The Reserve Bank of Australia (RBA) has been at the center of debate, with politicians and the public questioning its policies on interest rates. There’s increasing frustration that the RBA has not reduced interest rates, despite community pressure. Let’s take a look at what’s really happening and why the RBA is maintaining its current course.

Political Criticism of the RBA

Treasurer Jim Chalmers has openly blamed rising global uncertainty and interest rates for “smashing the economy.” Former Treasurer Wayne Swan also voiced his frustration, accusing the RBA of following outdated economic principles instead of making sensible decisions. He argues that their policies are hurting families, causing less spending, and pulling the economy backward.

For Australians with mortgages or paying rent, the last 13 consecutive interest rate hikes have been hard to bear. The first increase happened in May 2022, and there has been no relief since. This has had a ripple effect on households, leaving many feeling the squeeze.

The RBA’s Decision on Interest Rates

In its September meeting, the RBA Board chose to keep the official cash rate at 4.35%. The main reason for this decision is the ongoing problem of high inflation, which has been a challenge for the past 11 quarters. In the year leading up to June 2024, the consumer price index (CPI) rose by 3.9%, staying above the RBA’s target range of 2-3%.

Despite this high inflation, the RBA has been clear that it’s too early to think about lowering interest rates. RBA Governor Michele Bullock has warned that rate cuts are unlikely anytime soon.

Economic Data Paints a Gloomy Picture

According to the Australian Bureau of Statistics (ABS), the June 2024 National Accounts show that the economy is struggling. Per capita GDP declined for the sixth consecutive quarter, falling by 0.4% to -1.5%. This marked the longest period of continuous economic weakness on record.

Household spending, which is a major part of the economy, has also slowed down. In the June quarter, spending decreased by 0.2%, the weakest since the COVID Delta-variant lockdown in September 2021.

Less Spending on Discretionary Items

One of the biggest areas hit by the downturn is discretionary spending—money people spend on non-essential items like travel, events, and dining out. This type of spending fell by 1.1%, with the hardest-hit sectors being hotels, cafes, and restaurants, which saw a 1.5% decrease. Even spending on groceries dropped slightly by 0.1%, showing how households are cutting back to save money.

Household Savings Hit a 17-Year Low

Adding to the financial stress, household savings are at their lowest level since 2006. Households are now saving just 0.9% of their income. When household spending grows faster than income, it becomes harder for people to save, making it tougher to build financial security.

Where is Economic Growth Coming From?

While household spending is down, the Australian economy still managed to grow by 0.2% in the June quarter. However, this growth was mainly driven by government spending, not consumer demand. Government consumption added 0.3 percentage points to GDP growth, with social assistance programs and state government expenditures boosting the economy.

The RBA’s Difficult Balancing Act

The RBA is trying to balance two major goals: bringing inflation back to its target range while protecting the job market gains made in recent years. The RBA expects to reach its inflation target of 2-3% by the end of 2025.

Over the past 18 months, most items in the consumer price index (CPI) basket have been rising faster than normal. However, prices for goods have started to come down as supply issues caused by the COVID-19 pandemic and the war in Ukraine have begun to ease. But two problem areas remain: housing and services.

The Cost of Housing and Services

Housing costs are rising because of increased construction costs and higher rent. Meanwhile, inflation for services remains high at 5.3% in the June quarter, even though spending on things like travel and dining out is down. The high cost of services is driven by several factors: wage increases, lower productivity, and rising business expenses such as electricity, insurance, logistics, and rent.

Who’s Hurting the Most?

Inflation tends to hit lower-income households the hardest, as they spend more of their income on necessities like food, utilities, and rent. In contrast, wealthier households tend to spend more on housing and non-essential items. As a result, younger and lower-income households are feeling the brunt of rising costs.

Conclusion

The RBA’s decision to keep interest rates high, despite political pressure and public dissatisfaction, reflects the complex challenge it faces. The RBA is trying to curb inflation while preventing the economy from falling into deeper trouble. While the pain is real for many Australians, especially those with lower incomes, the RBA remains focused on its long-term goal of stabilizing prices by 2025. Until then, the economic strain is likely to continue.

Pitt Martin Group is a CPA accounting firm, providing services including taxation, accounting, business consulting, self-managed superannuation funds, auditing and mortgage & finance. We spend hundreds of hours each year on training and researching new tax laws to ensure our clients can maximize legitimate tax benefit. Our contact information are phone +61292213345 or email info@pittmartingroup.com.au. Pitt Martin Group is located in the convenient transportation hub of Sydney’s central business district. Our honours include the 2018 CPA NSW President’s Award for Excellence, the 2020 Australian Small Business Champion Award Finalist, the 2021 Australia’s well-known media ‘Accountants Daily’ the Accounting Firm of the Year Award Finalist and the 2022 Start-up Firm of the Year Award Finalist, and the 2023 Hong Kong-Australia Business Association Business Award Finalist.

Pitt Martin Group qualifications include over fifteen years of professional experience in accounting industry, membership certification of the Australian Society of Certified Practising Accountants (CPA), Australian Taxation Registered Agents, certified External Examiner of the Law Societies of New South Wales, Victoria, and Western Australia Law Trust Accounts, membership certification of the Finance Brokers Association of Australia Limited (FBAA), Registered Agents of the Australian Securities and Investments Commission (ASIC), certified Advisor of accounting software such as XERO, QUICKBOOKS, MYOB, etc.

This content is for reference only and does not constitute advice on any individual or group’s specific situation. Any individual or group should take action only after consulting with professionals. Due to the timeliness of tax laws, we have endeavoured to provide timely and accurate information at the time of publication, but cannot guarantee that the content stated will remain applicable in the future. Please indicate the source when forwarding this content.

By Angela Abejo @ Pitt Martin Tax

The Australian Securities and Investments Commission (ASIC) recently reported a significant 39% uptick in corporate insolvencies compared to the previous financial year. Industries like construction, accommodation, and food services have been hit the hardest by this surge.

Restructuring Trends and Survival Rates

In the financial year 2023-24, there was an over 200% rise in restructuring efforts. Small businesses with liabilities under $1 million have the option to engage in restructuring processes. This allows them to keep control of their operations while formulating a recovery plan with the help of a restructuring expert. The goal is to establish an agreement with creditors.

