Changes to tax deductions for self-education

The Federal Government’s decision to cap tax deductions for self-education at $2000 flies in the face of its stated aim to improve professionalism across the financial services sector.

The SMSF Professionals’ Association of Australia (SPAA), which has been at the forefront of lifting professional standards across the SMSF sector over the past decade, says this decision is both “short-sighted and self-defeating”.

SPAA Senior Manager, Technical & Policy, Jordan George, says: “A quick check of what’s involved for SPAA members to remain at the top of their game in a FoFA environment clearly indicates that the $2000 cap is totally inappropriate and misunderstands the costs of professionalism.

“By our reckoning a SPAA specialist would spend more than $6000 a year attending conferences and participating in courses and webinars just to stay abreast of developments in their professions, and that’s taking a conservative view of what courses and conferences they attend.

“What has to be remembered is that gaining a qualification doesn’t end the education process; a changing world means members have to continually improve their skills.

“All our feedback from our members, of whom 50% attend the national conference, is that they enormously value the technical content of what SPAA offers, believing it’s integral to their professional development. And it’s the clients who lose when our members face barriers to improving their professional skills.”

George says with the SMSF sector now having about $500 billion in assets under management, and with the number of trustees approaching one million, the need for trustees to be able to access the highest quality professional advice has never been greater.

“We constantly read how the Government and regulators have concerns about the SMSF sector. One way to help alleviate those concerns is to ensure SMSF advisors are encouraged to continually upgrade their skills,” he says.

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Positive changes for SMSF pensions

Changes to how non-reversionary pensions are treated when a pensioner dies will have far-reaching tax implications for self managed super funds.

SMSF Professionals’ Association of Australia (SPAA) Director, Technical and Professional Standards, Graeme Colley, says the changes to the super law to allow the tax exemption to continue on the income from investments after the death of a non-reversionary pensioner until a lump sum has been paid or a new pension begins is a positive outcome for trustees.

Colley says:  “It is now possible to sell investments supporting a non-reversionary pension tax free after the pensioner’s death and before it is paid to beneficiaries as either a lump sum or a new pension begins.

“These investments continue to be treated as remaining in pension phase although the pension payable to the deceased has ceased and during the time the trustees are working out who should receive the superannuation death benefit proceeds.”

Another change to the rules for non-reversionary pensions is the calculation of the taxable and tax free components. At the time a superannuation pension begins in the fund, a calculation is made to work out the taxable and tax free components of the pension.

Colley says: “This is called the proportioning rule and the proportions remain with the pension until it ceases.  Under the amendment to the rules for non-reversionary death benefit pensions the taxable and tax free proportions remain after the death of the pensioner and apply to any lump sum or new pension that commences from the death benefit.

“The rules allow any income earned on investments that support the pension assets after the pensioner’s death to be included in the pension account balance that is subject to the proportioning calculation.  However, any other amounts credited to the account from the proceeds of the insurance policy plus any anti-detriment payments are not included in the same calculation.

“As an example, George was receiving a superannuation income stream that was non-reversionary at the time of his death on 1 May 2013.  The tax free portion of his superannuation income stream was 45% and the taxable proportion was 55%.

“At the time of George’s death the balance of his non-reversionary income stream account was $500,000.  In addition, the proceeds of an insurance policy of $400,000 were added to the account after George’s death.

“Under the rules of the fund George’s adult son, Harry, is entitled to a lump sum.  The lump sum of $920,000 will consist of a tax free component of $225,000 (45% of $500,000), the taxable component of $275,000 and the proceeds of the insurance component which will have different tax free and taxable components,” he says.

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“This is the first financial year in which the Government’s private health insurance rebate has been means tested,” says CANSTAR Research Manager, Mitchell Watson.

“While some consumers claim their 30% rebate when they submit their tax return, many people claim the rebate in the form of reduced monthly premiums. If they haven’t realized that they will be caught by the new means testing – and haven’t reduced the amount of rebate they are receiving – they could be in for a tax bill.”
 

Means testing 
The income test threshold kicks in for families at $168,001 and is applied at progressive rates up to $260,001. The amount of rebate a family is entitled to depends on age as follows:

Based on CANSTAR’s research of average annual premiums for a family package (hospital plus extras) policy on a state-by-state basis, CANSTAR calculates that high earning families who were previously receiving a 30% rebate and have not manually reduced this amount could be in for the following liability at tax time:
Traps
Mr Watson observes that the income test for the private health insurance rebate involves more than just taxable income.

“Some families could get caught out, assuming that they won’t trigger the reduction in rebate because their combined taxable incomes are less than $168,000,” he says.

