December Tax Update

Welcome to the December 2010 tax update, in this issue we will discuss some important areas affecting your business and your wealth:

• Payroll tax issues
• How to avoid paying 93% tax on your super contributions
• Purchasing a holiday home in your SMSF
• New residential tenancy rules

Payroll tax issues

Payroll tax is a very important issue if you are running a business in NSW as it will reduce your profit. We will discuss some major issues for payroll tax to provide to you planning opportunities and to avoid audit penalties.

Rates

For the year 1 July 2010 to 30 June 2011 if the total wages, super contributions, directors fees, allowances, termination payments, grossed-up FBT contributions, employee share schemes and certain contractor payments exceed $658,000 you will be liable for payroll tax. The rate is 5.5% for the period 1 July 2010 to 31 December 2010 and 5.45% for 1 January 2011 to 30 June 2011 based upon 50% of the threshold for each period. Payroll tax is levied on the amount in excess of the threshold. If you pay wages inter-state your threshold entitlement will be reduced. Importantly maternity and paternity leave payments for up to 14 weeks are exempt from payroll tax as well as workers compensation payments.

You pay payroll tax monthly, seven days after the end of each month, the monthly thresholds are below:

28 days = $50,477

30 days = $54,082

31 days = $55,885

Contractor payments

This is an important area in terms of payroll tax calculations and it is important that you are aware of it. Contracts which provide for the payment to contractors and subcontractors for work they perform, are potentially liable for payroll tax. The contractor provisions apply even if the party to the contract is a company or personal service business. Therefore, the tests applied by the ATO on what is a contractor do not apply.

There are nine types of exempt contract that are not included as liable. The main exemptions that may be applicable to you are discussed below:

Contractors engaging labour to fulfil the contract-This exempts payments to contractors who engage other people to do all or part of the work of the contract. There must be two or more persons engaged by the contractor to provide the service before this exemption will apply. In all cases, the person engaged must perform the work that is the object of the contract. It would not be sufficient for a spouse performing purely clerical work, to satisfy the exemption provisions, as they would not be engaged in the work to which the contract relates.

90 day test-This exemption applies to contracts where the services are provided for a period or periods, which in aggregate do not exceed 90 days in a financial year.

Services normally required for less than 180 days per financial year. The exemption relates to your business needs being less than 180 days per financial year for certain contracting labour. This normally applies for ad-hoc services provided to businesses to operate effectively but are not required for the whole year and also seasonal businesses.

Contractors who also promote their services to the general public may have their payments exempt from payroll tax. You must apply to the Office of State Revenue to receive this exemption.

Grouping

Two or more entities may be grouped for Payroll tax purposes. This means that the threshold will only apply to one entity. Grouping may apply where two entities have:

• use of common employees
• commonly controlled businesses
• groups arising from tracing of interests in corporations
• smaller groups subsumed by larger groups.

The important thing to remember is that it is not possible to create a separate company or trust you also own in order to avoid paying payroll tax.

How to avoid paying 93% tax on your super contributions

Your excess concessional contributions (employer and personal deductible contributions) count towards your non-concessional contributions cap. To the extent your contributions exceed both the concessional and non-concessional contributions caps in a financial year, the excess amount could end up being taxed at 93%. The information below will help you to eliminate this.

If your concessional cap is $50,000 and your employer contributes $60,000 then your SMSF must pay 15% tax on all the employer contributions it receives and the $10,000 in excess concessional contributions ($60,000 - $50,000) will be taxed at 31.5% which you must withdraw from your SMSF to pay for. If you have already maximised your non-concessional contributions as well then the excess of $10,000 will also be counted towards the non-concessional cap for the year and taxed again at 46.5%. that must be withdrawn from the SMSF to be paid for. Therefore, $10,000 will be taxed at 93%. In order to avoid this amount we suggest that you review your SMSF bank statements and assets you contributed to your SMSF to confirm how much is being contributed during the year so that the excess tax can be avoided. You may apply to the ATO for the excess contributions tax to be disregarded but it is best to avoid being in this situation.

You must withdraw the full amount of your excess non-concessional contributions tax from your super, whether you use it to help you pay the tax or not.

Purchasing a holiday home in your SMSF

When you are away at your holiday destination you may like a particular place and you may want to buy a holiday home at a particular location either to live in or for investment purposes. Your SMSF cannot purchase a holiday home that you plan to use for your personal benefit. If this ever happens then the assets in the SMSF may be taxed at the highest marginal tax rate so it eliminates any tax benefit in having an SMSF. The asset in your SMSF should be used to grow your wealth and you cannot use it for your personal pleasure.

It may be possible for your SMSF to invest in an investment vehicle such as a property syndicate or managed fund that invests in holiday units. The investment vehicle owns the units and your SMSF does not own a particular property. It may possible for you to stay at the unit if you pay market rates, if you receive an upgrade due to availability there should not be a problem with this either. If your SMSF owns a holiday unit that is managed by a real estate agent and you visit it in the off-peak period when it is not booked to undertake significant repairs, it may be possible for you to pay normal commercial rate to the agent to stay in the property.

The most important thing to remember is that before purchasing any asset you must do your research to ensure that it has growth potential and will improve your retirement savings. If you decide to buy an asset then importantly you must also protect it such as for a property purchasing insurance or doing general repairs so that the value is protected.

Be careful before you buy a holiday unit in your SMSF as you do not want to breach the super rules unless you buy it as part of a managed investment or you only live there to carry out repairs on the property while paying market rent.

New residential tenancy laws

New residential tenancy laws will come into effect later this year which will affect landlords, a summary of the rules are provided below:

• Additional option for serving notices will include hand delivery to person’s letterbox
   
• Landlord can build in a fixed penalty (a break fee) in event that tenant breaks lease before end of fixed term
   
• Landlords are offered more certainty where tenant no longer on lease does not move out after being given a ‘no grounds” notice to vacate, the Tribunal must terminate the agreement and return possession to landlord.
   
• The eviction process will be cut by 2weeks
   
• Notice period will increase from 60 to 90 days where landlord wants tenants to move out (without grounds) and they are on a continuation lease (i.e. fixed term agreement has expired).
   
• If fixed term lease is due to expire, and landlord wants tenants to move out at end of lease, notice period increases from 14 to 30 days
   
• Premises must be water efficient if tenants separately metered
   
• Holding fees can only be charged once tenancy application approved (though if tenant pulls out they will lose whole fee rather than pro-rata amount)
   
• Co-tenants can end their contract with landlord separately (i.e. can give 21 days notice once fixed term lease ends) thus ending their liability for future rent, damages etc

We hope you have enjoyed this article and found it informative and useful. Please contact us if you would like further explanation on any topics discussed in this article. The Partners and Staff at DP Loewy & Co Pty Ltd would like to wish you a happy and prosperous 2011.


Disclaimer - The material contained in this newsletter does not constitute advice. DPL is not responsible for any action taken in reliance on any information contained in this newsletter. Anyone reading the newsletter should not act upon material contained in this newsletter without appropriate consultation.