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Items that heat up your depreciation deductions

With the winter season upon us, a number of property investors may be thinking of doing nothing more than curling up under a rug in front of a wood fire with a good cup of coffee.

         

 

While this might sound tempting, it’s also tax season and the perfect time to obtain a comprehensive tax depreciation schedule that ensures you maximise the deductions you can claim from an investment property.

Many of the items which make your home a cosy place to spend the winter months can also be found within an investment property.

When an investor asks a specialist Quantity Surveyor to complete a depreciation schedule for their property, they will perform a detailed site inspection to make sure that no items are missed.

One of the reasons investors often miss out on deductions at tax time is because they don’t seek expert advice. Quantity Surveyors are recognised under Tax Ruling 97/25 as one of a few professionals with the knowledge necessary to estimate construction costs for depreciation purposes.

To demonstrate some of the items which heat up the deductions you can claim from an investment property, let’s take a look at an example of the depreciation claims available in the first financial year in the following graphic.

The depreciation deductions in the above example have been calculated using the diminishing value method.

Capital works deductions have been calculated at a rate of 2.5 per cent. The immediate write-off rule and low-value pooling have been applied for applicable items.

There are two types of claims available in any income producing property as demonstrated by the graphic above; capital works deductions and plant and equipment depreciation*.

Capital works deductions apply to structural and fixed items within a residential property; for example the kitchen cupboards, walls, doors, drawers and shelving. Structural items will depreciate at a rate of 2.5 per cent per year over forty years so long as construction commenced after the 15th of September 1987.

An investor could claim $586 in the first financial year for the kitchen cupboards and $140 for the serving bar in the above property. Tiles on the splashback would also result in $74 in capital works deductions in the first year for the owner.

Any of the easily removable plant and equipment assets found during a site inspection of a property may also entitle the owner to claim depreciation deductions. Examples of plant and equipment assets as demonstrated above include the refrigerator, the range hood, furniture, light fittings, floating timber floors, the gas heater and ducted gas floor heating.

Unlike capital works deductions, depreciation for plant and equipment are calculated based on an individual effective life and depreciation rate set for each asset by the Australian Taxation Office.

In the above example, an investor could claim $398 in first year deductions for the range hood, $767 for the refrigerator, $176 for the light fittings, $820 for the gas heater and $512 for ducted gas floor heating. The smoke alarm, which costs less than $300 will entitle the owner to an immediate write-off for this item, meaning they can deduct its full value in the first financial year and claim $232 in deductions.

In total, an investor is able to claim $800 in capital works deductions and $4,228 in plant and equipment depreciation, a grand total of $5,028 in depreciation deductions in the first year for this area of the property alone. Additional deductions will also be available for the walls, doors, ceiling and joinery and any other eligible capital works or plant and equipment items found in the rest of the property.

*Under proposed changes to legislation, investors who exchange contracts on a second hand residential property after 7:30pm on 9th May 2017 will no longer be able to claim depreciation on plant and equipment assets. Investors who purchase a new property will be able to continue to claim these items as they were previously. We are currently speaking with government to further understand the intricacies relating to the proposed changes. To learn more visit www.bmtqs.com.au/budget-2017.

 

Date: 20 Jul 2016
By: BMT team
www.bmtqs.com.au

Government to shut down salary sacrifice loophole

The government has announced it will remove a loophole from legislation that allows unscrupulous employers to use their employee’s salary sacrifice contributions to pay their Superannuation Guarantee obligations

           

 

The government has announced it will remove a loophole from legislation that allows unscrupulous employers to use their employee’s salary sacrifice contributions to pay their Superannuation Guarantee obligations.
In a statement today, the Minister for Revenue and Financial Services Kelly O’Dwyer said the Turnbull government will introduce a bill into Parliament this year that will ensure that contributions made under a salary sacrificing arrangement do not reduce their employer’s superannuation guarantee obligation.

This follows a recommendation from the Superannuation Guarantee Non‑compliance report to remove the loophole.

The report made a number of practical recommendations to improve employer’s compliance with their superannuation guarantee obligations, and was compiled by senior representatives from the ATO, the Treasury, the Department of Employment, ASIC and APRA.