Out of the 573 companies that began restructuring after January 1, 2021, and finished their restructuring plan by June 30, 2024, 89.4% were still registered as of June 30, 2024, while 5.4% had entered liquidation, and 5.2% were deregistered.

Michelle Bull from the Reserve Bank of Australia recently commented on the growing pressures within the business sector. She noted that the outlook is not as positive as it once was, and productivity is also lagging. This situation highlights the importance for managers to maintain a clear understanding of their financial health. Identifying and addressing issues early can prevent them from escalating.

Key Factors Behind Business Failures

A company is considered insolvent when it cannot meet its debt obligations on time. The top three reasons for business failure include:

1. Ineffective strategic management
2. Poor cash flow or excessive spending
3. Operating losses

Recognizing Warning Signs

It’s easy for businesses to miss early warning signs, leading to an over-reliance on hope that conditions will improve. Common signs of trouble include:

• Underperformance: When results fall significantly short of budget projections.
• Rising Fixed Costs: Increasing fixed costs without a corresponding revenue increase can harm profitability. Fixed costs remain the same regardless of business activity, so any rise can be detrimental if not matched by growth in revenue.
• Declining Gross Profit Margins: A shrinking margin between sales and the cost of goods sold directly reduces net profit.
• Over-Reliance on Debt: Relying heavily on debt rather than equity financing can lead to financial instability.
• Falling Sales: A drop in sales can have a ripple effect, stifling growth and reducing profits.
• Delayed Payments to Creditors: Good sales alone aren’t enough if cash flow issues prevent timely payment to creditors.
• Overspending: Spending beyond the business’s cash flow, hoping future income will cover today’s expenses, is a risky strategy.
• Inadequate Financial Reporting: Operating without clear financial visibility is like flying blind.
• Overexpansion: Rapid growth can overwhelm a business if sales outpace the company’s capacity to sustain them.
• Significant Bad Debts or Unsellable Inventory: Customers who fail to pay and stock that doesn’t sell can drain resources.

Pitt Martin Group is a CPA accounting firm, providing services including taxation, accounting, business consulting, self-managed superannuation funds, auditing and mortgage & finance. We spend hundreds of hours each year on training and researching new tax laws to ensure our clients can maximize legitimate tax benefit. Our contact information are phone +61292213345 or email info@pittmartingroup.com.au. Pitt Martin Group is located in the convenient transportation hub of Sydney’s central business district. Our honours include the 2018 CPA NSW President’s Award for Excellence, the 2020 Australian Small Business Champion Award Finalist, the 2021 Australia’s well-known media ‘Accountants Daily’ the Accounting Firm of the Year Award Finalist and the 2022 Start-up Firm of the Year Award Finalist, and the 2023 Hong Kong-Australia Business Association Business Award Finalist.

Pitt Martin Group qualifications include over fifteen years of professional experience in accounting industry, membership certification of the Australian Society of Certified Practising Accountants (CPA), Australian Taxation Registered Agents, certified External Examiner of the Law Societies of New South Wales, Victoria, and Western Australia Law Trust Accounts, membership certification of the Finance Brokers Association of Australia Limited (FBAA), Registered Agents of the Australian Securities and Investments Commission (ASIC), certified Advisor of accounting software such as XERO, QUICKBOOKS, MYOB, etc.

This content is for reference only and does not constitute advice on any individual or group’s specific situation. Any individual or group should take action only after consulting with professionals. Due to the timeliness of tax laws, we have endeavoured to provide timely and accurate information at the time of publication, but cannot guarantee that the content stated will remain applicable in the future. Please indicate the source when forwarding this content.

By Yvonne Shao @ Pitt Martin Tax

In a recent Federal Court case, the Tax Commissioner successfully argued that over $1.6 million deposited into an Australian couple’s bank account constituted assessable income rather than a gift or loan from friends.

The Case: Rusanova and Commissioner of Taxation

The case of Rusanova and Commissioner of Taxation, reads like a telemovie. It involves an Australian-resident Russian couple who received over $1.6 million in unexplained bank deposits, accrued more than $67,000 in interest, a father-in-law who is a Russian seafood exporter, several Australian companies, and a friend who provided multiple loans in $20,000 instalments.

The key issue in this case was whether the couple could convince the Australian Tax Office (ATO) that these unexplained deposits were either gifts or loans, and what happens when the Tax Commissioner disagrees. If the Commissioner believes the deposits are income, he can issue a default tax assessment, which shifts the burden onto the taxpayer to prove otherwise.

The Unexplained Deposits

Between 2012 and 2016, the couple received around $1,636,000 in their bank accounts. The ATO became suspicious when neither spouse lodged tax returns, mistakenly believing they had no taxable income. The couple claimed the deposits were gifts from the wife’s father, thus not subject to tax. However, there were no records, texts, or emails to support their claim or even to acknowledge the receipt of these funds.

In addition, a friend of the couple deposited several amounts, including a series of $20,000 transactions over the course of a week. The friend asserted these were interest-free loans with no agreed terms, although he couldn’t recall how he was asked to make the loans. There were also no loan agreements, emails, or texts to substantiate these transactions. Oddly, around the same time, the husband was documented as repaying amounts exceeding what had been borrowed, including transferring a Porsche Cayenne to his friend in Russia as alleged loan repayment.

Further complicating matters, the husband held directorships in four Australian companies, none of which had lodged tax returns. One of these companies was involved in seafood wholesale, distributing products from his father-in-law’s Russian export business. The husband claimed he was merely helping develop his father-in-law’s business from 2010 to 2016 without receiving any remuneration.

Challenging the Tax Commissioner

In 2017, a covert tax audit led to the ATO assessing the couple’s income tax liability based on the unexplained deposits and expenses, issuing a default assessment. The couple objected, partially succeeding in having the assessment revised. However, when they contested the revised assessment before the Administrative Appeals Tribunal (AAT), arguing it was excessive, their challenge was ultimately unsuccessful.

Can the Tax Commissioner Decide Your Tax Liability?

The Tax Commissioner has the authority to issue a ‘default assessment’ for overdue tax returns or activity statements based on what the ATO believes is owed, not what has been declared. Default assessments are particularly concerning because they may carry an administrative penalty of 75% of the tax-related liability, potentially increasing to 95% in cases of persistent non-compliance.

