Vote “1” for tax

When I was interviewed for a job with the Labor party  I was asked whether I had ever voted for John Howard. It was a joke question and they did not expect me to answer, but I did.

“Of course”, I said confidently, “he has had a better tax policy for some time.”

This Saturday I will vote based on tax policy. Sounds a bit strange. I think that if you fix the revenue side of the income statement, the expenditure side will fix itself (I hope). If you have a simple, efficient, adequate and equitable tax system, you will have the money to pay for what is important, and you won’t have the money to pay for what is not important so soon enough people will stop borrowing to pay for unimportant things (I hope).

So what do we have for this election. Lets summarise the tax policies of the two real options.

What they both agree on…

  • All the Super changes in the recent budget.

Yes, while they won’t admit it, the Labor party have taken all the savings in the recent budget made from the super changes… Every single dollar. They say they “might” vary them but only if they raise the same amount of money. So you could vote on who is more likely to back down and remove the retrospective nature of the $500,000 lifetime cap but I am unsure who that would be.

  • Company tax cuts for businesses under $2 million.
  • Reducing the R&D tax offset by 1.5%
  • Minor changes to the personal tax rates at $80k
  • Employing more ATO officers to go after multinationals

What Labor is offering…

  • Negative gearing (offsetting the interest losses against slurry and wage income – not other income) gone for all new assets unless they are new residential property.

Yes that means if you borrow, buy shares and the shares pay no dividends in a year you can’t claim the interest as a deduction.

  • 50% discount become a 25% discount

What I love about the Labor policy to limit negative gearing and the 50% discount is they say it will fix housing affordability and is not just a money grab. So how will reducing the 50% discount on shares and stopping negative gearing on shares fix housing prices? This is just a money grab.

  • Keeping the temporary deficit levy so that the highest marginal rate remains at 49%

Lets hope they keep the name so we have a “temporary” deficit levy for many decades to come.

  • Capping of tax deductions for managing tax affairs

What the Coalition is offering…

  • Company Tax rate changes

But don’t trust any promise more than 3 years away as there will be another election before then. However, the Coalitions company tax rate changes will mean small businesses with less than $10 million turnover benefit, rather than $2 million for Labor.

  • Change to SBE definition to $10 million

Not for the Small Business CGT Concessions but this will increase who can get the $20,000 instant asset deduction for one year.

  • Div 7A changes

This will be amazing but won’t happen till 1 July 2018 (10 year loans, repayments and interest only due at 3,7 and 10th year, UPEs not loans…)

  • GST on all low value imported goods
  • Simplified BAS for small businesses (just two labels)

Summary

So almost no difference at all other than the discount and negative gearing changes. But I am tempted to vote for the Coalition just on the Division 7A changes, but this is more an administration issue rather than fixing the revenue side of the income statement.

So I might just buy a sausage sandwich before I go in to vote and see where the tomato sauce lands…

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R&D concessions go full circle

In the 2014/15 Budget the Government announced they would reduce the tax offset rate for the R&D Tax Incentive by 1.5%. This Bill was introduced in 2015 and has since been blocked by Labor and the cross benchers in the Senate.

But, over two years later, Labor has just announced if it wins the election it will pass this reduction to the rate of the offset.

And a timeline…

  • When I first claimed the R&D concessions it was a 150% deduction for R&D expenditure – which at a 30% company tax rate is a 15% return on any R&D expenditure.
  • It then got reduced to a 125% deduction for R&D expenditure – which at a 30% company tax rate is a 7.5% return on any R&D expenditure.
  • It then got changes to, for the big end of town, a 40% tax offset, which at a 30% tax rate is a 10% return on any R&D expenditure.
  • It then got capped to only $100 million of R&D expenditure per group per year.
  • And now, irrespective of who wins the election, for the big end of town it will be a 38.5% tax offset, which at a 30% tax rate is an 8.5% return on R&D expenditure.

But it is worth remembering the policy for the 1.5% reduction in the 2014/15 budget was due to the company tax rate dropping by 1.5% to 28.5% for small businesses (which happened on 1 July 2015). If the Coalition wins the company tax rate for small businesses from 1 July 2016 will be 27.5%. So it is likely a coalition government will reduce the offset rate to by another 1%.

At its worst, the R&D Tax Concession was an uncapped 7.5% return of R&D expenditure. Soon it will be a capped 8.5% return on R&D expenditure, and there is a good chance it will drop again to a capped 7.5% return on R&D expenditure…

Around in circles we go.

