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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…