Welcome to our April newsletter and, as the days are getting shorter, there’s definitely a bit of a nip in the air.
While temperatures may be cooling, the financial markets are continuing to generate some heat as investors keep a close eye on activities in Australia and overseas.
Since the Albanese Government announced its intention to double the tax on investment earnings for super account balances over $3 million, there has been lots of talk about taking money out of self managed superannuation funds (SMSFs) to avoid the tax hikes. In our second article we discuss the ATO’s increasing focus on illegal early SMSF access.
Our final article this month is about what to look out for this end of FBT year for both employers and employees.
How do interest rates affect your investments?
Interest rates are an important financial lever for world economies. They affect the cost of borrowing and the return on savings, and it makes them an integral part of the return on many investments. It can also affect the value of the currency, which has a further trickle-down effect on other investments.
So, when rates are low they can influence more business investment because it is cheaper to borrow. When rates are high or rising, economic activity slows. As a result, interest rate movements are also a useful tool to control inflation.
For the past few years, interest rates have been close to zero or even in negative territory in some countries, but that all started to change in the last year or so.
Australia lagged other world economies when it came to increasing rates but since the rises began here last year, the Reserve Bank of Australia (RBA) has introduced hikes on a fairly regular basis. Indeed, the base rate has risen 3.5 per cent since June last year.
The key reason for the rises is the need to dampen inflation. The RBA has long aimed to keep inflation between the 2 and 3 per cent mark. Clearly, that benchmark has been sharply breached and now the consumer price index is well over 7 per cent a year.
Winners and losers
There are two sides to rising interest rates. It hurts if you are a borrower, and it is generally welcomed if you are a saver.
But not all consequences of an interest rate rise are equal for investors and sometimes the extent of its impact may be more of a reflection of your approach to investment risk. If you are a conservative investor with cash making up a significant proportion of your portfolio, then rate rises may be welcome. On the other hand, if your portfolio is focussed on growth with most investments in say, shares and property, higher rates may start to erode the total value of your holdings.
Clearly this underlines the argument for diversity across your investments and an understanding of your goals in the short, medium, and long-term.
Shares take a hit
Higher interest rates tend to have a negative impact on sharemarkets. While it may take time for the effect of higher rates to filter through to the economy, the sharemarket often reacts instantly as investors downgrade their outlook for future company growth.
In addition, shares are viewed as a higher risk investment than more conservative fixed interest options. So, if low risk fixed interest investments are delivering better returns, investors may switch to bonds.
But that does not mean stock prices fall across the board. Traditionally, value stocks such as banks, insurance companies and resources have performed better than growth stocks in this environment.iAlso investors prefer stocks earning money today rather than those with a promise of future earnings.
But there are a lot of jitters in the sharemarket particularly in the wake of the failure of a number of mid-tier US banks. As a result, the traditional better performers are also struggling.
Fixed interest options
Fixed interest investments include government and semi-government bonds and corporate bonds. If you are invested in long-term bonds, then the outlook is not so rosy because the recent interest rates increases mean your current investments have lost value.
At the moment, fixed interest is experiencing an inverted yield curve, which means long term rates are lower than short term. Such a situation reflects investor uncertainty about potential economic growth and can be a key predictor of recession and deflation. Of course, this is not the only measure to determine the possibility of a recession and many commentators in Australia believe we may avoid this scenario.ii
What about housing?
House prices have fallen from their peak in 2022, which is not surprising given the slackening demand as a result of higher mortgage rates.
Australian Bureau of Statistics data showed an annual 35 per cent drop in new investment loans earlier this year.iii
The changing times in Australia’s economic fortunes can lead to concern about whether you have the right investment mix. If you are unsure about your portfolio, then give us a call to discuss.
Illegal early SMSF access on ATO’s radar
Since the Albanese Government announced its intention to double the tax on investment earnings for super account balances over $3 million, there has been lots of talk about taking money out of self managed superannuation funds (SMSFs) to avoid the tax hikes.
As SMSF trustees have more control of their super assets compared to those invested in a large superannuation fund, accessing your money, and moving it out of the super system can sound like an attractive idea.
But as good as it might sound, gaining early access to your super savings is illegal and it is an activity the Australian Taxation Office is increasingly keen to stamp out.
Trustee disqualifications rise
According to ATO assistant commissioner Justin Micale, nearly 300 SMSF trustees have been disqualified for illegally accessing their retirement savings in the first half of 2022-23, more than in the entire 2021-22 financial year. The ATO crackdown has seen $2 million in administrative penalties issued and an additional $4 million in tax collected.i
Illegal early release is one of the major areas of focus for the ATO’s SMSF enforcement team. “We are seeing an increasing number of trustees taking advantage of their direct access to their superannuation bank account and they are using these savings to pay for items such as business debts, holidays, renovations and new cars,” Micale told an SMSF industry conference.ii
In an attempt to stamp out early access, the ATO is checking funds that fail to lodge annual returns, while SMSF auditors are being encouraged to report SMSF loans or breaches of the payment standards – even if the money is repaid to the fund.