For the couple, the challenge was proving that the funds were indeed gifts, which are not taxable. However, the burden of proof lies with the taxpayer. The AAT held that without reliable evidence, there was no basis to determine if the deposits were part of the couple’s taxable income. As a result, the couple’s claim that the deposits were gifts or loans was dismissed by the AAT. Despite an affidavit from the wife’s father stating the funds were gifts, the couple failed to demonstrate what their actual income was or provide sufficient proof that the funds were indeed gifts.

The Federal Court dismissed the couple’s appeal, upholding the Tax Commissioner’s default tax assessment and associated penalties.

Avoiding the Gift Tax Trap

Gifts of money or assets are generally not taxed if given voluntarily, without expectation of something in return, and without the donor materially benefiting. However, there are circumstances where tax may apply:

1. Gifts from a Foreign Trust: If you are an Australian tax resident and a beneficiary of a foreign trust, amounts paid to you or applied for your benefit may need to be declared in your tax return. This rule can apply even if the money was indirectly received, such as through a family member who then gifted it to you.
2. Inheritances: Inherited money or property is usually not taxed, but capital gains tax (CGT) may apply when disposing of an inherited asset. For example, if you inherit your parents’ home, CGT generally doesn’t apply if the property was their main residence, they were Australian residents for tax purposes, and you sell the property within two years. However, CGT might apply if the property is sold more than two years after inheriting it, or wasn’t their main residence, or your parents were not Australian tax residents at the time of their death.
3. Gifting an Asset: Donating or gifting an asset doesn’t avoid CGT. If you receive nothing or less than the market value for the asset, the market value substitution rule might apply, potentially triggering a CGT liability. For instance, if parents gift a block of land to their daughter, the ATO will consider the land’s market value at the time of the gift. If the land’s value exceeds the purchase price, a CGT liability could arise even though no money changed hands. Similarly, donating cryptocurrency might trigger CGT. If you donate cryptocurrency to a charity, you might be assessed on its market value at the time of donation. You can only claim a tax deduction if the charity is a deductible gift recipient and accepts cryptocurrency.

Pitt Martin Group is a CPA accounting firm, providing services including taxation, accounting, business consulting, self-managed superannuation funds, auditing and mortgage & finance. We spend hundreds of hours each year on training and researching new tax laws to ensure our clients can maximize legitimate tax benefit. Our contact information are phone +61292213345 or email info@pittmartingroup.com.au. Pitt Martin Group is located in the convenient transportation hub of Sydney’s central business district. Our honours include the 2018 CPA NSW President’s Award for Excellence, the 2020 Australian Small Business Champion Award Finalist, the 2021 Australia’s well-known media ‘Accountants Daily’ the Accounting Firm of the Year Award Finalist and the 2022 Start-up Firm of the Year Award Finalist, and the 2023 Hong Kong-Australia Business Association Business Award Finalist.

Pitt Martin Group qualifications include over fifteen years of professional experience in accounting industry, membership certification of the Australian Society of Certified Practising Accountants (CPA), Australian Taxation Registered Agents, certified External Examiner of the Law Societies of New South Wales, Victoria, and Western Australia Law Trust Accounts, membership certification of the Finance Brokers Association of Australia Limited (FBAA), Registered Agents of the Australian Securities and Investments Commission (ASIC), certified Advisor of accounting software such as XERO, QUICKBOOKS, MYOB, etc.

This content is for reference only and does not constitute advice on any individual or group’s specific situation. Any individual or group should take action only after consulting with professionals. Due to the timeliness of tax laws, we have endeavoured to provide timely and accurate information at the time of publication, but cannot guarantee that the content stated will remain applicable in the future. Please indicate the source when forwarding this content.

By Zoe Ma @ Pitt Martin Tax

Divorce and separation are difficult life events, bringing not just emotional stress but also financial complications. One of the key issues that arise during a relationship breakdown is how assets are divided between the partners. Among these assets, those that have appreciated in value, like real estate, shares, or investments, may be subject to Capital Gains Tax (CGT) when they are sold or transferred.

However, in Australia, the law provides some relief through what is known as a relationship breakdown rollover. This means that, under certain conditions, you can transfer assets between separating spouses without triggering an immediate CGT liability. This article explains how the CGT rollover works, when it applies, and how it interacts with other aspects of divorce, like superannuation and family businesses.

What is Capital Gains Tax (CGT)?

CGT is a tax on the profit you make when you sell or transfer an asset, such as property or shares, for more than what you paid for it. The gain is considered part of your taxable income and is taxed at your marginal tax rate. For many people, the largest assets subject to CGT are their home (if it’s not exempt), investment properties, or shares.

What is a Relationship Breakdown Rollover?

A relationship breakdown rollover is a special provision in Australian tax law that allows the transfer of assets between spouses during a divorce or separation without immediately paying CGT. Instead, the tax is deferred until the person who receives the asset sells it in the future.

This rollover is meant to ease the financial burden during a relationship breakdown, as paying a large tax bill right away could add to the stress and financial strain of divorce.

When Does the Relationship Breakdown Rollover Apply?

The CGT rollover applies in specific situations:

1. Court Orders and Formal Agreements: The rollover can be applied if the transfer of assets occurs due to a court order, an agreement made under the Family Law Act, or a binding financial agreement (BFA).
2. Eligible Assets: The rollover can only be applied to certain types of assets, like real estate, shares, or units in a managed fund. It generally doesn’t apply to assets that are not subject to CGT, such as your primary residence (if exempt) or depreciating assets like cars.
3. Spouse Transfers: The transfer must occur between spouses or former spouses as a result of a relationship breakdown. This includes de facto couples as well.
4. Asset Held at the Time of Relationship Breakdown: The asset must have been held by one of the spouses at the time of the relationship breakdown for the rollover to be applicable.

If all these conditions are met, the asset can be transferred without triggering CGT. Instead, the spouse who receives the asset takes on the original cost base of the asset, and the CGT is deferred until they sell it.

How Does CGT Rollover Work with Superannuation?

Superannuation is treated differently in divorce, but it’s also a significant financial asset. When superannuation interests are split between spouses as part of a property settlement, the transaction is usually exempt from CGT under Australian law.

For example, if one spouse’s superannuation fund owns an investment property, transferring a portion of that property to the other spouse’s super fund as part of a divorce settlement won’t trigger CGT. The superannuation splitting process requires a court order or a superannuation agreement.