FYI, for the small end of town, for companies with a turnover of less than $20 million, the current rate is an offset of 45% but this will reduce to 43.5%.

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My first Solomon Island post

I am working in Honiara for the Solomon Island government and I was asked to look at the Sales Tax Act.

It states there is Sales tax of 50 cents a movie ticket… Except there are no movie theatres in the Solomon Islands. 

There are only 17 “prescribed goods and services” in the Sales Tax Act, and one does not exist…

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Backpackers are already tax avoiders

There are concerns about the “backpackers tax”. This was a change announced in the 2015/16 Budget that would deem people working in Australia on holiday visas to be non residents for tax. As a result they would be taxed at 32.5% from the first dollar they earned, rather than being able to apply the tax free threshold of $18,200.

But what no one seems to want to engage with is that these backpackers have been, are already, and will be tomorrow, non resident under the current law. Without any change in the law almost everyone of these backpackers should already be paying tax like a non resident.

Back in early 2015 there were three test cases that considered if backpackers on working holiday visas were tax residents. As they don’t have a domicle in Australia and have no long lasting connection with Australia, the only hope for these taxpayers was that they could pass the “183 day” test of residency.

In all three cases the AAT found they were not residents (Clemens and Commissioner of Taxation [2015] AATA 124, Jaczenko and Commissioner of Taxation [2015] AATA 125, Koustrup and Commissioner of Taxation [2015] AATA 126)

Each stayed for more than 183 days but as none had a “usual place of abode in Australia” as required in the 183 day test (which of course they did not as they were backpacker), they were not residents and were subject to the non resident tax rates of 32.5% from the first dollar with no tax free threshold.

Therefore, there is no need to introduce a backpackers test. The Commissioner should apply the law as interpreted by the Courts and start taxing backpackers on working holiday visas as non residents! Yes I know the AAT is not a Court so maybe they should fund an appeal to the Federal Court but I understand why he did not fund an appeal as the Government had just announced they were going to remove any doubt by changing the law. I guarantee the Federal Court will uphold the decision of the AAT (note that the decision in the AAT was made by Professor R Deutsch, who probably wrote the tax textbook you have sitting on your shelf… What do you mean you don’t have tax textbooks on your shelf?)

Once again, journalist just accepting the word of lobbyists…

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I would hate to be a super specialist…

There are a number of changes that are going to make advising high wealth/income clients to use super very hard.

Lets start with transition to retirement pensions. People have been recommending staring these TTR pensions as soon as you turn 55 but make sure you salary package the amount back to your super fund. You end up with the same income (pension replaces salary packaged super) but you pay less tax (marginal rate vs 15%). But from 1 July 2017 TTR pension income will be taxed at 15%.  This means it is now marginal rates vs 15%+15%. Still a benefit, but if the client has income over $250,000 we also get the Division 293 tax – so it is marginal rates vs 15%+15%+15% or 49% vs 45%. Almost no benefit at all in this!

Many high wealth/income individuals will have already put $500k of non concessional contributions away. So the new lifetime cap will mean this is no longer an option. And if they have not done $500k of non concessional contributions yet, this will often be just a once only contribution.

Salary packaging super will also be limited with a $25,000 concessional cap limit from 1 July 2017. If the high wealth/income client has a salary of $200k, their employer will have already put away $19k in SGC. That just leaves them $6,000 to salary package into super to stay under the cap. So packaging them to the $25,000 cap will save $2k in tax, and this reduces to $1k if they are subjected to Division 293 tax (greater than $250k income).

Division 293 tax applying from $250k rather than $300k will mean (a few) more taxpayers will have an effective contribution tax of 30%. But this won’t make much of a difference.

And finally, the change that will really cause problems. From 1 July 2017 the total amount of superannuation that can be transferred into retirement phase will be capped at $1.6 million. If you build up more than that in super, you have to keep it in accumulation (taxed at 15%) or take the amount out as a lump sum (which if you invest will be taxed at marginal rates).

But maybe you can advise lower income/wealth clients.

From 1 July 2017 taxpayers with balances under $500k in super can use up any unused concessional contribution caps in the prior 5 years. This could mean you could salary package lots in a year for someone who has a low super balance.

Also, it was announced that from 1 July 2017, the current 18% tax offset of up to $540 for low income super balances will be available for any individual, whether married or defacto, contributing to the super account of a spouse whose income is up to $37,000. So you might advise spouse contributions – but for a $500 benefit only?