“The income test that applies for this rebate is more comprehensive though – it also includes reportable fringe benefits, net investment losses and reportable superannuation contributions. When those items are all added in, families might discover thattheir total earnings are higher than they thought!”

Tips
CANSTAR urges consumers to check their likely income levels. “The tax office has some excellent information on their website to help taxpayers calculate their income in relation to the rebate,” says Mr Watson.

“It’s worth checking this out because the rebate is a sudden death thing: one dollar of income over the threshold and you could suddenly be looking at several hundred dollars-worth of tax liability.”

Mr Watson also encourages consumers not to drop their cover. “The median waiting times for elective surgery in public hospitals can significantly impact on patients’ quality of life,” he says.

“There are several thousand unfortunate people who stay on the waiting list for over a year. Our public system is great if you have a life threatening emergency – but you do not want to be uninsured when it comes to elective procedures.”

For savvy shoppers there is money to be saved.

“Each year we undertake an annual comparison of health insurers around the country; our most recent analysis compared over 10,000 quotes from 1,200 products and compared them against 11 profiles across seven states and territories,” says Mr Watson.

“There is no one-size-fits-all policy and consumers will all have different insurance needs. Premiums for the same level of cover do vary between providers though – it is worth doing some research.” 

Consumers can download the CANSTAR health insurance star ratings report on www.canstar.com.au. The report is an immensely valuable resource for those who are serious about comparing health funds and products to determine the best value for their health insurance dollar.

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I have my  opinions and you are entitled to yours. But some basic truths, old fashioned as it may sound, really aren’t subject to opinion. 

Nevertheless, in an effort to support raising taxes, particularly capital-gains taxes, and to head off the argument that such hikes would be a drag on the economy, billionaire investor Warren Buffett argued in a New York Times op-ed last month that tax rates don’t matter to investment decisions.

He wrote that if someone comes to you with a good investment idea, no one says, “If the taxes are too high, I  would rather leave the money in my savings account, earning a quarter of 1 percent.”  In the field of economics and finance you would be hard-pressed to find something more patently wrong. 

Consider how every business-school student, investment banker and investment analyst on Earth has been taught to choose whether  to invest in a specific project or company. You make a spreadsheet (a napkin will do sometimes). You put in your best guess of the future cash flows, and you discount those cash flows back to the present at some required rate of return you believe reflects the risk  entailed. Of course, opinions about the future cash flows and the proper discount rate can vary widely, but the essential methodology is  ubiquitous. 

Now here’s the kicker: Nobody who pays taxes and has ever done this exercise has failed (while sober) to use after-tax cash flows in this calculation. Somewhere in the spreadsheet there is a number, say 20%, or 28%, or a Gallic 75%, representing the taxes you’ll pay  on the assumed cash flow—and you only count the amount you’ll get after paying this tax. If you turn the tax rate up high enough, projects or companies that looked like good investments become much less attractive and vice versa. 

Mr Buffett is undoubtedly right that rich people will continue to invest some amount in something regardless of the tax rate (except for a 100% rate!). He’s also undoubtedly right that an investment that easily clears all hurdles will likely still be attractive after a small tax increase.

But life, and the investment decision, occurs at the margin. Fewer and smaller investments will be made if the after-tax prospects are worse. It’s just math and logic, unassailable and commonly accepted regardless of one’s political persuasion. 

Some recent commentators have actually tried to prove the illogic that Mr Buffett merely asserts. They argue that if an investment was  profitable at a 15% tax rate, it will still be profitable at, say, a 35% tax rate—just less so. Therefore investors will still go ahead with it.  But here, as in so many things, the government doesn’t play fair.

It taxes gains, but losses are deductible only under certain conditions  and circumstances. In finance-speak, the government grants itself a call option on your profits. This fact alone will make investments  that were profitable at one tax rate decidedly not so at a higher one.

The bond market offers particularly compelling evidence that people focus on after-tax cash flows when making investments and that  they will, contrary to Mr Buffett’s assertion, alter their investment behavior based on tax rates. The yield on tax-free municipal bonds is  almost always considerably lower than the before-tax yield on taxable corporate bonds of similar risk.

Despite his claim that taxes don’t  matter, we can be sure that Mr Buffett would not hold corporate bonds in his taxable portfolio if, before taxes, they yielded only the rate on otherwise similar tax-free munis.  This sort of investment decision is just one example of how taxes affect our actions. Consider that George Lucas sold Lucasfilm Ltd., including the Star Wars franchise, to Disney this year at least partially to avoid a likely coming hike in the capital-gains tax. While Mr Buffett is telling us taxes don’t matter, here’s proof that taxes are stronger than The Force. 

Also consider the choice of where to retire. Opinions vary widely on how much state tax rates, high or low, affect this decision, but does  anyone claim there is no effect? One simple visit to Florida dispels this misconception. When retirees choose Florida over California, it’s  not the heat—it’s the progressivity. 