Legally accessing your retirement savings
The ATO scrutiny is part of a broader campaign to remind SMSF trustees of their responsibility to ensure if they access their super early, they do it within the super laws.
Generally, you can only access your super when you reach your preservation age and retire, or turn 65 even if you are still working. For anyone born after 30 June 1964, the preservation age is age 60.
To access your super legally, you must satisfy a condition of release. There are only very limited circumstances where you can legally access your super early and the eligibility requirements often relate to specific expenses or terminal illness.
It is illegal to access your super for any reason other than when it is allowed by the superannuation law.
Illegal early access schemes
Currently, a spate of illegal early access schemes are encouraging trustees to withdraw their super early to pay for personal expenses such as credit card debt, holidays, or buying property.
According to the ATO, promoters of these schemes usually charge high fees and commissions and request identity documents. This often leads to identity theft (which involves using your personal details to commit fraud or other crimes) and can take years to clear up. Your super savings could even be stolen.
The best way to protect yourself from illegal access schemes is to halt any involvement with a scheme or the person approaching you. Do not sign any documents or provide your personal details and contact the ATO immediately.
Protecting your SMSF
Keeping your fund details updated with the ATO is one of the best ways to help reduce the risk of fraud and illegal access to your SMSF.
Trustees should ensure their SMSF’s membership details are recorded correctly and the ATO is notified of any changes. This includes details such as the fund’s bank account, electronic service address, trustees, members and contact details.
Regular updates ensure that, when someone initiates a rollover request from an SMSF the ATO’s SMSF Verification System (SVS) can verify the fund and member details. If the receiving SMSF does not have a ‘registered’ or ‘complying’ status, it won’t be able to receive the rollover.
To further reduce the risk of fraud, the ATO sends trustees emails and text alerts when changes are supplied about key details relating to a fund.
If you need help understanding the super and tax rules governing your SMSF, call our office today.
What to look out for this end of FBT year – 31 March 2023
The Fringe Benefits Tax (FBT) year ends on 31 March. We’ve outlined the hot spots for employers and employees.
FBT updates and problem areas:
- Housekeeping essentials
- FBT exemption for electric cars
- Work from home arrangements
- Car parking changes
- Mismatched information for entertainment claimed as a deduction and what is reported for FBT purposes
- Business assets personally used by owners and staff
- Employee contributions for FBT purposes and salary sacrifice
- Not lodging FBT returns
- Travelling or living away from home
It can be difficult to ensure the required records are maintained in relation to fringe benefits – especially as this may depend on employees producing records at a certain time. If your business has cars and you need to record odometer readings at the first and last days of the FBT year (31 March and 1 April), remember to have your team take a photo on their phone and email it through to a central contact person – it will save running around to every car, or missing records where employees forget.
FBT exemption for electric cars
Electric cars represent a small but growing proportion of the new car market in Australia. To encourage Australians to make the shift, the Government has passed legislation that provides an FBT exemption for certain no or low emissions vehicles from 1 July 2022.
This means that providing your team members with the use of electric cars, hydrogen fuel cell electric cars or plug-in hybrid electric cars can now potentially qualify for an FBT exemption. The FBT exemption should normally apply where:
- The value of the car is below the luxury car tax threshold for fuel efficient vehicles ($84,916 for the 2022-23 financial year); and
- The car is both first held and used on or after 1 July 2022.
If your business provides these benefits to employees your business will still need to work out the taxable value of the car benefit as if the FBT exemption didn’t apply. This is because the value of this exempt car benefit is still taken into account in the reportable fringe benefits amount of the employee. While income tax is not paid on this amount, it can impact the employee in a range of areas (such as the Medicare levy surcharge, private health insurance rebate, employee share scheme reduction, and social security payments).
FBT and work from home arrangements
Post the pandemic, many workplaces have shifted from fully remote, to a combination of remote and in-office work. To keep everyone productive, many employers have provided employees with work-related items such as laptops and mobile phones.
Providing these devices shouldn’t trigger an FBT liability as long they are primarily used for work purposes. Where multiple similar items have been provided during the FBT year, the situation becomes more complex unless your business is a small business (has an aggregated turnover of less than $50m).
If an FBT exemption isn’t available, it is often worth considering whether the FBT liability on these items could be reduced by the employee purchasing the item themselves and claiming a once-only deduction in their personal return.
More workplaces caught by car parking changes
A controversial ruling from the ATO has expanded the scope of the FBT rules dealing with car parking benefits meaning that more employers will be considered to be providing car parking benefits to staff.
The ruling expands the definition of what constitutes a commercial parking station. It can now include parking stations that charge penalty rates for all-day parking to the public, such as those normally located in shopping centres.
Where an employer provides:
- Car parking facilities for employees within 1km of a commercial parking station, and
- That commercial car park charges more than the car parking threshold ($9.72 for the year ended 31 March 2023)
a taxable car parking fringe benefit will normally arise unless the employer is a small business and able to access the car parking exemption.