It’s important to note that superannuation cannot be paid out directly unless the receiving spouse is eligible to access their super (for instance, they’ve reached the retirement age). Instead, the amount is rolled over into the receiving spouse’s super fund, and no immediate CGT is triggered.

Managing Family Businesses During a Divorce

Divorce can complicate the management of a family business, especially when both spouses have ownership interests. The relationship breakdown rollover can apply here as well, allowing one spouse to transfer their shares or interest in the business to the other without an immediate CGT bill. On the other hand, payments made by a corporation as settlements may be classified as taxable dividends and could be taxed at the applicable marginal tax rate of the spouse receiving them. It’s crucial to get proper advice to ensure the business continues to run smoothly and that the tax implications are fully understood.

When managing a family business during a divorce, it’s also important to think about the long-term health of the business. Beyond the tax issues, keeping the business operations stable is vital, especially if one or both spouses rely on the business for their income.

Planning Ahead: Protecting Both Parties from Financial Stress

One way to minimize the financial stress of divorce is through careful planning. Couples should consider how assets, including superannuation and business interests, are owned and managed during the marriage. Even before a relationship breaks down, strategies like income splitting or topping up the lower-earning spouse’s super can help balance the financial benefits and tax burdens.

For instance, if one partner earns significantly less, increasing their super contributions can be tax-efficient because super contributions are taxed at a lower rate. Additionally, balancing the income flow between spouses can reduce the overall tax burden on the household.

In the event of a divorce, having a well-planned tax and financial strategy can make the division of assets more straightforward and less contentious.

Conclusion

Divorce and relationship breakdowns bring many challenges, but understanding the tax implications, especially related to CGT, can help ease the financial burden. The relationship breakdown rollover offers a valuable tool for deferring CGT when transferring assets between spouses. However, it’s essential to seek professional advice to navigate the complexities of tax law, superannuation, and business management during such a difficult time.

By planning ahead and staying informed about your financial situation, you can better protect yourself and your assets during a divorce.

Pitt Martin Group is a CPA accounting firm, providing services including taxation, accounting, business consulting, self-managed superannuation funds, auditing and mortgage & finance. We spend hundreds of hours each year on training and researching new tax laws to ensure our clients can maximize legitimate tax benefit. Our contact information are phone +61292213345 or email info@pittmartingroup.com.au. Pitt Martin Group is located in the convenient transportation hub of Sydney’s central business district. Our honours include the 2018 CPA NSW President’s Award for Excellence, the 2020 Australian Small Business Champion Award Finalist, the 2021 Australia’s well-known media ‘Accountants Daily’ the Accounting Firm of the Year Award Finalist and the 2022 Start-up Firm of the Year Award Finalist, and the 2023 Hong Kong-Australia Business Association Business Award Finalist.

Pitt Martin Group qualifications include over fifteen years of professional experience in accounting industry, membership certification of the Australian Society of Certified Practising Accountants (CPA), Australian Taxation Registered Agents, certified External Examiner of the Law Societies of New South Wales, Victoria, and Western Australia Law Trust Accounts, membership certification of the Finance Brokers Association of Australia Limited (FBAA), Registered Agents of the Australian Securities and Investments Commission (ASIC), certified Advisor of accounting software such as XERO, QUICKBOOKS, MYOB, etc.

This content is for reference only and does not constitute advice on any individual or group’s specific situation. Any individual or group should take action only after consulting with professionals. Due to the timeliness of tax laws, we have endeavoured to provide timely and accurate information at the time of publication, but cannot guarantee that the content stated will remain applicable in the future. Please indicate the source when forwarding this content.

By Angela Abejo @ Pitt Martin Tax

Exciting news for small businesses! Two significant changes are happening for the 2024 financial year, thanks to new laws passed by Parliament recently.

Instant Asset Write-Off Increase

First, the instant asset write-off threshold has been raised from $1,000 to $20,000 for business annual aggregated turnover less than $10 million. This means that small businesses can now write off purchases of assets costing less than $20,000 in 2024 financial year. This change is a big boost for cash flow, as businesses can claim the tax deduction immediately instead of spreading it out over several years.

To take advantage of this, the asset must be bought and either used or installed and ready to use between 1 July 2023 and 30 June 2024. For example, if you buy an industrial fridge, it needs to be delivered and installed by 30 June 2024 to qualify for the write-off.

If the business is registered for GST, the cost of the asset must be less than $20,000 after deducting GST credits. If the business is not registered for GST, the cost must be $20,000 including GST. If the asset is only partly used for business, to determine the amount you can claim, subtract the portion used for private purposes. The remaining balance, which is the portion used to earn assessable income, is typically considered the taxable purpose portion (or business purpose portion). Although you can only deduct the taxable purpose portion, the total cost of the asset must be below the $20,000 threshold.

This new threshold applies to each asset individually. So, a small business can deduct the full cost of several items as long as each one costs less than $20,000. Additionally, a Bill is currently before Parliament to extend this increased threshold to 30 June 2025.

Small Business Energy Incentive

Another great benefit for small businesses is the new small business energy incentive. This incentive provides an extra tax deduction of 20% for the cost of eligible assets and improvements that make your business more energy-efficient or support electrification, such as purchasing of an air conditioner that replace a gas heater, installing time-shifting devices which allow electrical appliances to operate at off-peak times, etc.

There are some exceptions for the energy efficiency solutions, such as no bonus deduction for electric vehicles, solar panels, capital works, etc. Also, the maximum bonus deduction is $20,000, which means you can spend up to $100,000 on qualifying expenses happened between 1 July 2023 and 30 June 2024. Different from the Instant Asset Write-Off, this incentive is available to businesses with an annual turnover of less than $50 million. However, businesses with an annual turnover less than $10 million may can potentially claim both the Instant Asset Write-Off and Small Business Energy Incentive for the eligible assets and improvements. To read the details about the policy, please refer to our previous article ‘Empowering Your Business with Electrification: Unlocking the $20k Tax Deduction’.

Summary

These changes provide fantastic opportunities for small businesses to improve their cash flow and invest in energy-efficient equipment. With the increased write-off threshold and the energy incentive, make sure to check if your purchases qualify and take full advantage of these new laws.