“If Australians are to continue to have confidence in the integrity of the superannuation system, we must ensure employers are paying workers their full entitlements, whether they are wages or superannuation,” Ms O’Dwyer said.

The government also welcomed another outcome of the working group, which has been strengthening cross-agency collaboration to improve the superannuation system for Australians. 

“The ATO has increased its focus on superannuation guarantee compliance and information sharing across agencies has improved. Agencies are committed to a continued focus on protecting employee rights and entitlements and providing a level playing field for employers,” said Ms O’Dwyer.

The government is carefully considering the remaining recommendations made by the working group report to ensure that any measures progressed will improve compliance without unduly burdening employers.

 

STAFF REPORTER
14 July 2017
www.smsfadviser.com

Technical expert flags estate planning strategies for 2017-18

With the $1.6 million transfer balance cap now in place, technical experts have identified some of the considerations that will need to be made in relation to death benefits and reversionary pensions.

         

 

Perpetual Private head of strategic advice Colin Lewis says many SMSF practitioners, in the lead-up to 30 June 2017, didn’t have the opportunity to review their clients’ estate planning in light of the changes to superannuation.

“SMSF practitioners now really need to start looking at the client’s estate plans in terms of what income streams they’re receiving, if they’re receiving any reversionary income streams or whether they just have binding death benefits in place,” Mr Lewis said.

“For those with more than $1.6 million, reversionary pensions may be treated more favourably in terms of the amount and when it’s counted towards the transfer balance account test.”

SuperConcepts executive manager of SMSF technical and private wealth, Graeme Colley, said it’s important reversionary pensions are considered carefully before they are implemented, as there can be some traps.

“If you’re going to put a reversion in, make sure your pension can move from being non-reversionary to reversionary,” Mr Colley said.

“If that’s not possible, they may need to commute that pension and start a new pension. The trap there will be that if someone qualifies for Centrelink benefits, then that is an issue they need to be aware of. That may lend itself to people keeping the non-reversionary pension. 

Individuals with more than $1.6 million who’ve had to do something with the excess or will be doing something with it to transfer it out of pension phase, will need to work out what to do with the money when it gets paid out to their family on their death, Mr Colley said.

“Or if their spouse dies, they’ll need to decide what happens with the money then,” he said.

“They might want to look at whether they can implement equalisation strategies for the estate [also].” 

 

MIRANDA BROWNLEE
5 Jul 2017
www.smsfadviser.com

Key Economic Indicators, 2017

This month's focus is on Australia's Labour Force and Demography.

             

 

Click here for full access to Australia's economic indicators – National Accounts, International Accounts, Consumption and Investment, Production, Prices, Labour Force and Demography, Incomes, and Housing Finance.

Labour Force and Demography

 

 

 
Employed persons – Trend
 
Jun 2017
'000

 
12 160.1

 
0.2%

 
1.9%

 
Participation rate – Trend
 
Jun 2017
%

 
64.9

 
0.1 pts

 
0.2 pts

 
Unemployment rate – Trend
 
Jun 2017
%

 
5.6

 
0.0 pts

 
-0.1 pts

 
Employment to Population ratio – Trend
 
Jun 2017
%

 
61.3

 
0.1 pts

 
0.2 pts

 
Job Vacancies – Trend
 
May 2017
'000

 
189.2

 
1.7%

 
9.2%

 
Estimated resident population – (Preliminary)
 
Dec Qtr 2016
'000

 
24,385.6

 
0.3%

 
1.6%

 
Short-term overseas visitor arrivals – Trend (a)
 
May 2017
'000

 
734.9

 
0.8%

 
7.7%

 
For unemployment and participation rates, the changes are given as percentage points.

 

 

Source: ABS

Why Australian retirees aren’t happy and what we can do about it

When it comes to retirement planning, we could be forgiven for giving ourselves a collective pat on the back here in Australia.

           

 

Not only are we further down the path of defined contribution (DC) provision than any other major pension market, but our system is lauded as one of the most advanced in the world.

As Robin Bowerman, Principal, Market Strategy & Communications at Vanguard Australia, observes in a recent Smart Investing article, a recent survey ranked Australia as the world's second best country for a comfortable retirement-behind only our neighbours in New Zealand.

