Dear Client,

As we come to the end of another year, we take this opportunity to remind you of some important tax matters which should be addressed prior to 30 June 2010.  Of course, for tax planning to be most effective, it should form part of all financial decisions made year round.  The information in this newsletter is general in nature and should you have specific questions, please contact our office.

Superannuation contribution limits

It is important to continue to be aware of the limits imposed on superannuation contributions.  If these limits are breached, penalty tax may be levied on the excess contribution at the top marginal rate.

You can make up to $150,000 a year in non-concessional (undeducted) contributions.  If you’re under 65 in a financial year, you have the option of “bringing forward” some of these contributions.  Instead of a yearly cap of $150,000 you could contribute $450,000 in one year and then no no-concessional contributions over the next two years.

From 1 July 2009, any contributions made by your employer that are in addition to the mandated 9% superannuation guarantee will be reported on your PAYG Payment Summary and will be assessed in order to measure eligibility for assistance payments, such as Family Tax Benefit, Baby Bonus, Superannuation Co-Contribution, as well as eligibility to claim a tax deduction for personal superannuation contributions.  Such contributions are known as Reportable Employer Superannuation Contributions.

Superannuation Co-Contributions

As in prior years, the Superannuation Co-Contribution is available for taxpayers who make personal superannuation contributions.  The Government co-contribution will be paid to the taxpayer’s fund when the Tax Office has received both the taxpayer’s 2010 tax return and contribution information supplied by their superannuation fund.  The co-contribution is not shown on the taxpayer’s tax return or assessment, but notified separately once the information has been matched.

To be eligible, an individual must make a personal contribution (after tax) to a Superannuation Fund and earn more than 10% of their total income from either salary or business income. The individual’s total income (assessable income, salary sacrificed amounts, reportable fringe benefits and reportable employer superannuation contributions) must be less than $61,920.

How is the contribution calculated?

For the 2010 income year, where an individual’s total income is $31,920 or less, the co-contribution is an amount equal to 100% (up to a maximum co-contribution of $1,000) of the employee’s personal contributions.  Where total income exceeds $31,920 the co-contributed amount phases out until it ceases at $61,920.  The co-contribution is not taxed when received by the fund.

Minimum pension draw down limits to increase

In 2008 the Federal Budget announced that the minimum pension draw down limits were halved as a temporary measure to assist superannuation funds and their members during the Global Financial Crisis.  This temporary measure will cease at 30 June 2010.  Accordingly, superannuation members who are drawing either an account based pension or a transition to retirement pension should ensure that for the 2011 year and following, that they meet the new minimum pension requirements.  Should you require further information, please contact your Superannuation Fund or this office.

Reduction in personal rates commencing 1 July 2010

The recent Budget also announced the following reductions in personal rates (excluding Medicare Levy):

From 1 July 2010 the Low Income Tax Offset increases from $1,350 to $1,500.

Medical expenses offset

In the recent Federal Budget, Treasurer Swan advised that from 1 July 2010, the Medical Expenses Offset threshold will increase from $1,500 to $2,000.  For the 2010 tax year, the threshold continues to be $1,500 and any out of pocket medical expenses above this amount will attract a rebate of 20%.

Standard tax deduction

The Government also announced a standard tax deduction of $500 per individual which will be able to be accessed by individuals from the 2013 income year.  We will address this further in future updates.

Henry Review into the Taxation System

You would no doubt have seen a lot of press surrounding the release of the Henry Report and the Government’s response to some of its recommendations.  While the review recommended 138 changes, a small number have been addressed by the Government.  Those which will impact on you in the near future have been announced as part of the recent Federal Budget and have been addressed above.

ATO Benchmarking

The ATO has released a range of benchmarks for business to assess their profitability against industry benchmarks.  The ATO are planning to use these benchmarks as a tool to assist in curtailing the cash economy.  We will post a link to the available benchmarks on our website for your information, and if you have any queries, you should contact our office.

Mixing Business/Investment loans with personal debt

I take this opportunity to remind you again of the importance of keeping a distinction between business/investment loans from private debt. The Australian Taxation Office will look at the purpose of the loan to ascertain whether the interest is deductible. The problem arises when a business/ investment loan has a redraw facility and due to payments in advance a redraw is made and the funds used for private purposes. This redraw, even though made from surplus repayments, will be a private loan and from that point on the repayments and interest will need to be apportioned between the business/investment and private debt.  A repayment specifically for the private portion of the debt cannot be made as any repayment must be apportioned between the two types of debt. It is a better practice to “park” excess repayments in an offset account and use the offset account to fund private projects.

I also take this opportunity to remind you to provide our office with updated information when you move, change telephone numbers or email addresses, or your personal circumstances change.  This will ensure all your information is current with the relevant authorities.

We will continue to update the website throughout the year with developments and interesting articles for your information.  The website also has links to the following data:

• Vehicle kilometre rates
• Travel allowance – reasonable expenses
• Industry benchmarks

Have a prosperous new financial year.

Regards,

Disclaimer

While B Davis & Associates Pty Ltd considers the advice provided above to be accurate, no warranty is given to this effect.  The advice is general in nature and you should seek specific, tailored advice before acting on any of the above.  It should not be considered financial product advice for the purposes of the Corporations Act 2001.

