals $43,488), then you need to put $400 of your own contribution in to qualify for it. Use the Super contributor calculator (above) to calculate this for you.
- Make sure your contribution is a personal ‘non concessional’ contribution. You cannot claim a tax deduction for this contribution.
- Note this to your tax agent when completing your tax return.
- Even if you borrowed the money from say a home loan at 5.0% to fund a contribution of $1000, the interest cost for one year would be $50 compared to a maximum potential benefit of $500. You could then pay the loan off over the next year.
- If you retired this year and your income is lower than normal or if you are now only working at more modest levels than you once did, this could also apply to you.
This is FREE MONEY for your super. If you have been saving to invest long term anyway then this is a no brainer.2. Review your CONCESSIONAL super contributions
Please note the maximums (CAPS) have changed for this. Everyone under age 50 has an increased CAP of $30,000 (up $5,000 from last year). The higher CAP of $35,000 is now assessable from age 50 and above (previously aged 60 and above). This is summarised in the following table:
# If you are aged 49 as at 30/6/14 – you fall into the 50-60 age group with a $35,000 CAP. More simply put if you turn 50 before this 30 June 2015, then you fall into the higher CAP category.
You may have one last opportunity to reduce your taxable income and either salary sacrifice from your last pay or if self-employed make a larger contribution to lower your taxable income for the year.
For salary and wage earners it’s a little too late to make any major changes – but you can, for example, still sacrifice your month’s entire last wage – if you are looking to reduce your taxable income. Make sure you account for your employers ‘Super Guarantee’ (SG) contributions in the your CAP calculations.
Trap 1– If you sacrificed your income up to the CAP last year and have not altered your contributions for this year you are likely to fall short of the CAP for this year if your are under age 60. If this is the case, you have the capacity still to consult with payroll and contribute/sacrifice more of your remaining wages before 30 June.
Trap 2 – Your pay slip does not necessarily match the timing of when the super fund receives employer or sacrificed contributions, so if you are running up to your CONCESSIONAL CAP, be sure to check in with your Super fund on the count so far (your pay slip may mislead you (if June’s contribution last year arrived in July this year for example).
For the self-employed (including those with Partnerships or Pty Ltd), you have a little more flexibility to make late contributions.
- Review your projected taxable income for this year and if you (and or spouse) are likely to exceed $37,000 in taxable income, you can benefit from making lump sum contributions to Super to lower your income tax.
- Make sure you account for any life insurance premiums that may be structured as a super policy.
- For the genuinely self-employed (i.e. unincorporated) - Before making contributions – check with your accountant that you qualify as being substantially self-employed (often referred to as the 10% rule).
3. Review shares/managed fund portfolios and current gain/loss positions
If you are sitting on unrealised capital tax losses in your investment portfolio at the moment and are considering selling down or replacing investments, this can present a suitable tax minimisation strategy in some cases:
If you have realised capital gain elsewhere (shares and especially property), crystallising losses can reduce the impact of capital gains tax on your other capital gains. This could be particularly relevant if you are looking to change your asset allocations (for example increase global share exposure).
Caution – Tax washing – The ATO takes a very dim view of selling shares to create a capital tax loss to then buy back the same shares. In this case the only purpose of the strategy would be to avoid tax – and thus invoke Part IV A of the tax act.
4. Check your contribution classifications are correct - Contributions received by your super fund will be classified as ‘concessional’ (tax deductible to the payer) or ‘non-concessional’ (not tax deductible). If your contributions have been incorrectly classified as ‘non-concessional’, it can prevent your accountant from claiming the deductions (in the case of the self employed / small business). This is an easy mistake to make when making your own contributions to Super as a self-employed person.
Tip 1 – Make sure your accountant is aware of any personal concessional contributions you have made – pointless exercise if you don’t actually claim the deductions – your Super fund should provide a summary statement. You usually have to complete a form “Intention to Claim a Tax Deduction” to advise your Super fund you intend to claim the tax deductions.
Tips 2 – If you work for yourself under a Company (Pty Ltd) structure – paying yourself wages, any contributions need to be paid by your company and represented as employer contributions if your company is to claim them as a tax deduction.
Tip 3 – Even after 30 June, it is not too late to correct classifications if an error is detected. However, it is worth checking your 2013/14 contribution classifications as you still have (in most cases) until 30 June 2015 to correct those.
5. Spouse contributions
If your spouse’s income is under $10,800, you can make a contribution of up to $3,000 and claim up to a maximum 18% rebate ($540 maximum). This phases out to nil once the receiving spouse’s income is above $13,800. In assessing spousal income, you must also include any reportable Fringe Benefits or additional contributions (or salary sacrifice) mandated above Super Guarantee (SG) levels.
6. Super splitting (to spouse only)
Super splitting is the process of rolling over your previous year’s concessional contributions (less the 15% tax) to your spouse. So once 30 June 2015 arrives, the window for rolling over 2013/14 contributions to your spouse will close.
Reasons why you would consider this:
- Useful strategy in levelling out Super balances between spouses as a natural hedge against legislative risk.
- Spousal age gap:
- Shelter assets to younger spouse (for Centrelink benefits), or
- To increase accessibility of Super by splitting to the older spouse – closest to preservation age. Similarly Super splitting to an older spouse may allow you to get the assets into the tax-free arena of Allocated Pensions (no tax on earnings of the asset base).
7. Pre-payment of deductible expenses - Suitable only to someone who is going to be in a higher tax bracket this year than next year – due to a one-off event such as capital gains tax, large bonus, or alternatively are retiring or taking maternity leave and expect to have a low-income next year. Examples:
- Prepayment of next year’s investment loan interest in June this year bringing the expense forward.
- Attending to any investment property maintenance issues or payment of expenses in advance.
Relevance? - With today’s wide tax brackets this has much less impact than it once did. There is the old age argument, that it’s better to get the tax refund from the ATO a year earlier, but for me this strategy is really best used for when this years Marginal Tax Rate looks like being unusually higher than next years (as might be in the case of a larger capital gain).
B. TAX DEDUCTIONS TO BE PREPARED FOR:
8. Depreciation on real estate property - Make sure you have a depreciation(s) schedule for your accountant including construction as well as fixtures and fittings (white goods, heating/cooling systems, carpets, etc). If your investment property is under 40 years old (or had a major renovations in the last 40 years), there will be deductions available. Seek advice from your accountant if you are uncertain. If you have recently purchased a property, you may need to engage a Quantity Surveyor.
9. Investment loan deductions – Mortgage broker and loan establishment fees, title search fees charged by the lender, valuation fees for loan approval, costs for preparing and filing documents on the loan, and lender's mortgage insurance – are all tax deductible items. If your total borrowing expenses are more than $100, the deduction is spread over five years or the term of the loan, whichever is less. These expenses are often overlooked when doing tax returns.Read in full + comments 0 Comments
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