Pitt Martin Group is a CPA accounting firm, providing services including taxation, accounting, business consulting, self-managed superannuation funds, auditing and mortgage & finance. We spend hundreds of hours each year on training and researching new tax laws to ensure our clients can maximize legitimate tax benefit. Our contact information are phone +61292213345 or email info@pittmartingroup.com.au. Pitt Martin Group is located in the convenient transportation hub of Sydney’s central business district. Our honours include the 2018 CPA NSW President’s Award for Excellence, the 2020 Australian Small Business Champion Award Finalist, the 2021 Australia’s well-known media ‘Accountants Daily’ the Accounting Firm of the Year Award Finalist and the 2022 Start-up Firm of the Year Award Finalist, and the 2023 Hong Kong-Australia Business Association Business Award Finalist.

Pitt Martin Group qualifications include over fifteen years of professional experience in accounting industry, membership certification of the Australian Society of Certified Practising Accountants (CPA), Australian Taxation Registered Agents, certified External Examiner of the Law Societies of New South Wales, Victoria, and Western Australia Law Trust Accounts, membership certification of the Finance Brokers Association of Australia Limited (FBAA), Registered Agents of the Australian Securities and Investments Commission (ASIC), certified Advisor of accounting software such as XERO, QUICKBOOKS, MYOB, etc.

This content is for reference only and does not constitute advice on any individual or group’s specific situation. Any individual or group should take action only after consulting with professionals. Due to the timeliness of tax laws, we have endeavoured to provide timely and accurate information at the time of publication, but cannot guarantee that the content stated will remain applicable in the future. Please indicate the source when forwarding this content.

By Angela Abejo @ Pitt Martin Tax

The main residence exemption typically shields your family home from capital gains tax (CGT) upon its sale. However, as with many tax matters, it’s not straightforward. Below, we delve into the key aspects of the Main Residence Exemption to provide a comprehensive guide.

Qualifying as Your Main Residence

A home is usually deemed your main residence if:

• You and your family live in the house.
• Your personal belongings are in the house.
• You receive mail at this address.
• You register this address on the electoral roll.
• Utility services like telephone, gas, and electricity are connected in your name.
• You intend for it to be your main residence.

Interestingly, there is no specific time requirement for how long you must live in the home. The intention of making it your main residence is the key factor.

Application of the Main Residence Exemption

Generally, CGT applies to home sales unless you qualify for an exemption, partial exemption, or can offset the tax with a capital loss. If you’re an Australian tax resident, you can claim the full main residence exemption if:

• The home was your primary residence for the entire ownership period.
• You didn’t use the home to generate income.
• The land area is 2 hectares or less.

Partial Exemption

If your home was used to produce income, you may qualify for a partial exemption. This often arises in cases where you:

• Run a business from home (working from home is acceptable).
• Rent out the home or a part of it.

Since July 2023, platforms like Airbnb must report transactions to the ATO, which will match this data against reported income.

Foreign Residents and Changing Residency

Foreign residents cannot access the main residence exemption, even if they were residents for part of the ownership period. If you’re a non-resident when you sell the property, the exemption likely won’t apply. Conversely, if you’re a resident at the time of sale and meet other criteria, you could qualify for the exemption even if you were a non-resident for part of the ownership period.

The Absence Rule

The absence rule allows your home to remain your main residence for tax purposes even if you are not living there, under certain conditions:

• Rented Out: The home can be rented out for up to six years and still qualify as your main residence.
• Not Producing Income: If the home is not rented out and not producing income, it can remain your main residence indefinitely.

It’s crucial to note that applying the absence rule to one property prevents you from claiming the main residence exemption on another property during the same period.

Timing

Your home generally qualifies as your main residence from the time you move in. If you move in as soon as practicable after the settlement date, it’s considered your main residence from the acquisition date.

If you buy a new home but haven’t sold your old one, you can treat both properties as your main residence for up to six months without affecting your main residence exemption eligibility. This applies if your old home was your main residence for at least three continuous months within the 12 months before you sold it and was not used to produce income during any part of that time when it was not your main residence. If selling the old home takes more than six months, the main residence exemption may apply to both homes only for the last six months before selling the old home. Before this period, you may choose which home is your main residence, with the other becoming subject to CGT.

If your new home is rented when purchased and you cannot move in, it is not your main residence until you do. Unforeseen circumstances, like hospitalization or an overseas work posting, might allow the main residence exemption if you move in as soon as practicable after resolving the issue. Inconvenience is not a valid reason, and documentation is required.

Couples and Main Residences

For couples, the rules are slightly different. Couples cannot claim the full CGT exemption on two separate homes. You have two options:

• Single Main Residence: Choose one home as the main residence for both.
• Split Exemption: Nominate different homes as main residences, splitting the exemption between you.

If you choose different homes:

• Owning 50% or less means the home is your main residence, qualifying you for the exemption.
• Owning more than 50% means the home is your main residence for half the period.

Divorce and the Main Residence

Assuming the home is transferred between spouses (not involving a trust or company), both individuals used the home solely as their main residence during their ownership period, and all other eligibility conditions are met, a full main residence exemption should be available when the property is eventually sold.

If the home qualified for the main residence exemption for only part of the ownership period for either individual, a partial exemption might be available. In this case, the spouse receiving the property may need to pay CGT on the gain from their share of the property received as part of the settlement when they eventually sell it.

Conclusion

While the Main Residence Exemption offers substantial benefits, the rules can be complex and vary based on individual circumstances. Factors such as changes in residency status, periods of absence, and property use can all impact your eligibility. Therefore, seeking professional advice is highly recommended to navigate these rules effectively and ensure you are maximising your tax benefits.

Pitt Martin Group is a CPA accounting firm, providing services including taxation, accounting, business consulting, self-managed superannuation funds, auditing and mortgage & finance. We spend hundreds of hours each year on training and researching new tax laws to ensure our clients can maximize legitimate tax benefit. Our contact information are phone +61292213345 or email info@pittmartingroup.com.au. Pitt Martin Group is located in the convenient transportation hub of Sydney’s central business district. Our honours include the 2018 CPA NSW President’s Award for Excellence, the 2020 Australian Small Business Champion Award Finalist, the 2021 Australia’s well-known media ‘Accountants Daily’ the Accounting Firm of the Year Award Finalist and the 2022 Start-up Firm of the Year Award Finalist, and the 2023 Hong Kong-Australia Business Association Business Award Finalist.