I have great admiration for Warren Buffett as an investor. He has also been smart about minimizing his tax bill. From making sure his  profit is in the form of long-term capital gains and not, for instance, dividends, to how he structures his bequests and charitable  contributions, Mr Buffett is perhaps our premiere national example that tax rates and tax structure affect people’s investment decisions in a very real way. 

Taxes matter. They matter to business and life decisions alike. They matter to the rich and to the poor. They are, or at least they should  be, incorporated into nearly every financial decision made. Discussing tax policy without acknowledging this fundamental reality is  bizarre. Actually asserting the opposite is willful ignorance.

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“I urge anyone worried about not meeting the deadline to call 13 28 61 as soon as possible, to discuss their situation,” said Tax Commissioner Michael D’Ascenzo.

“It is important to lodge before 31 October to avoid penalties.

“The quickest and easiest way to lodge on time is by using e-tax. Over two million people have already lodged online.

“E-tax can save you time by downloading information like your bank interest, payment summaries, health insurance details and government payments directly to your return.

“It also has built-in checks and calculators to help you complete your return, and provides you with an estimate of your tax assessment.

“Best of all, most refunds will issue in 12 business days or less.”

E-tax can be downloaded free from the ATO website .

Sometimes, simple errors can hold up tax refunds. Some common mistakes that cause delays include:

• providing incorrect date of birth, address or bank details
• not advising of a name change from a previous year’s return
• forgetting to include income such as interest from bank accounts, a previous job or income from overseas
• not completing labels you are required to, for example the ‘income test’ questions at IT1-IT7 on the tax return (this information is used to work out entitlement to payments or Child Support obligations).

If you are using a tax agent for the first time or a different tax agent to last year, you need to contact them before 31 October. It is important to check that all the information in your return is correct before lodging. Make sure that you include all income, only claim deductions or offsets you are entitled to, and accurately record your personal information.

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“Each year our ability to match data gets better, making it more likely people will be identified if they leave anything out or incorrectly report items on their tax return,” said Tax Commissioner Michael D’Ascenzo.

“We have received more than 600 million transactions from organisations this tax time to check against tax returns.

“This information comes from a range of businesses and agencies, including employers, financial institutions, share registries, and government agencies like Centrelink, who are required to report data to the ATO regularly.”

The ATO cross-checks this information after taxpayers have lodged their tax returns to help stop fraudulent claims and detect any income that has not been included.

“Last year, we wrote to 540,000 taxpayers about discrepancies in the information they reported on their tax returns. This led to 90 per cent of these returns being amended and we raised $915 million in revenue as a result,” said Mr D’Ascenzo.

If you think you have made an error or left something out, you can complete a voluntary disclosure statement that will allow you to request an amendment of your tax return.

“We are very reasonable with people who have made an honest mistake – we appreciate that can happen to anyone,” Mr D’Ascenzo said.

“However, people who deliberately attempt to defraud the tax system can face heavy fines and risk having a criminal conviction recorded.”

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“One of the most alarming incidents is that scammers are using fake job advertisements to illegally access people’s personal information,” said Tax Commissioner Michael D’Ascenzo.

“Bogus job ads are being posted on recruitment websites by scammers where people are being asked to provide their tax file numbers (TFN) as a part of their job application.”

In some cases, people have even been offered the advertised position and then asked to provide their TFN and bank account details prior to the start date of employment and after providing this personal information, the job offer has then been withdrawn.

ATO investigations have shown that the advertised positions never existed and those running the scams generally communicate by email or mobile phones.

“You should not provide a prospective employer with personal details, such as your tax file number or bank account details until after you begin work in the position,” said Mr D’Ascenzo.

“Personal information can be used by scammers to lodge false tax returns in your name, enable the use of your credit cards or even result in people taking out a loan in your name. In some cases, identity crime can take years to resolve.

“This year there have been over 6,000 reports from the community about bogus e-mails using the ATO brand, and over 4,000 reports of attempted phone scams. At this time of year when many people expect refunds, scammers use the opportunity to pretend to be from the ATO.”

Only certain people and organisations can ask for your TFN, the most common being:

• the ATO
• when discussing your tax recordsyour employer, but only after you start work
• your bank or other financial institution
• Centrelink
• your superannuation fund.

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SPAA Technical Director Peter Burgess says discussions with industry players following the recent release of an ATO decision “has lead SPAA to conclude that many SMSF trustees may  not be taking full advantage of tax deductions they are legally entitled to claim.

“In some cases this has resulted in funds paying hundreds of dollars extra of tax a year which, over the course of a few years, quickly adds up to a substantial amount of money.”

