Practice Update
SEPTEMBER 2023
🔶 Ensuring Compliance: Appointing an SMSF Auditor 🔶
When it comes to self-managed superannuation funds (SMSFs), compliance is paramount. Trustees are reminded of the crucial need to appoint an approved SMSF auditor each income year, ideally 45 days before the annual SMSF return is due.
Why is this appointment so critical?
First and foremost, the SMSF audit must be completed before trustees can lodge their annual return. The audit report provides essential information that trustees rely on to accurately complete this process.
It's important to note that this requirement applies universally, regardless of whether the fund had financial activity during the year. Even if no contributions or payments occurred, an SMSF audit remains mandatory.
Independence is a fundamental requirement for SMSF auditors. They should have no financial interest in the fund they audit and should maintain no close personal or business relationships with its members or trustees. This ensures an unbiased evaluation of the fund's financial and compliance aspects.
Moreover, an SMSF auditor's role extends beyond financial scrutiny. If any breaches of the SMSF operation rules are discovered, the auditor may need to report these contraventions to the Australian Taxation Office (ATO). This underscores the auditor's role in upholding compliance within the SMSF sector.
🔶 ATO's "Green Light" for Annual Tax Returns 🔶
The Australian Taxation Office (ATO) is signaling the "green light" for taxpayers with straightforward financial affairs to lodge their annual income tax returns.
According to ATO Assistant Commissioner Tim Loh, most taxpayers with simple financial affairs will discover that the necessary information to complete their tax return has already been pre-filled, simplifying the process considerably.
However, Mr. Loh also offers a reminder to taxpayers that some income sources may require manual input. These include income from rental properties, certain government payments, or earnings from "side hustles" – those additional income streams like online activities or sharing economy ventures.
As taxpayers prepare to file their returns, here are some valuable tips to keep in mind:
Include all income:
It's crucial to report all sources of income, including additional earnings from online work, interest from investments, or any other sources of income acquired during the year.
Assess changing circumstances:
If your job or personal circumstances have changed in the past year, make sure to accurately reflect these changes in your tax claims to avoid discrepancies.
Maintain accurate records:
To claim deductions for work-related expenses, it's imperative to maintain meticulous records that substantiate your claims.
Wait for your Notice of Assesment:
Before making any plans for a potential tax refund, it's advisable to wait for your official notice of assessment from the ATO.
Beware of Scams
Always exercise caution and remain vigilant against potential scams. The ATO will never send links to log into their online services or request personal information via social media, email, or SMS.
Additionally, it's important to note that when taxpayers file their own returns, the due date for payment is November 21st, regardless of when the return is submitted. However, if you use a registered tax agent, the due date for payment can be significantly later, providing more flexibility in managing your tax obligations.
🔶 Different meanings of “dependant” for
superannuation vs. tax purposes 🔶
Different meanings of “dependant” for superannuation and tax purposes
In the intricate landscape of superannuation and taxation, the term "dependant" carries different connotations and implications. Understanding these distinctions is crucial, especially in the context of superannuation benefits and estate planning.
When an individual passes away, their superannuation benefits can only be disbursed to one or more "dependants" as per the superannuation framework. Alternatively, these benefits may be channeled through the deceased's legal personal representative for distribution in alignment with their Will.
For tax purposes, the tax treatment of superannuation death benefits hinges on whether they are paid (either directly or indirectly) to individuals deemed "dependants" for taxation purposes.
Here's where the subtle divergence in the definition of "dependant" for superannuation and tax purposes becomes pertinent:
For Superannuation Purposes, a "Dependant" Encompasses:
Spouse (Including De Facto Spouse):
Child (of Any Age):
Interdependency Relationship: An individual who shared a close interdependency with the deceased, as defined by specific criteria.
Financial Dependence: An individual who was financially reliant on the deceased.
For Tax Purposes, a "Dependant" (or 'Death Benefits Dependant') Comprises:
Spouse or Former Spouse (Including De Facto Spouse):
Children Under 18
It's important to note that, due to these distinctions, superannuation death benefits typically cannot be directly paid to a former spouse because they do not meet the criteria for dependants in the superannuation context.
Additionally, while a child of any age qualifies as a dependant for superannuation purposes, the tax definition narrows the scope to children under the age of 18.
Consequently, while children of any age may receive superannuation death benefits directly, these benefits will generally only be tax-free if the child is below 18.
🔶 How Superannuation applies to temporary residents 🔶
Superannuation in Australia is a retirement savings plan. If you work in Australia, your employer usually contributes to a super fund for you, regardless of your visa or tax status. If you are entitled to super, you can choose how your super is invested.
When you leave Australia as a temporary resident, you may claim your super as a Departing Australia Superannuation Payment (DASP), with some tax deductions. You must apply after leaving, but starting the process earlier is helpful.