So developments here are often seen as a bellwether for other markets as they move further down the DC path and grapple with the challenges of moving pension liabilities off corporate and government balance sheets and placing more responsibility on the shoulders of individuals.

But let’s not get too complacent. Australia's retirement system definitely has some great attributes, but is it leading to satisfactory outcomes for all retirees?

The unhappy country

The transition to retirement generally brings increased contentment with uncertainty giving way to acceptance, as you can read in this great piece by my colleague in the US Anna Madamba.

And while this is as true for Australians as it is for American, British and Canadian retirees, the level of local respondents reporting high satisfaction is the lowest of the four countries surveyed in Vanguard's recent paper, Retirement transitions in four countries – as you can see in the graph below.

So why are we so relatively unhappy here in Australia? I'd like to look at the part that choice plays in influencing outcomes.

DC models like ours transfer the primary responsibility for retirement from the government and the employer to the individual. This naturally generates a number of choices for retirees.

  • How much should I take as a lump sum and how much as an income stream?
  • Should I think about an account-based pension or an annuity…or a combination of both?
  • How do I manage my retirement income to maximise my government entitlements?

Compared with some overseas retirement regimes, our combination of compulsory superannuation, means-tested age pension and relatively complex drawdown requirements requires a higher degree of financial literacy and dependence on professional advice.

And while most of us would support the principle of encouraging deeper engagement, in practice the need to choose between more complex options may be leading to dissatisfaction.

Too many flavours?

Behavioural scientists have shown that increased choice does not necessarily lead to increased happiness.

The famous Jam Study demonstrated that the more options we have, the harder it is to make a decision. Faced with more flavours of jam, consumers buy fewer jars. For some this can end in choice paralysis. For others it can lead to the well-documented phenomenon of buyer's remorse as they look back with regret at the jam flavours they didn't buy.

It's the same with super.

  • What if I'd taken more advantage of super's concessional tax framework by putting more before-tax contributions into my super while I was working?
  • What if I'd put my super into a lower-cost fund that charged less for a similar outcome?
  • What if I'd changed my growth/defensive asset mix before making the transition to retirement?

Cutting a path ahead

As an industry we need to cut through the tyranny of choice overload and make sense of retirement planning. We can do this in two main ways.

From a mass customised ‘default’ perspective, product manufacturers can move towards adopting the incoming CIPR (Comprehensive Income Products for Retirement) architecture that will help to develop clearer pathways to retirement.

And from a bespoke advice perspective, financial advisers can play a crucial role in helping clients make sense of the choices and guide them to a satisfactory outcome in retirement.

Based on: Retirement transitions in four countries, January 2017, Anna Madamba, PhD, and Stephen P. Utkus

Paul Murphy
07 July 2017
www.vanguard.com.au

Multiple super accounts in a ‘gig’ society

Just yesterday (23-7-17) a planner's client said 'By the way I located lost super and would like some financial advice please. There are still a couple more lost supers, not located,
How should I proceed?  (NB: do not let things simply run because in a few years you'll forget and discovery will be very hard).

         

 

How many super accounts do you have? No doubt, some people have even more super accounts than credit cards.

One of the consequences for those working in the gig society is that individuals simultaneously holding a portfolio of part-time jobs often have more than one super account. And those with full-time jobs often join a new default super fund whenever changing jobs.

It can be particularly easy for, say, a young person – who is relatively new to the job market and to super – to quickly hold a collection of super accounts.

Think about a few of the statistics.

How Australia Saves, a research paper recently published by Vanguard, highlights how more than 45 per cent of Australian super fund members have multiple super accounts. In fact, Australians had more than 29 million super accounts in June 2016 against a total population at the time of a little over 24 million.

And the Productivity Commission’s current inquiry into the competitiveness and efficiency of the super system, has pointed to tax office data showing that close to 20 per cent of members have between three and five accounts each.

As the commission commented in a report* published late last year, some members may be holding multiple accounts for good reason such as to maintain insurance cover or because of restrictions in the choice of fund provisions.

However, the vast majority of members with multiple accounts would be unnecessarily paying multiple sets of fund administration fees and insurance premiums. That's the reality.

The inaugural How Australia Saves report – a collaboration between Vanguard and Sunsuper – provides an insight into how some members of Sunsuper are consolidating their multiple accounts. (Vanguard researchers drew on the on the transactions and investment experiences of more than a million Sunsuper members.)