Burgess, who was addressing SPAA’s Technical Conference in Melbourne today, says: “The ATO decision, issued in May, says that super funds are entitled to include the total value of all contributions (not just taxable contributions) and rollovers received during the income year when determining the proportion of a general administration expense that is attributable to gaining or producing the fund’s assessable income – and therefore the proportion of the expense that can be claimed as a tax deduction.

“This has relevance in situations where the fund may have some exempt income because the fund has members both in the accumulation and pension phase.

“As the fund has earned some exempt income, it is not entitled to a deduction for the full amount of the general administrative fee.

“Instead, the fund is required to work out the proportion of the general administrative expense that is attributable to gaining or producing the fund’s assessable income to be deducted from the fund’s assessable income.

“It is common practice for SMSF trustees to only include the value of taxable contributions in the fund’s assessable income total when calculating the proportion of general administrative expenses that can be claimed as a tax deduction.

“However, this ATO decision makes it clear that the full amount of any contributions or rollovers received by the fund during the income year can be treated as assessable income.

“By including the full value of contributions and rollovers, a higher proportion of the general administrative fee can then be claimed as a deduction versus what would be the case if rollovers and non-taxable contributions, such as non-concessional contributions, are excluded.

“Based on our own observations, it is common practice for many SMSFs to do the latter, which means they may have been under-claiming tax deductions for general administrative expenses where they have members both in the accumulation and pension phase,” he says.

Burgess says SPAA is now urging practitioners to review their current tax calculation programs and processes to ensure their SMSF clients are not under-claiming tax deductions.

26 July 2012

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Developed by the Australian Taxation Office (ATO), the new Digital Curriculum Resource, Tax, Super + You was launched today at MacGregor State High School in Brisbane.

The new resource helps students gain a better understanding of how the taxation system works to support the community and how superannuation can provide for their retirement income.

“This is a fantastic new online resource that teachers will be able to use in schools to help explain to their students how our taxation system works,” Mr Bradbury said.

“It will also help to improve financial literacy, with interactive scenarios that will help give students the skills they need to better manage their tax and super when they leave school.”

Taxation Commissioner Michael D’Ascenzo said the ATO had conducted extensive consultation with students and teachers in developing the new resources and had trialled the package in a number of schools around Australia, including MacGregor State High School.

“In developing Tax, Super + You we wanted to ensure it would be able to be integrated as easily as possible into any class curriculum,” Mr D’Ascenzo said.

“It includes suggested lesson plans to help teachers when needed but also can be used as a self-paced learning tool, lessening the demand on teachers.”

Local Federal Member for Moreton, Graham Perrett, said that local students would benefit from access to these new digital curriculum resources.

“Tax, Super + You empowers young people to take control of their financial future and I look forward to seeing the students from MacGregor State High School learn more about our taxation and superannuation system and how it benefits them and their local community,” Mr Perrett said.

11 July 2012

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Speaking at the release of the ATO’s third quarter update of prosecution results, Tax Commissioner Michael D’Ascenzo said the figures show that there are significant risks and consequences for people who do not properly fulfil their legal and civic responsibilities in relation to tax and superannuation.

“The year-to-date results to 31 March reveal that the ATO successfully prosecuted 1,106 individuals and 400 companies for tax and superannuation offences,” Mr D’Ascenzo said.

“We have a range of measures in place to ensure we detect and deal with those who evade their obligations. This includes information sharing and working with other government agencies, and also with overseas counterparts.

“The ATO pursues tax cheats to the full extent of the law to ensure honest taxpayers have their interests looked after. Australians don’t want to face an unfair burden when dishonest people avoid their tax obligations, and they expect the ATO to provide a level playing field.”

The prosecution results show that the 1,106 individuals and 400 companies successfully prosecuted comprised:

• Thirty people prosecuted and convicted of serious tax crime offences, with sentences ranging from two months up to nine years. Five of these convictions occurred under Project Wickenby. These serious convictions cover a range of offences including attempting to dishonestly obtain a financial advantage by deception, dealing with the proceeds of crime, and illegally seeking access to superannuation funds.
• 1,076 individuals and 400 companies were successfully prosecuted for other tax offences.
• Of these, 916 individuals and 332 companies had a formal conviction recorded against them. Offences included failing to lodge a tax return, providing false and misleading information, and receiving a fee for preparing an income tax return when not being a registered tax agent.

With the quarter’s figures largely on trend, Mr D’Ascenzo said it was important to note the ATO’s commitment to encouraging willing and proper participation in the tax and superannuation systems.

“Prosecution is often a last resort, but it’s there to protect the vast majority of taxpayers who do the right thing from being disadvantaged by those that don’t,” Mr D’Ascenzo added.

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