Example:

The balance of a loan outstanding is $50,000 and a redraw facility is used to fund a $50,000 holiday. Sometime after the holiday $50,000 is repaid to the loan.

To avoid this adverse outcome offset accounts or subsidiary loans should be used.  This will enable private funds to be accumulated beside the main investment loan (offset account) and used for private purposes when required.  A subsidiary loan enables repayments to be directed toward specific loans and maximise deductible interest expense by accelerating repayments toward the loans used to provide funds for private use.

There are 2 ways by which a religious organisation (hereafter “churches”) can remunerate their religious workers (“ministers”):

• by way of salary/stipend;
• by way of non-assessable benefits.

1.         Salaries or Stipends

Ministers are now regarded as “employees” under the “Pay As You Go” requirements.  Churches are therefore required to:

• Be registered with the Tax Office as an employer;
• Complete and forward to the Tax Office an “Employment Declaration” within 28 days of the commencement of any new employee;
• Withhold tax at the applicable rate and forward it to the Tax Office when lodging their Business Activity Statement.
• Provide employees with a “PAYG Summary” at the end of the June financial year.
• Make superannuation contributions on behalf of the minister every quarter (currently 9% of their salary).  These payments should be made within 28 days from the end of the quarter.

There are significant financial penalties imposed where an organisation fails to comply with the above.

2.         Providing Benefits

In addition to a salary/stipend, a church may provide non-assessable benefits to a minister.

Section 57 of the Fringe Benefits Tax Assessment Act states that where a religious institution provides a benefit to a religious practitioner, and the benefit is provided principally in respect of pastoral duties or duties directly related to the practice, study, teaching or propagation of religious beliefs, then the benefit is an exempt benefit.

Consequences of a benefit being an “Exempt Benefit”

The minister is not assessed on the receipt of exempt benefits.  The church pays no Fringe Benefits Tax on the payment of exempt benefits.  Exempt benefits are not required to be reported on the PAYG Payment Summary issued to the minister by the church.

Complying with the Section 57 Requirements

The benefit must be paid by a “religious institution”, such as a local church, denomination or church agency.

The employee is a “religious practitioner”, defined as a person considered appropriately qualified by the religious institution and called by its due processes to pastoral or related duties. Students undergoing religious instruction should fall within the definition.

Other church employees, such as personal assistants, administrators, caretakers, etc, are unable to receive exempt benefits.

The benefit should be provided principally in respect of pastoral or related duties.  Therefore, a minister will not be able to receive exempt benefits where their role is principally of a non-pastoral nature, such as administration or finance.

Determining How Much Will Be Paid as Stipend and Benefits

Whereas it is technically possible for a church to provide no stipend and 100% in exempt benefits to a minister, such extreme arrangements or anything close to it may be considered an inappropriate use of a generous concession.

In our opinion, a good rule of thumb is the amount of exempt benefits provided should not exceed the amount paid to the minister as salary or stipend.  That is, exempt benefits should not exceed 50% of the total financial package.

Determining What Type of Exempt Benefits Will Be Paid

The church and the minister should agree in advance and in writing as to the amount and type of benefits that will be provided.  A church Minute should also recognise the arrangement.

Some common benefits provided are:

• Motor vehicle expenses, including fuel, registration, insurance, loan repayments.
• Housing expenses, including rent, mortgage repayments, rates, insurance, electricity.
• Home office expenses, including telephone, internet, library, computer, desk or other office furniture.
• Ministry related hospitality expenses.
• Seminar or study costs, including travel and accommodation related to such.
• Education expenses for the minister’s family, such as school or university fees, textbooks.
• Health insurance for the minister’s family, as well as unrecouped medical and dental costs.

In our opinion, the following benefits would not be considered appropriate:

• Grocery and food supplies.
• Personal clothing and other household items.
• Holiday expenses.

Administering the Payment of Exempt Benefits

Exempt benefits must be paid or reimbursed by the church.  If a separate account is required from which benefits will be paid, then the account must be in the name of the church.

Signatories to the account must be in accordance with the constitution of the church.  Generally, 2 signatories would be required.

Accounts in the name of the minister (even where designated “Benefit Account”), or where the minister is the sole signatory, are not effective in providing exempt benefits.  All amounts received into such accounts will be assessed to the minister in addition to any amounts received by way of salary or stipend.

Since the Exempt Benefit Account is a church account, invoices and vouchers are the property of the church and must be retained in case of audit.  The church may entrust this obligation to the minister.

The Exempt Benefit Account should be disclosed in the Financial Statements of the church.

GST paid on exempt benefits by the church can be claimed back through the church’s Business Activity Statement.  The GST refunded would then generally be allocated to the Exempt Benefit Account.

Any surplus balance at the end of the financial year may be rolled over into the following year, or paid out as salary/stipend (with PAYG withheld) and included in the minister’s taxable income.  The amount may be forwarded to another church should the minister commence pastoral duties in another setting.

Conclusion

Ministers and those in leadership should ensure that they act with integrity. Churches and ministers have been accorded significant tax concessions by the government, and should not be careless with the concession.