October 2013 Newsletter

Welcome to the October 2013 newsletter from DP Loewy & Co Pty Ltd. In this article we will discuss:

• Salary Sacrificing Into Super
• Investing In Farmland With Your SMSF
• What To Do With Your Money After Down-Sizing Your Home
• Deferral of $2000 Self-Education Cap
• Other Tax Changes Proposed By The New Government.

Salary Sacrificing Into Super

If you are an employee then generally the concessional contributions into your SMSF can only be made by your employer. If you plan to maximise the concessional contributions into your SMSF so that you can reduce your personal tax liability then you must ensure that you enter into a salary sacrifice arrangement with your employer.

In order to do this properly you must do the following with your employer:

1. Enter into an agreement with your employer, preferably in writing that confirms the salary forgone that will be instead contributed into your SMSF as a super contribution. There should be a separate agreement for each financial year.

2. The agreement to salary sacrifice into your SMSF can only be made for wages, bonuses and commissions that you have earned after the agreement has been entered into. This means that you cannot salary sacrifice wages, bonuses or commissions that you have earned before entering into the agreement.

3. The wages, bonuses or commissions that you have salary sacrificed means that you have no entitlement to that income as it is being contributed into your SMSF. Once you are over 55 you can access part of the contribution as a Pension.

The salary sacrificed super contributions are generally made during the year at the same time as your employer makes their employee super contributions.

The maximum amount that you can salary sacrifice every year is $25,000 if you are under 60 and $35,000 if you are over 60 during the 2014 financial year. If you over contribute you may be penalised and any excess amount over $25,000 can be treated as a Non Concessional contribution and this may cause you further problems in the future.

Salary sacrificing super can be an effective way to reduce your personal tax liability if you are an employee and to build up your super balance. It is important that you do organise this properly with your employer.

Trap tip - 'beware of the effect of timing differences as prior year's June quarter could be paid in July and tip you over the cap'.

Investing In Farmland With Your SMSF

An SMSF is allowed to invest in farmland, here are some benefits listed below by your SMSF investing in farmland:

• The farmland can be protected from creditors as it is not owned personally and is separate from the business;

• Your business can pay rent to your SMSF for using the farmland and the rental income that the SMSF receives is tax-free if it is paying you a Pension or the income is taxed at 15% if no Pension is being paid from your SMSF. More importantly the rent that the business pays your SMSF will reduce the tax liability for your business as it is a tax deductible expense;

• The farmland can be sold tax-free when your SMSF is paying a Pension;

• If you own farmland personally then you can transfer the farmland into your SMSF as your SMSF is allowed to purchase farmland from you, this can be transferred potentially tax-free under the CGT small business concessions;

• The super rules do allow for a home to be on the farmland that you or someone else can live in but the home must be less than 2 hectares and the farm cannot be a hobby farm;

• The farmland can be developed to maximise the value of the property but this cannot be done if the farmland was bought with a loan and the loan has not been repaid. The loan must be repaid before any development can take place.

There are many different advantages in owning farmland in your SMSF so please speak to us for tax planning ideas.

What To Do With Your Money After Down-Sizing Your Home

It is becoming increasingly popular with Baby boomers to down-size their property as their children have moved out. The main issue becomes what to do with the money once you have sold your old home and moved into a new one. If there is money left over after down-sizing it may be a good idea to contribute this money into your SMSF due to some favourable tax advantages listed below:

• If you are over 55 you can contribute money into your SMSF and start to draw down a Pension;

• The money that you contribute can be treated as a Non-Concessional Contribution or can be treated as a Concessional Contributions (this depends upon your personal circumstances);

• Any money contributed as a Non-Concessional Contribution will allow you to draw out a Pension tax-free, even if you are under 60 years of age;

• The amount that is contributed as a Non- Concessional Contribution will also reduce any tax liability to your adult children when they inherit your SMSF balance;

• Any amounts contributed into your SMSF as a Concessional Contribution will reduce your personal tax liability;

• The money invested in your SMSF will earn tax-free income inside your fund and this includes the tax-free status on the sale of assets such as shares and property while your SMSF is paying a Pension;

• Owning your next investment property in your SMSF will allow you to earn tax-free income and the ability to leave property to your children tax-free which is not possible if the property was owned personally; Please note that while the property is owned in the SMSF it cannot be rented out to related parties.

• Your SMSF can always borrow to fund an ideal investment property if it takes longer to sell your home and your SMSF can repay the loan once the sale of your home has been completed and you have made a contribution into your SMSF;

* Owning a property in your SMSF also provides you with the ability to pay less land tax and income taxes which assists you in increasing your property portfolio. Please speak to us if you plan on down sizing so we can advise you accordingly.

Deferral of $2000 Self-Education Cap

The proposed $2000 cap on claiming self-education expenses has been deferred. This is welcoming news if you are undergoing continuous self-education as it means that your deductions are not reduced. It is also positive news if you plan on doing a Masters degree as it will not limit your ability to deduct your course fees.

Other Tax Changes Proposed By The New Government

The following is what is being proposed by the new Government:

• Discontinuing the ability by small businesses to claim an immediate write-off on items under $6,500;

• Discontinuing the ability by small businesses to claim up to $5,000 as an immediate deduction for motor vehicles;

• Cut the company tax rate by 1.5% to 28.5% from 1 July 2015;

• Impose a 1.5% levy on companies’ taxable incomes in excess of $5 million;

• Not proceed with the abolition of the FBT statutory method for salary-sacrificed cars;

• Discontinue the low income superannuation contribution which refunds the tax paid, up to $500 a year, on superannuation concessional contributions for people with incomes up to $37,000;

• Delay the progressive increase in the super guarantee charge from 9% to 12% by two years;

• Develop appropriate processes to address all inadvertent breaches of super contribution caps due to genuine mistakes or errors; and

• Review minimum withdrawal amounts from account based pensions for adequacy and appropriateness.


We hope you have enjoyed this article and please contact us if you require any assistance.