Pitt Martin Group qualifications include over fifteen years of professional experience in accounting industry, membership certification of the Australian Society of Certified Practising Accountants (CPA), Australian Taxation Registered Agents, certified External Examiner of the Law Societies of New South Wales, Victoria, and Western Australia Law Trust Accounts, membership certification of the Finance Brokers Association of Australia Limited (FBAA), Registered Agents of the Australian Securities and Investments Commission (ASIC), certified Advisor of accounting software such as XERO, QUICKBOOKS, MYOB, etc.

This content is for reference only and does not constitute advice on any individual or group’s specific situation. Any individual or group should take action only after consulting with professionals. Due to the timeliness of tax laws, we have endeavoured to provide timely and accurate information at the time of publication, but cannot guarantee that the content stated will remain applicable in the future. Please indicate the source when forwarding this content.

By Zoe Ma @ Pitt Martin Tax

Personal Tax and Superannuation

As of 1 July 2024, personal income tax cuts are now active. Additionally, the superannuation guarantee (SG) rate has increased by 0.5% to 11.5%. Employers need to update their payroll systems, including salary sacrifice agreements, to accommodate these changes. PAYG withholding will also be affected.

The ATO has reminded employers to ensure they are meeting their super guarantee obligations. The definition of an employee for SG purposes is broad, including temporary residents, backpackers, certain company directors, family members working in the business, and some contractors. Make sure your classifications are accurate.

Employers must verify that the correct fund details and tax file numbers are provided to the super fund for their employees. SG payments must be made into the employee’s fund by the quarterly due date, with the next payments due by 28 July. Missing the deadline incurs the super guarantee charge (SGC), which includes the outstanding SG, 10% annual interest from the start of the quarter, and an administration fee. SGC amounts are not tax-deductible.

Wage Increases

From 1 July 2024, the national minimum wage has increased by 3.75% to $24.10 per hour, or $915.90 per week. This increase applies from the first full pay period on or after 1 July 2024. Typically, there is no direct link between minimum wage increases and inflation.

Private sector annual wage growth slightly decreased to 4.1% in the March quarter of 2024 from 4.2% in December 2023, indicating that wage growth may be stabilizing.

Interest Rates and Cost of Living

RBA Governor Michelle Bullock has highlighted that inflation is the main cause of cost of living pressures, not interest rates. Interest rates are used by the RBA to control inflation. Since inflation is easing more slowly than expected, the RBA may make further adjustments. Inflation dropped from 7.8% in December 2022 to 3.6% in the March quarter but rose again to 4% in May, affecting hopes for stable interest rates.

Business Confidence

The latest NAB business survey shows a decline in business confidence, which fell into negative territory in May as conditions continued to soften. Businesses have faced eight consecutive months of declining forward orders, leading to a cautious outlook. GDP saw marginal growth in the March quarter, while per capita consumption continued to decline. However, the labor market remains strong, with unemployment at 4% in May.

Treasury forecasts a slight improvement in economic growth (GDP) to 2% in 2024-25, a modest but credible outlook.

Migration and Labor

Post-pandemic, Australia saw a surge in migration with the return of international students, working holiday makers, and temporary skilled labor to address shortages. In the year ending 30 June 2023, overseas migration added a net gain of 518,000 people to Australia’s population, the highest on record.

The 2024-25 Federal Budget estimates a drop in net migration to 260,000. While migration pressures on housing have been well-publicized, the positive impact on labor supply was significant. Post-COVID, Australia faced severe labor shortages that hindered supply chain recovery.

From 1 January 2025, student visa numbers will be capped. Student visa grants were already down 34% in March 2024 compared to the same period in 2023. The government’s focus is shifting towards skilled migration, with an increase of 7,175 employer-sponsored places, although skilled independent visas will decrease by 13,475. The minimum salary requirement for sponsoring an employee (Temporary Skilled Migration Income Threshold) will rise to $73,150 from 1 July 2024.

Strategic Business Management

Businesses often fail because they don’t understand or monitor their operations effectively. Managers need to stay on top of their numbers to identify and address issues early. Profitability issues can weaken a business, but cash flow problems can be fatal. It’s crucial to plan, track, and measure cash flow, including managing debtor collections and inventory and maintaining a rolling three-month cash flow position to provide early warnings of potential problems.

Effective business management also involves overseeing cash flows, operating budgets, cost control, and debt management. By maintaining control over these areas, businesses can reduce their risk exposure.

Small businesses often absorb increasing costs. Raising prices during challenging times is not a betrayal; it’s a necessity. If the cost of doing business rises, this should be reflected in pricing unless the business can afford to make less for the same effort or is in a highly price-sensitive industry following the lead of larger competitors.

Pitt Martin Group is a CPA accounting firm, providing services including taxation, accounting, business consulting, self-managed superannuation funds, auditing and mortgage & finance. We spend hundreds of hours each year on training and researching new tax laws to ensure our clients can maximize legitimate tax benefit. Our contact information are phone +61292213345 or email info@pittmartingroup.com.au. Pitt Martin Group is located in the convenient transportation hub of Sydney’s central business district. Our honours include the 2018 CPA NSW President’s Award for Excellence, the 2020 Australian Small Business Champion Award Finalist, the 2021 Australia’s well-known media ‘Accountants Daily’ the Accounting Firm of the Year Award Finalist and the 2022 Start-up Firm of the Year Award Finalist, and the 2023 Hong Kong-Australia Business Association Business Award Finalist.

Pitt Martin Group qualifications include over fifteen years of professional experience in accounting industry, membership certification of the Australian Society of Certified Practising Accountants (CPA), Australian Taxation Registered Agents, certified External Examiner of the Law Societies of New South Wales, Victoria, and Western Australia Law Trust Accounts, membership certification of the Finance Brokers Association of Australia Limited (FBAA), Registered Agents of the Australian Securities and Investments Commission (ASIC), certified Advisor of accounting software such as XERO, QUICKBOOKS, MYOB, etc.

This content is for reference only and does not constitute advice on any individual or group’s specific situation. Any individual or group should take action only after consulting with professionals. Due to the timeliness of tax laws, we have endeavoured to provide timely and accurate information at the time of publication, but cannot guarantee that the content stated will remain applicable in the future. Please indicate the source when forwarding this content.

