Following this year’s Federal Budget, discretionary family trusts are under scrutiny while many advisers will be helping their clients work through a larger-than-usual GST impost as receipts rise in line with inflation.
Discretionary family trusts are in focus this 30 June after the Australian Taxation Office (ATO) published new guidance material regarding section 100A of the Income Tax Assessment Act 1936. The ruling affects how trusts distribute income and impacts common tax structures for high-net-worth individuals (HNWs) and small businesses.
“As a result, there will be less scope to widely distribute income among family groups, which is likely to result in higher taxes for family members who are beneficiaries of a discretionary family trust,” explained Pete Pennicott, principal adviser of financial advice firm Pekada.
The ATO’s updated guidance may not impact every discretionary trust. Nevertheless, advisers are spending considerable time in the lead up to the end of the financial year working through their clients’ affairs to ensure all trust distribution arrangements are in line with the ATO’s latest guidance.
“We are forming views on how the ATO’s announcements affect clients’ specific situations,” said HLB Mann Judd Sydney tax partner Peter Bembrick.
Founder of and principal adviser at Wealtheon Financial Services, Kristopher Meuwissen, said some other wealth management tax issues for HNWs this year included land tax and capital gains tax.
“There is going to be downward pressure on growth asset values with interest rates slated to increase. So HNW investors are looking to take some risk off the table and get ready for a market correction. This means selling assets like property, shares and crypto that have done very well over the last five years.”
With market volatility spiking in recent months, advisers are spending considerable time as we head towards 30 June assessing clients’ capital gains and capital loss status on their investment portfolio.
”While the overall portfolio return may be positive, there could be opportunities at the moment to exit positions where the client’s investment conviction has changed and trigger a capital loss to offset capital gains this financial year or into future financial years. This will also allow clients to recalibrate their portfolio for current conditions,” said Pennicott.
It’s important to start this process sooner rather than later. This is because tax loss harvesting tends to peak late into the financial year, which can prompt extra weakness for assets whose investment values have already dropped this financial year.
NAVIGATING SUPER AND PENSION RATES
Concessional superannuation contributions may be a way to address capital gains implications from investment returns achieved in the first half of 2021/22.
“Disparity between spouses’ super balances is really common, which presents an opportunity to reduce tax and make progress in achieving a balance between both partners’ accounts.
“Although, it’s important not to fixate too much on the current financial year and instead think long term about the best way to approach the balance transfer cap, which is currently $1.7 million. So, annual super contribution strategies should be front of mind if it’s likely one spouse will breach this level and the other one will fall short,” said Pennicott.
In this situation, it can make sense to carry forward contributions if one half of the couple has a total super balance of less than $500,000 as at 30 June, 2021.
“They can carry forward any unused concessional contributions cap amounts accrued from 2018/19 to 2020/21 to increase their concessional cap in 2021/22. This may be particularly useful where a large asset has been sold, such as an investment property,” he added.
New laws mean retirees who could not previously make contributions to their super, based on their age, may now be able to add to their fund. Under previous rules, members must have been no older than 67 on 1 July of any financial year to be eligible to use the bring-forward rule. From 1 July, 2022, members may be able to access the bring-forward rule if they are less than 75 on the prior 1 July.
Under the bring-forward provisions, eligible super fund members may contribute funds equivalent to three years of the annual non-concessional contributions cap to their super fund in one year, without paying more tax. If a member’s total super balance is less than $1.48 million, he or she may be able make non-concessional contributions of up to $330,000 in a single financial year or over a three-year period using this provision.
“Other eligibility rules will continue to apply, such as the total super balance limits, so make sure you understand your eligibility before making any contributions,” said Pennicott.
Super aside, relaxed pension drawdown rules also remain in place for the time being, with the 50% reduction to minimum pension drawdowns extended for the 2022/23 financial year.
“These measures have been in place since the 2019/20 financial year and the extension is an opportunity for people to preserve their tax-free pension balance. This is a big win for self-funded retirees, who may have other assets to draw on to support their lifestyle in less tax-effective structures,” he added.
What’s key is to assess whether clients need more than the reduced minimum pension requirement to support their lifestyle.
Pennicott added: “If not, then it may be beneficial to retain their funds within the tax-free pension environment, allowing them to continue compounding. Also remember the reduced minimums are an option and not mandatory”.
For retirees, an important issue is maximising deductible super contributions, subject to their level of taxable income, where possible continuing non-concessional contributions to move available cash into the more tax-effective structure of a super account or self-managed superannuation fund (SMSF).
“Tax-effective estate planning is very important for retirees, including reviewing the use of testamentary trusts in their wills and reviewing CGT implications of key assets that will be inherited by their children and other family members,” said Bembrick.
Tax issues triggered by downsizing the family home, including maximising use of the CGT main residence exemption and making down-sizer super contributions, also occupy advisers’ minds at this time of year.
Bembrick also recommends at this time of year, retirees consider the implications of tax-effective transfers or gifts of assets to their children during the retirees’ lifetime, including managing CGT and transfer duty issues and tidying up family investment structures.
TAKING CARE OF BUSINESS
As usual, this year’s Budget was full of tweaks both positive and negative to the tax and legal system governing small businesses. These changes will likely keep advisers awake at night for the next few months.
For instance, a 120% tax deduction for external staff skills and training costs for small businesses starts immediately and runs until 30 June, 2023.
“Although any amounts spent before 30 June, 2022 can only be claimed in the 30 June, 2023 year,” said Bembrick.
Qualifying small businesses can also immediately enjoy a 120% tax deduction for digital technology expenses. This provision starts now and runs until 30 June, 2023.“The additional deduction allowance for any amounts spent in the 2022 year can only be claimed in the 30 June, 2023 tax return, along with any amounts spent in the 2023 year, capped at $100,000 of qualifying expenditure per year,” he added.
Advisers are also helping clients navigate changes to the employee share scheme rules for start-up businesses. This includes a rise in the concession limit from $5,000 to $30,000.
Payroll tax as well as fringe benefit tax paid by companies who have provided extra benefits to employees alongside or instead of pay rises, are some of the other major tax issues small businesses and their advisers are managing this financial year end. Additionally, this year many businesses will likely need to pay more GST than usual. This is because inflation has lifted the price of goods and services, which directly translates to higher GST costs for many firms.
Other areas of focus include profits paid as company dividends, including the reduction in small business company tax rate to 25% from 1 July, 2022, and ensuring the correct franking percentages.
“We’re working on correctly accounting for shareholder loans and discretionary trust distributions to companies to ensure compliance with the rules in Division 7A, including timing of loan repayments or entering into complying loan agreements,” said Bembrick.
“Analysing the impact of the ATO’s new guidelines on allocation of professional firm profits, which impact a wide range of professions such as lawyers, medical practitioners, vets, accountants, architects, engineers, management consultants, actuaries and more, is also in focus this year,” he added.
Against this backdrop, it’s shaping up to another busy end of tax year for financial advisers and their clients to ensure everyone is in the best possible financial and tax position.