New Zealand citizens can't claim a DASP, but residents or citizens may transfer their Australian super to a KiwiSaver scheme or receive it directly if eligible, including unclaimed super held by the ATO.
🔶 Strict verification on when to legally access your super 🔶
The ATO stresses the importance of adhering to legal procedures when accessing superannuation funds to avoid severe consequences.
Legal Access to Super:
Accessing your super is subject to specific conditions, such as reaching preservation age, retiring, or turning 65.
You must satisfy a condition of release to access your super legally.
Beware of Illegal Access Schemes:
Be cautious of schemes or individuals promoting early super access before you meet the legal criteria.
These schemes may suggest setting up self-managed super funds (SMSFs) to withdraw super for personal expenses like debt payment, buying assets, or vacations.
Verify the legitimacy of anyone offering such schemes, ensuring they are licensed financial advisers.
Consequences of Illegal Access:
Illegally accessing super leads to substantial financial penalties and loss of retirement savings.
Any accessed amount is treated as income in your tax return, incurring additional income tax, penalties, and interest.
Attempting to return illegally accessed super to the fund is considered a new contribution.
Using fraudulent documents results in penalties for false statements.
Participating in such schemes can make you a victim of identity theft.
Consequences for SMSF Trustees:
Trustees releasing benefits illegally may face administrative penalties and disqualification.
Disqualification impacts professional, personal, and financial aspects.
Legal Actions Against Promoters:
The ATO and ASIC may prosecute promoters of illegal super access schemes.
Breaches involve misleading conduct and unlicensed financial advice.
Penalties may include fines and imprisonment.
🔶 Taxable, assessable & exempt income: What to report? 🔶
Most of your income can fall into different categories: assessable, taxable, exempt, or non-assessable non-exempt. Here's a breakdown:
Assessable Income:
Most income you earn is assessable income, subject to taxation if it exceeds the tax-free threshold.
Examples include salary and wages tips, gratuities and other payments for your services some allowances, such as for clothing and laundry interest from bank accounts dividends and other income from investments bonuses and overtime an employee receives commission a salesperson receives pensions, and also rent.
Income received as goods or services must be declared at its market value.
Cash income, including cash cheques, must also be declared.
Taxable Income: stable income − allowable deductions = taxable income
Taxable income is your assessable income minus allowable deductions.
It's used to calculate your tax liability.
Allowable deductions reduce your taxable income, reducing the tax you owe.
Exempt Income:
Exempt income is tax-free income.
While not subject to tax, it may still need to be reported for other tax calculations.
Examples include certain government pensions and some education payments.
Non-assessable, Non-exempt Income:
Non-assessable, non-exempt income isn't included in your tax return, and you can't claim deductions against it.
Examples include the tax-free portion of employment termination payments, super co-contributions, income earned by foreign resident workers in certain schemes, and specific disaster payments and grants.
🔶 How investment incomes should be reported 🔶
Understanding the rules for reporting different types of investment income is essential for accurate tax filing.
When to Declare Investment Income:
All income from investments and assets must be declared in your tax return.
This includes interest, dividends, rental income, managed investment trust credits, crypto assets, and capital gains.
Income from Jointly Held Assets:
When you jointly hold assets, the income is generally assumed to be divided equally unless you can prove otherwise.
Interest Income:
Australian residents must declare interest income.
financial institution accounts, term deposits, interest you earn from any other source including penalty interest you receive on an investment, interest you earn from children's savings accounts, interest ATO pay or credit to you, or interest ATO have imposed if it is remitted or recouped and you have claimed (or can claim) a deduction for the interest.
It covers various scenarios, including term deposits and foreign sources.
Dividends:
Dividend income can come in the form of money or other property, such as shares.
Imputation or franking credits may be attached to some dividends.
When selling shares, capital gains or losses must be declared.
Rental Property Income:
Full (gross) rent and related payments must be declared.
This includes payments received for goods and services instead of rent.
Capital gains or losses must be declared upon selling or disposing of rental properties.
Co-Ownership:
include your share of rental income and expenses in your tax return, if you:
own a rental property jointly or in common with another person".
have an interest in a partnership that carries on a rental property business
Managed Investment Trusts:
Income or credits from trust investment products, including various types of trusts, must be reported.
Capital gains or losses must also be declared upon selling trust units.
Crypto Asset Income:
Rewards received for staking crypto assets, including additional tokens, should be declared as other income.
The money value of established tokens received by airdrop is also considered income.
Capital gains or losses occur when selling or disposing of crypto assets.
Capital Gains:
Declare capital gains when selling or disposing of capital assets like property, shares, or crypto assets.
The capital gain is the difference between the asset's cost base and capital proceeds.
Capital gains and losses are part of your total income, you can offset any allowable capital losses against your capital gains to work out your net capital gain or loss. You pay tax on a net capital gain. If you have a net capital loss, you can retain the loss to offset capital gains in future years
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