By Yvonne Shao @ Pitt Martin Tax

A recent tax case of Duncan and Commissioner of Taxation [2024] AATA 974, the Administrative Appeals Tribunal (AAT) looked at a situation where a taxpayer, Mr. Duncan, tried to claim large deductions for meals eaten during his work trips. As the new financial year arrives, the tax return has been started. This case in time has shed some light on the meal expenses deduction claiming for the tax return season.

The Situation

Mr. Duncan is a long-haul truck driver who spent 282 days on the road in the year in question. He claimed a deduction of $100 per day for food and drink, which added up to a total of $28,200 for the year. This amount was just below the Australian Taxation Office’s (ATO) reasonable amounts (See TD 2023/3), so Mr. Duncan believed he did not need to provide detailed evidence for these expenses.

The ATO’s Response

The ATO agreed that Mr. Duncan spent $8,393 on meals at cafes and restaurants because these expenses were supported by his bank statements. However, the ATO did not accept the remaining $20,000 deduction because there was not enough evidence to support it.

The Arguments

1. Automatic Deductions Claim:
   • Mr. Duncan argued that he was entitled to automatic deductions up to the ATO’s reasonable amounts without needing to prove he spent the money.
   • The AAT disagreed, stating that the law requires the expenses to be actually incurred, even if the claim is below the ATO’s reasonable amounts.
2. Evidence of Grocery Expenses:
   • Mr. Duncan tried to show some expenses by providing evidence of purchases at supermarkets and stores near his home.
   • The AAT found it difficult to determine which meals were eaten during his trips and which were not because the purchases were made near his home.

Tribunal’s Decision

The AAT ruled against Mr. Duncan, highlighting that even if the claimed deductions are below the ATO’s reasonable amounts, taxpayers still need to prove that the expenses were actually incurred.

Important Lessons

• Substantiation Exceptions: The rules can reduce the need for keeping every receipt and invoice, but taxpayers still need to incur the expenses.
• Evidence Requirements: The ATO can ask for evidence on how deductions were calculated and require proof that the expenses were incurred.
• Good Practices: Keeping a detailed diary or log of trips and meals, along with bank and credit statements, can help support deductions and reduce the risk of ATO challenges.

Pitt Martin Group is a CPA accounting firm, providing services including taxation, accounting, business consulting, self-managed superannuation funds, auditing and mortgage & finance. We spend hundreds of hours each year on training and researching new tax laws to ensure our clients can maximize legitimate tax benefit. Our contact information are phone +61292213345 or email info@pittmartingroup.com.au. Pitt Martin Group is located in the convenient transportation hub of Sydney’s central business district. Our honours include the 2018 CPA NSW President’s Award for Excellence, the 2020 Australian Small Business Champion Award Finalist, the 2021 Australia’s well-known media ‘Accountants Daily’ the Accounting Firm of the Year Award Finalist and the 2022 Start-up Firm of the Year Award Finalist, and the 2023 Hong Kong-Australia Business Association Business Award Finalist.

Pitt Martin Group qualifications include over fifteen years of professional experience in accounting industry, membership certification of the Australian Society of Certified Practising Accountants (CPA), Australian Taxation Registered Agents, certified External Examiner of the Law Societies of New South Wales, Victoria, and Western Australia Law Trust Accounts, membership certification of the Finance Brokers Association of Australia Limited (FBAA), Registered Agents of the Australian Securities and Investments Commission (ASIC), certified Advisor of accounting software such as XERO, QUICKBOOKS, MYOB, etc.

This content is for reference only and does not constitute advice on any individual or group’s specific situation. Any individual or group should take action only after consulting with professionals. Due to the timeliness of tax laws, we have endeavoured to provide timely and accurate information at the time of publication, but cannot guarantee that the content stated will remain applicable in the future. Please indicate the source when forwarding this content.

By Angela Abejo @ Pitt Martin Tax

With the financial year-end approaching, here’s a concise guide on areas under ATO scrutiny and strategies to optimize your deductions.

Opportunities for Individuals

1. Tax Cuts and Deductions:

• Bring forward deductible expenses to benefit from 1 July 2024 tax cuts.
• Prepay deductible expenses, make superannuation contributions, and plan charitable gifts for the 2023-24 financial year.

2. Superannuation Contributions:

• If your total superannuation balance permits, make a one-off deductible contribution up to the $27,500 cap.
• Utilize unused concessional cap amounts from the last five years if your super balance was below $500,000 on June 30, 2023.
• Ensure you’re under 75, lodge a notice of intent to claim a deduction, and receive acknowledgment before filing your tax return.
• For those aged 67-75, meet the work test to make personal contributions.
• If your spouse earns less than $37,000, contribute to their super for a $540 tax offset given other conditions are met.

3. Offset Tax Bills with Super Contributions:

• Use larger personal super contributions to offset taxes from capital gains if you sold any shares or property to avoid a large tax bill.

4. Charitable Donations:

• Donations over $2 to registered DGRs are tax deductible.
• Consider public or private ancillary funds for structured giving and potential immediate deductions.

5. Investment Property:

• Get a depreciation schedule to maximize deductions for property wear and tear.

Risks for Individuals

1. Work from Home Expenses:

• Claim either using the 67c per hour method or the actual expenses method.
• Keep accurate records and receipts for claims.

2. Investment Property Deductions:

• Claim expenses only if the property is genuinely available for rent.
• Properly apportion loan interest and distinguish between repairs (immediate deduction) and capital improvements (deducted over time).
• Co-owned property expenses must be claimed according to ownership percentage.

3. Gig Economy Income:

• Declare all income from platforms like Airbnb, Uber, etc., as the ATO matches reported data.
• New reporting rules for ride-sourcing, taxi travel, and short-term accommodation platforms started from 1 July 2023.

Opportunities for Businesses

1. Bonus Deductions:

• Instant asset write-off for assets under $20,000, pending legislative approval.
• Energy incentive of additional 20% deduction for energy-efficient assets, pending legislative approval.
• 20% bonus skills and training boost deduction for employee training by registered providers.

2. Write-off Bad Debts and Obsolete Equipment:

• Write off bad debts and obsolete plant/equipment by 30 June.

3. Advance Tax Deductions:

• Commit to directors’ fees, employee bonuses, and June quarter super contributions in June.

