Help! I've put too much into my super fund
One of the great things about making extra superannuation contributions is the tax rates for concessional contributions. Concessional contributions are payments made by or for you to a super fund, which are included in the assessable income of the super fund (for example, super guarantee, salary sacrificed amounts and any amount you are allowed as a personal super deduction in your income tax return). These payments, which are made from your pre-tax income are taxed at 15%. However, there are caps placed on how much you can contribute to your super and still receive the concessional tax rate.
In the 2007/08 and 2008/09 financial years, the concessional contributions cap was $50,000 for anyone under 50 years of age, and $100,000 for those 50 years or older on 30 June 2007. For the 2009/10 financial year, the concessional contributions cap has been lowered to $25,000 for those under 50 and $50,000 for those 50 or over on 30 June 2009.
The non-concessional contributions cap (amounts you make from your post-tax income) is $150,000 which can be averaged over three years. This allows you to exceed the cap in one year, as long as over the three years you don't exceed a total of $450,000.
Further changes to these caps will apply from 1 July 2012 when the concessional cap will reduce to $25,000 per annum. (Although, by that time indexation may force an increase in that amount.)
So far, so good. What happens if you go over the capped amount in a financial year?
Many people inadvertently go over the concessional capped amount, and are subsequently taxed an additional 31.5% on top of the initial 15% paid by the super fund for the amounts over the cap. If you go over the non-concessional amount, the additional amounts are taxed at 46.5%.
The problem with excess amounts is that once they've been paid, they are very hard to get back. Under law, once a contribution has been accepted by the fund, the preservation rules apply. This means you can only get the money out once you meet the conditions of release - such as by turning 60. The exception to this is when you breach the contribution limit in one transaction. For example, writing a cheque for $1 million dollars and depositing it into your super fund account. Superannuation funds have a fund capped contribution limit to prevent unwanted excess contributions. By law, they must refund the excess contribution to reverse it. No excess tax applies in these circumstances. The problem is, the fund acceptance cap only applies when the contributions limit has been breached in one transaction.
In some cases, if you can prove that an honest mistake has been made, the money can be refunded. Honest mistakes can include inadvertently banking money in the wrong account - that being the superannuation account, provided you can prove it. However, discovering you're over the cap and changing your mind about the contribution or having a change in income levels which prevents you from benefiting from the tax deduction does not count as an honest mistake, so be careful.
A few taxpayers have tried to get around the contributions cap by amending their SMSF trust deeds and inserting a clause to restrict the trustee from accepting all or part of a contribution if it would cause the member to exceed a contributions cap. If the trustee does accept the contribution the trust deed directs the trustee to hold the contribution in a separate trust, even though the amount has been treated as a contribution and mixed with other assets of the super fund. But the Commissioner is onto this scheme and has stated that he considers the schemes “ineffective” and tax is still likely to apply to the excess contributions.
So, you need to be aware of what the contribution caps are, how much you've contributed in a single financial year and what's contained in your trust deed.
Those most likely to exceed the cap are people with multiple employers and those who have been salary sacrificing in previous years and have not reviewed the amounts being paid into their superannuation fund. This includes anyone using the transition to retirement strategy.
If your would like advice on managing your SMSF and contributions to your fund, please contact us on (03) 9622 0600 or click here and we will contact you.
Who's looking at your Facebook?
Recently the online small business magazine Smart Company published an article which will have many people monitoring what they put on Facebook and other social networking sites.
The last people you'd think of as looking at your Facebook profile would be the Tax Office, but maybe you'd better think twice. According to a Lecturer at Latrobe University's Faculty of Law and Management, who was cited in the Smart Company article,
Facebook is being used to build prima-facie cases against investors with offshore accounts in tax havens.
It appears the need to share every movement of our lives with other people is being used by the Tax Office to research people with high net wealth.
So beware. If you're telling the Tax Office you have a modest income, but then posting pictures of yourself on your yacht in the Bahamas every weekend, or explaining in great detail the latest shopping trip on the Champs-Elysees, the next call on your designer mobile may well be from the Tax Office.