This new expanded definition of a commercial parking station applies from 1 April 2022. If you provide car parking facilities to team members, it is important that you either:
- Have certainty that you are able to access the small business exemption (which has a more generous business turnover threshold of less than $50m from 1 April 2021 onwards); or
- Understand the implications of the ruling to the car park facilities you provide.
Mismatched information for entertainment claimed as a deduction and what is reported for FBT purposes
One of the easiest ways for the ATO to pick up on problem areas is where there are mismatches.
When it comes to entertainment, employers are keen to claim a deduction but this is not recognised as a fringe benefit provided to employees.
Expenses related to entertainment such as a meal in a restaurant are generally not deductible and no GST credits can be claimed unless the expenses are subject to FBT.
Let’s say you taken a client out to lunch and the amount per head is less than $300. If your business uses the ‘actual’ method for FBT purposes then there should not be any FBT implications. This is because benefits provided to client are not subject to FBT and minor benefits (i.e., value of less than $300) provided to employees on an infrequent and irregular basis are generally exempt from FBT. However, no deductions should be claimed for the entertainment and no GST credits would normally be available either.
If the business uses the 50/50 method, then 50% of the meal entertainment expenses would be subject to FBT (the minor benefits exemption would not apply). As a result, 50% of the expenses would be deductible and the business would be able to claim 50% of the GST credits.
Business assets personally used by owners and staff
Private use of business assets is an area that crosses across a whole series of tax areas: FBT, GST, Division 7A and income tax.
Take the ATO’s example of the property company that claimed deductions for a boat on the basis that it was used for marketing the company. Large deductions were claimed relating to running the boat. This attracted the ATO’s attention and a review was carried out.
The ATO discovered the boat was used by the director and other employees for private trips, and to host parties for people who had paid to attend the company’s property seminars.
When looking at the overall business activities, the ATO determined the director had purchased the boat primarily for their own private use. As a result, they disallowed the deductions and the private use of the boat was a fringe benefit for the employees of the company. The company had to lodge an FBT return and pay the resulting FBT liability, as well as the income tax shortfall, interest and penalties.
Employee contributions for FBT purposes and salary sacrifice
An issue that frequently causes confusion is the difference between the employee salary sacrificing in order to receive a fringe benefit and making an employee contribution towards the value of that fringe benefit.
To be an effective salary sacrifice arrangement (SSA), the agreement must be entered into before the employee becomes entitled to the income (e.g., before the period in which they start to perform the services that will result in the payment of salary etc.).
Where an employee has salary sacrificed on a pre-tax basis towards the fringe benefit provided – laptop, car, etc., they have agreed to give up a portion of their gross salary on a pre-tax basis and receive the relevant fringe benefit instead.
As a starting point, the taxable value of the fringe benefit is the full value of the expense paid by the employer. The salary sacrifice arrangement doesn’t reduce the FBT liability for the employer.
The employer recognises a lower cost of salary and wages provided to the employee as their ‘cost saving’, which results in lower PAYG withholding and in most cases, superannuation guarantee obligations, but they still recognise the full value of the fringe benefit as part of their taxable fringe benefit which is subject to FBT.
The employee recognises that they have a reduced amount of salary and wages, and a non-cash benefit in the form of the fringe benefit.
Not lodging FBT returns
The ATO is concerned that some employers are not lodging FBT returns or lodging them late to avoid paying tax. The ATO will normally pay close attention to any employer that:
- Is registered for FBT but lodges late. If your business is likely to face delays in lodging the FBT return, it’s usually a good idea to get in touch with the ATO early and ask for an extension request; or
- Is not registered for FBT. If your business employs staff (even closely held staff such as family members), and is not registered for FBT, it’s essential you have reviewed your position and are certain that you do not have an FBT liability. If the business provides cars, car spaces, reimburses private (not business) expenses, provides entertainment (food and drink), employee discounts etc., then you are likely to be providing a fringe benefit. Make sure you have reviewed the FBT client questionnaire we sent you!
Travelling or living away from home
The ATO have recently finalised their guidance on travel costs and will be looking closely at transport, meal and accommodation benefits.
Travel allowances often cause confusion for many businesses. If your business provides travel allowances to employees, you will normally need to consider whether they are living away from home or just travelling overnight in the course of work.
Where your employees are travelling overnight in the course of work, these travel allowances are normally assessable to your employees. However, they might be entitled to personally claim deductions for some of their travel expenses.
For workers that are living away from home, these allowances are dealt with instead through the FBT system as a fringe benefit. While the taxable value of the benefit is usually the amount paid, there are some generous concessions that can allow for some or all of the allowance to be FBT exempt if certain conditions are met.
As a result, getting the distinction right between travelling overnight for work or living away from home is important.
The ATO explains in TR 2021/4 when allowances should be classified as a travel allowance or a living away from home allowance. Helpfully, the ATO has also finalised a ‘safe harbour’ style approach in PCG 2021/3 which can be used specifically for this purpose.