Risks for Businesses

1. Tax Debt and Reporting Obligations:

• Failing to lodge returns signals issues; ATO can issue assessments.
• Seek assistance for meeting obligations and managing tax debts.

2. Professional Firm Profits:

• The ATO is reviewing profit distributions in professional services firms, architects, lawyers, accountants, etc., to ensure appropriate income reporting and tax payments.

Need Help?

For guidance on maximizing your deductions and minimizing risks, reach out to us today 0292213345.

Pitt Martin Group is a CPA accounting firm, providing services including taxation, accounting, business consulting, self-managed superannuation funds, auditing and mortgage & finance. We spend hundreds of hours each year on training and researching new tax laws to ensure our clients can maximize legitimate tax benefit. Our contact information are phone +61292213345 or email info@pittmartingroup.com.au. Pitt Martin Group is located in the convenient transportation hub of Sydney’s central business district. Our honours include the 2018 CPA NSW President’s Award for Excellence, the 2020 Australian Small Business Champion Award Finalist, the 2021 Australia’s well-known media ‘Accountants Daily’ the Accounting Firm of the Year Award Finalist and the 2022 Start-up Firm of the Year Award Finalist, and the 2023 Hong Kong-Australia Business Association Business Award Finalist.

Pitt Martin Group qualifications include over fifteen years of professional experience in accounting industry, membership certification of the Australian Society of Certified Practising Accountants (CPA), Australian Taxation Registered Agents, certified External Examiner of the Law Societies of New South Wales, Victoria, and Western Australia Law Trust Accounts, membership certification of the Finance Brokers Association of Australia Limited (FBAA), Registered Agents of the Australian Securities and Investments Commission (ASIC), certified Advisor of accounting software such as XERO, QUICKBOOKS, MYOB, etc.

This content is for reference only and does not constitute advice on any individual or group’s specific situation. Any individual or group should take action only after consulting with professionals. Due to the timeliness of tax laws, we have endeavoured to provide timely and accurate information at the time of publication, but cannot guarantee that the content stated will remain applicable in the future. Please indicate the source when forwarding this content.

By Zoe Ma @ Pitt Martin Tax

The Australian Taxation Office (ATO) has issued a stern warning to trustees, emphasizing the importance of carefully considering how and to whom trust income is distributed. In recent years, trust distribution arrangements have faced increasing scrutiny, and trustees must meticulously review their practices to ensure compliance with relevant regulations. It is a good time to recapitulate this before the end of financial year distribution.

Understand your Trust Deed

One of the main concerns is that trustees may not be looking at their trust deed before distributing income. The trust deed is a legal document that outlines what the trust can do and who can receive income. It’s crucial to review this document before making any decisions.

Steps for Reviewing Your Trust Deed

1. Check the Deed and Amendments: Make sure that any actions taken by the trustees are in line with what the trust deed says.
2. Vesting Date: The trust deed specifies the procedures when the trust vests. Upon vesting, trustees may be required to distribute income and property to designated beneficiaries, losing their discretion in this regard.
3. Identify Beneficiaries: Determine who the beneficiaries are and understand their entitlements to income and capital.
4. Resolution Timing and Requirements: Review any conditions for trustee resolutions, including deadlines and the need for written resolutions, eg. it has to be done by 30 June.
5. Streaming Income: If you plan to allocate capital gains or franked distributions to certain beneficiaries, ensure the trust deed allows this.

Family Trust and Interposed Entity Elections

A family trust election ties the trust’s operations to a specific family group, helping protect losses and franking credits but potentially causing tax issues if misused. An interposed entity election brings an entity into an individual’s family group. Trustees need to understand the consequences of these elections before distributing income, as distributing outside the family group can result in hefty family trust distribution taxes.

Who really benefits?

The ATO is also vigilant about arrangements where income is allocated to beneficiaries who do not actually receive the financial benefit. If such arrangements reduce the overall tax paid, they are likely to draw the ATO’s attention.

Increased Reporting Requirements

Recent changes mean more detailed information is now required on tax returns about trust income distributions. These include:

• Trust Tax Return: Four new capital gains tax labels have been added, requiring information that matches what beneficiaries report in their returns.
• Beneficiaries: All beneficiaries must now file a new trust income schedule that matches the trust’s distribution statement.

The Importance of Compliance

Trusts offer significant flexibility in income distribution, but this comes with stringent compliance and control requirements. The ATO is closely monitoring how trusts distribute income and the associated tax implications.

Trustees must take these warnings seriously and diligently review their trust deeds and distribution arrangements to align with regulatory expectations. Ensuring proper compliance not only safeguards against potential penalties but also maintains the integrity and intended benefits of the trust structure.

Pitt Martin Group is a CPA accounting firm, providing services including taxation, accounting, business consulting, self-managed superannuation funds, auditing and mortgage & finance. We spend hundreds of hours each year on training and researching new tax laws to ensure our clients can maximize legitimate tax benefit. Our contact information are phone +61292213345 or email info@pittmartingroup.com.au. Pitt Martin Group is located in the convenient transportation hub of Sydney’s central business district. Our honours include the 2018 CPA NSW President’s Award for Excellence, the 2020 Australian Small Business Champion Award Finalist, the 2021 Australia’s well-known media ‘Accountants Daily’ the Accounting Firm of the Year Award Finalist and the 2022 Start-up Firm of the Year Award Finalist, and the 2023 Hong Kong-Australia Business Association Business Award Finalist.

Pitt Martin Group qualifications include over fifteen years of professional experience in accounting industry, membership certification of the Australian Society of Certified Practising Accountants (CPA), Australian Taxation Registered Agents, certified External Examiner of the Law Societies of New South Wales, Victoria, and Western Australia Law Trust Accounts, membership certification of the Finance Brokers Association of Australia Limited (FBAA), Registered Agents of the Australian Securities and Investments Commission (ASIC), certified Advisor of accounting software such as XERO, QUICKBOOKS, MYOB, etc.

This content is for reference only and does not constitute advice on any individual or group’s specific situation. Any individual or group should take action only after consulting with professionals. Due to the timeliness of tax laws, we have endeavoured to provide timely and accurate information at the time of publication, but cannot guarantee that the content stated will remain applicable in the future. Please indicate the source when forwarding this content.

By Angela Abejo @ Pitt Martin Tax