In 2015-16, 4 per cent of Sunsuper members rolled out their full balances to another APRA-regulated super fund while a further 1 per cent had a partial rollout. (The median rollouts to other funds were $5128 and $2503 respectively.)

“Members rolling benefits out tended to be younger and had small account balances,” the researchers commented on the Sunsuper experience. “It is likely that many of the rollouts were undertaken by members who had accounts with two or more different funds, stemming from multiple employment arrangements.”

A smart way to begin 2017-18 is to check that you don't needlessly hold multiple super accounts that add to your costs and complicate your retirement savings. Unnecessary costs erode your long-term returns.

Further reading: MoneySmart, the consumer website of the Australian Securities & Investments Commission (ASIC), has an easy-to-ready online guide on how to simply consolidate excess multiple super accounts.

*How to assess the competitiveness and efficiency of the superannuation system, a report published by the Productivity Commission, November 2016.

 

Robin Bowerman,
Head of Market Strategy and Communications at Vanguard.
www.vanguard.com.au

Government ‘undermines’ tax system in new moves on property expenses

Newly-released draft legislation, which firms up the 2017 budget move to limit investors’ ability to claim travel expenses and depreciation deductions, will “upset the fundamental basis behind our tax system” according to an accounting body.

       

 

The Turnbull government on Friday released exposure draft legislation and explanatory material for the housing affordability and tax integrity measures it announced in the 2017-18 budget.

The legislation means that property investors will no longer be able to claim travel expenses to inspect residential investment properties, and there are limitations to the depreciation deduction claims investors will be able to make on properties purchased after 9 May 2017.

Speaking to Accountants Daily, Institute of Public Accountants' senior tax adviser, Tony Greco, said that the changes go against the basis of Australia’s tax system.

“The premise behind our tax system is the ability to claim an expense against the revenues, so what they're doing is they're altering that fundamental right,” Mr Greco said.

“They’re basically saying we're not going to allow you a deduction against these kinds of expenditures, so it does upset the fundamental basis behind our tax system by excluding certain expenses.”

Mr Greco said that while these changes are essentially negative ones, many investors will be pleased that the government didn’t do more to tackle negative gearing.

“They didn't attack negative gearing in the federal budget, they didn’t make any changes other than these two measures, so some people were quite relieved on budget night that it just amounted to these two changes only,” he said.

“It does have a financial impact on the returns going forward, so it will have a negative impact, but if you thought they were going to dismantle negative gearing then you'd probably say it's not as bad as the expectation was.”

Mr Greco said that accountants must communicate these changes with their clients as soon as possible .

“Clients do claim travel for visiting and inspecting rental properties and some of those properties could be interstate, so accountants must communicate to their client that it's no longer deductible,” he said.

“Clients may not have realised, or may misunderstand, that with the travel one, irrespective of when you bought your property, it's just a total outright ban on deductibility, whereas the plant and equipment one depends on when you purchased the property.”

The government is accepting submissions to the draft legislation until 10 August 2017.

 

LARA BULLOCK
17 July 2017
www.accountantsdaily.com.au

Give your children a saving and investing edge – for life

Perhaps the best way to give your young children a lifetime saving and investing advantage is to ensure they are as financially literate as possible, as early as possible in their lives.

         

 

By indulging their every whim is likely to have the opposite effect. It may pave the way for them to become conspicuous spenders; a wealth-destroying approach to dealing with money.

Australian students have mixed results in a just published 2015 OECD study of the financial literacy of 15-year-olds in 15 countries (including 10 OECD members such as the United States, Canada and Italy). Almost 15,000 Australian students participated in the survey.

Australia ranks fifth with 15 per cent of Australian students being ranked as high performers.

However, there are clear gaps confirmed in the financial literacy of many young Australians with low levels of literacy among lower socio-economic groups including indigenous students. A fifth of Australian students do not reach the baseline for financial literacy – a little below the average for the surveyed OECD countries.

The researchers comment that students who did not reach the baseline for financial literacy could, “at best”, distinguish between wants and needs, and make simple decisions on everyday spending.

The survey was designed to assess the extent that 15-year-olds have the financial knowledge and skills to “make successful transition from compulsory schooling into higher education, employment or entrepreneurship”.