Using networking sites to find information adds another tool to those working in the multi-agency task force, known as Project Wickenby, whose purpose is to protect the integrity of Australian financial and regulatory systems by preventing people from promoting and participating in the abusive use of secrecy havens. The particular focus is offshore tax havens, and so far, many high profile taxpayers have been caught.
The hidden danger of the CGT small business concessions
The CGT small business concessions have become very popular with business owners selling their business. This is because the concession can reduce your capital gains tax liability to nothing. However, the large amount that business owners can save, means they are under the scrutiny of the ATO, and this has resulted in owners being hit with large, unexpected tax bills. Why? Because it turns out they weren't actually eligible for the concessions they claimed.
So, what are the concessions and what makes you eligible?
The main eligibility requirement is the $6 million maximum net asset test. This means that the combined assets of the business, any connected entities, any affiliates and any entities connected to the affiliates must not exceed $6 million. Some assets are not included in the test - these include the family home, some personal assets and your superannuation. However, assets such as privately held businesses or listed securities are included.
As the test is applies when the CGT event takes place (generally when the contract of sale is entered into), you'll need to be sure that your assets do not exceed $6 million at that point. This is particularly important if you are audited, but can be difficult to predict if your assets do include things such as listed securities and private businesses and you are near the threshold.
Why? Listed securities have a certain volatility. The is always the possibility that there will be a spike in their value at the time of the CGT event. This could lead to you breaching the $6 million threshold. The value of listed securities in available on public records, so check these carefully before you sell.
Private businesses create a different problem. The problem is that there is no clearly stated worth for these businesses, and their value is not readily identifiable. Without a formal valuation you may underestimate the value of your businesses. You need to value your business is not just by what is recorded in your financial statements, but also by whether it holds unrealised goodwill or other intangible assets. The value of the business can be substantially greater than is recorded in the financial statements.
The ATO commonly asks for evidence of your eligibility for the CGT concessions. If they have doubts about the value you've provided for the private businesses, they will conduct their own assessment, and again, this may cause you to breach the threshold.
Clearly, the more valuable your business is, and the closer your other assets are to the $6 million threshold, the greater your risk.
If you are contemplating selling your business or want to make sure you have the right structure in place, contact us today for a review.
Quote of the month
"I tried being reasonable, I didn't like it."
Clint Eastwood
Long wait for tax returns
Been waiting ages for your 2008/2009 tax return from the ATO? You're not alone. Since installing it's new multi-million dollar claims processing system in January, the ATO has a backlog of an estimated 236,000 returns.
Only taxpayers meeting the ATO's strict hardship criteria are having their returns processed, the rest are on hold while staff manually process claims. A task made more difficult by the fact that the ATO did not recruit extra staff to help with the processing.
A number of tax payers are getting frustrated, many because they rely on the money from their tax return to cover costs such as car registration.
Fiona Guthrie, of the Australian Financial Counsellors and Credit Reform Association, said many people in financial hardship "would be sweating on getting their tax refunds. People plan it into their budget management cycle."
Ms Guthrie said the Tax Office was taking a more realistic approach in helping people experiencing financial difficulties service their tax debts.
But the same could not be said of others needing their money, she said. "Hardship is often interpreted in an arbitrary and subjective way."
According to the ATO website, updated on 1 April, there are 236,000 returns progressing through the system, which will be printed shortly and another 150,000 due for printing and distribution from 5 April. Latest figures at the time of writing were not available.
The website also states that The Tax Office will pay interest on refunds that have taken more than 30 days to process, and that the interest would be calculated for anyone in that position.
So why such a backlog? The ATO began processing returns in the new system from 1 February, but kept processing volumes low in the first two weeks, so they could check the system was working correctly. However, on 9 March a problem with the data in some notices caused the ATO to stop printing assessments. The problem took longer to fix than anticipated and assessments started being processed and sent again on 22 March.
So, if you're still waiting?
According to the ATO, all remaining 2008-09 tax returns are now moving through the system. As per the ATO's published service standards, they're aiming to process 94 per cent of electronically lodged returns within 14 days and 80 percent of paper returns within 42 days.
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