In the end, the current advice of salary package super (limited and less benefit), lots of  non concessional contributions (very limited), use a TTR (very limited benefit) and at the end a tax free income source (limited as well) is all changed.

A brave new world for super advisors…

 

 

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The shortest Budget summary ever…

Lets be brief (so I will ignore what will be covered in future Budgets)…

The second highest bracket of the marginal tax rate goes from $80,000 to $87,000 on 1 July 2016. So people earning more than $80,000 pay less tax.

The company tax rate for companies with turnover of less than $10 million goes to 27.5% from 1 July 2016 (remember if the turnover was less than $2 million it has been 28.5% since 1 July 2015). Also, the unincorporated tax discount will be increased from 5 per cent to 8 per cent from 1 July 2016 for small businesses not operating through companies.

The government will take on some of the recommendations of the Board of Tax on Division 7A but they give us no idea what these are – but the Board’s recommendations were amazing but were hidden away late last year.

The Small business test will be increased to $10 million… BUT NOT FOR THE SMALL BUSINESS CGT CONCESSIONS… SO this will mean more small businesses can use the simplified depreciation rules, including the ability to claim an immediate deduction for each and every asset purchased costing less than $20,000 until 30 June 2017. Also, more small businesses could do GST on a cash basis.

And then there are the super changes…

Change 1: You can only make $500k of non concessional contributions in your lifetime. If at 3 May you had already done this you can’t make any more. No more $180k (or $540 over 3 years)

Change 2: Concessional cap goes to $25k on 1 July 2017 for everyone. That won’t leave much space for high income individuals to package extra super.

Change 3: If you have less than $500k in super you can use up prior year (up to 4 years ago) unused concessional cap amounts. So if you have $300k in super and have made no contribution in the last four years this proposes to let you put $100k (4x$25k) into super as concessions contributions

Change 4: Div 293 will apply to amounts above $250k, not $300k, from 1 July 2017.

AND MY FAVOURITE CHANGE – Change 5: There will be a $1.6 million balance cap on the total amount of superannuation that can be transferred into the tax-free retirement phase. If you currently have $10 million funding your pension in retirement, you have to get this down to $1.6 million by 1 July 2017 (by a $8.4 million payment to the member who then invests it and gets to pay tax at marginal rates rather than it being exempt). If you reach pension age and have more than $1.6 in your account you can tax the $1.6 million into pension but the remaining amount has to stay in accumulation (at 15% tax rate) and one day will be paid out as a lump sum (or lump sums).

I should also talk about the “Diverted Profits Tax” but it is just an extension of the General Anti Avoidance Rule and so I will save it for another time…

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Negative Gearing Equity?

The Government are being hammered for not removing negative gearing as it is not “equitable”. Those saying “equity” seem to have a different definition then the standard tax axioms but when asked what they mean they indicate that the benefit of negative gearing (aka borrowing to buy an income producing asset and claiming a deduction for the borrowing costs) goes to high wealth individuals.

Of course it does… We have a marginal tax system where high wealth individuals pay more tax on each dollar they earn and so get better benefit for their tax deductions. If I earn less than $18,200, negatively gear and pay $1 of interest I get no benefit from the $1 in my tax return as there was already no tax to pay before I even considered my deduction. But if I earn more than $180,000, I get $0.49 of benefit (less tax payable) for the $1 of interest.

So the solutions available if you don’t like this “inequity” include a flat tax rate (not possible, unless you are Ted Cruze or Donald Trump) or limit deductions for everyone. Not just negative gearing deduction, but all deductions as the same inequity applies to all deduction (just as ridiculous).

The reason every tax deduction is not “equitable” is the same reason tax payments are not “equitable”. Because some people pay a much higher rate of tax on each dollar they earn (someone earning $180,000 pays an average tax rate of 32%, someone on $80,000 pays an average tax rate of 22% and someone earring $18,200 pays an average tax rate of 0%) they get a much higher benefit from deductions.

And for the Labor supporters who think their policy is more “equitable”… Under the Labor policy negative gearing deductions on existing properties will still be able to be offset against non salary income. Who has non salary income (dividends, business income…)? High wealth individuals. This will mean even more of the benefit of negative gearing will flow to high wealth individuals. And who will buy the new residential premises that can be negatively geared? Those that can pay the most (high wealth individuals) and those who will get the most benefit from the negative gearing (high wealth individuals). If you believe the current system is a problem, then the Labor proposal will only make it worse.

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