In regard to Australian students, the survey's findings include:

67 per cent say they will save to buy something if they don't have enough – close to the OECD average.
57 per cent save money each week or month with 17 per cent saying they will only save when they want buy something.
As the Australian Securities & Investments Commission (ASIC) comments on the survey, financial literacy is particularly essential in an increasing cashless society, where it is easy to borrow on a credit card if you don't have the money right now. (For the record, Australian 15-year-olds are legally too young to be issued with a credit card.)

Young people confront significant financial decisions relatively early in their lives in such ways as choosing a career, financing tertiary education, finding a first job, leaving home for the first time and beginning to save.

Those who have a low level of financial literacy are at a huge disadvantage that can burden the rest of their lives as they may try and learn through trial and error.

Young, financially-savvy investors have the powerful advantage of enjoying the rewards of investment compounding over the very long term as their investments – perhaps including their first salary-sacrificed super – earn returns on returns as well as the original capital.

 

 

Written by Robin Bowerman
Head of Market Strategy and Communications at Vanguard.
05 June 2017
www.vanguardinvestments.com.au

‘Bank-like heists’ make way for new wave of cyber crime

Identity theft is an increasingly popular method of cyber crime as opposed to “bank-like heists” of the past, and SMSF trustees are a prime target, according to a university professor.

         

 

Professor Matthew Warren, deputy director at the Deakin University Centre for Cyber Security Research, told SMSF Adviser cyber criminals are no longer simply after stealing lump sums by cracking through security systems.

Instead, criminals aim for identity theft, which allows them to assume the identity of the client and transfer funds out into a different account, going under the radar of SMSF firms on the lookout for suspicious external activity.

“Attackers wouldn’t necessarily go after superannuation funds to extract large sums of money in a single transaction because they know identity theft and assuming the identity of customers of those organisations would just be as successful,” he said.

Professor Warren said there is more than one route of attack facing trustees, but more often than not, the pathway is based around identity theft utilising a social engineering method.

“A social engineering attack is when you are trying to manipulate people’s actions in terms of a social context whether it’s via email, whether it’s phoning someone and pretending to be someone else or whether it is physically going into an organisation,” said Professor Warren.

“So in terms of threats you are not seeing one particular type of threat but you are now seeing the sophistication of attackers develop a number of different threat strategies into a single attack.”

 

KATARINA TAURIAN AND JOTHAM LIAN
Tuesday, 13 Jun 2017
www.accountantsdaily.com.au

 

 

Adequacy of savings still a concern among Australians

The latest research into superannuation showed a significant proportion of Australians were still concerned about having enough money saved to fund their retirement.

         

 

The “RaboDirect Financial Health Barometer 2017 Super & Retirement Report” found 44 per cent of Australians did not believe they had enough money to fund their retirement.

Despite this concern, only 32 per cent of respondents said they were making voluntary contributions to their superannuation account.

“There’s definitely a head in the sand syndrome with people in terms of their approach to superannuation,” RaboDirect head Bede Cronin said.

Cronin pointed out 31 per cent of people were making voluntary contributions when the survey was performed in 2013, “so we haven’t seen a progressive increase in people making voluntary contributions yet”.

Another alarming statistic the report highlighted was a growing gap between the amount of money people expected to need in retirement versus their actual required living costs. 

This gap stood at $268,502 in 2014 and increased to $353,125 in the 2017 report.

Further, the research showed 18 per cent of respondents were relying on an inheritance for their retirement savings plan.

“That’s a bit of a call out for me particularly when we start to see people’s expectations of what they think they need in retirement are actually far below what actually independent research suggests is what you’ll need for a comfortable retirement,” Cronin said.

“So there is already a disconnect there from what people think they’re going to have and what they actually will need, and this trend of people saying ‘well, I can just not even worry about it because I’m going to get an inheritance’ is slightly concerning.”

Based on the findings, he said RaboDirect advocated for individuals to start to take an interest in their superannuation and understand the changes to the system to be implemented on 1 July, which were likely to have both positive and negative effects. 

The report findings were based on a survey of 2300 Australians aged between 18 and 65.

 

By Darin Tyson-Chan
15 Jun 2017
www.financialobserver.com.au

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