Financial Decisions | Boutique Financial Services

November 2016

With the halfway point of the financial year rapidly approaching, it is quite common for tax to slide off the list of priorities when it comes to wealth creation and management. However, diligence and forward planning now can make the difference between a comfortable and positive end to FY17, or a stressful and potentially costly tax season.

Here are a couple of elements to consider which might put you ahead of the pack this year.

Share and Share Alike

Share Economy and Tax

The surging popularity of services like Uber, Airtasker and Airbnb has brought the share economy into the mainstream. While an easy and effective means of generating income, many people are in the dark when it comes to the tax implications associated with the share economy.

What is it?

Not to be confused with the share market, the share economy is at the forefront of the new age of hybrid economies. In a nutshell, it is a constellation of goods and services providers linked via communities and networks.

Benita Matofska from advocacy group, The People Who Share, defines the share economy as:

“… a socio-economic ecosystem built around the sharing of human, physical and intellectual resources.  It includes the shared creation, production, distribution, trade and consumption of goods and services by different people and organisations.”

At its core, it is a wide-open marketplace, with all manner of goods and services available for swapping, renting, collective purchase, collaborative consumption, shared ownership and of course, good old outright personal purchase.

What are the benefits?

For many the share economy represents an ideal opportunity to supplement their finances, while for others it has opened up a world of possibilities and is their primary source of income.

Whichever category you fall into, it is by design a level playing field, ensuring that anybody can become involved at any level without requiring intimate, in-depth market knowledge or specialised education on exactly how to engage with it.

It is easily accessible, with money to be made or direct access to the marketplace literally at your fingertips thanks to an array of apps and websites that are, in most instances, the only real infrastructure of the share economy.

Depending on how you want to engage, getting involved is relatively straight forward – often with minimal overheads.

What are the tax implications?

If you are earning money, whether through provision of services or sale of goods, it is important to consider the following:

Are you operating an enterprise? If you are, you are legally required to obtain an ABN and register for GST.

Is there a GST component to the goods and services being provided? If yes, as with all businesses, GST must be collected and paid to the ATO.

Do you incur expenses? Expenses are eligible as deductions and claimable offsets for tax. Get in touch with your Financial Decisions Adviser to determine how to best manage your expenses and maximise your position through smart deductions.

Do you need to declare income earned in your tax return? As a general rule, you should be declaring any income earned, however there may be circumstances that could preclude the need for reporting this income. Again, please speak with your Financial Decisions adviser to ensure compliance with relevant rules and regulations.

Fear of the Dark

Limited Recourse Borrowing Arrangement (LRBA)

People fear what they don’t understand – a fact that proves especially true when it comes to financial matters. However, LRBAs are not something to be scared of and rather, they present an often-misunderstood opportunity to maximise your SMSF position.

What are they?

In simple terms, LRBAs allow you to borrow to acquire an asset that forms part of an SMSF portfolio. As an example, they can be utilised to purchase commercial or residential properties, assuming the SMSF has a deposit that meets the lender’s loan valuation ratio (LVR) requirements.

LRBAs enable lenders to retain the asset as security without any other elements of your SMSF being at risk. This fact can bring great peace of mind, as your hard earned portfolio is protected while the opportunity to improve your position is enhanced.

Non-arm’s length income

When it comes to making purchases with LRBAs, the terms of the transaction can muddy the waters – particularly in relation to tax applied to any income derived from your SMSF.

In the case of LRBAs, non-arm’s length income (NALI) relates to a situation in which there is a relationship (whether by blood, marriage or business) between the lender and the individual applying for the LRBA. For example, income derived through transactions involving family members, shareholders, suppliers, parent companies or subsidiaries, subject to the terms of the agreement, may be considered as being NALI.

Because non-arm’s length income is taxed at a higher rate, many people are inclined to avoid such transactions altogether. However, if it makes financial sense, there is no reason why you cannot enter such transactions if they are on commercial terms and structured properly.

In other words, it’s an option that is definitely worth exploring!

LRBAs can assist in the acquisition of assets without an outlay of a substantial capital sum and diversify the potential dividend and income streams for an SMSF. While acquiring an asset such as property can significantly brighten the prospects of your SMSF due to the nature and complexity of the transactions, it is recommended that you take advantage of our expertise to ensure you are minimising your tax exposure while simultaneously maximising the gains to your portfolio.

It could be the turning point that takes your SMSF to the next level.

Tax Tips 2017

Deductions

Claiming expenses at tax time is a great way to reduce your tax bill or enhance your return. While some people see this as an opportunity to employ some “creative accounting” and perhaps take liberties with the system, it is important to note that the Australian Tax Office is paying closer attention to deductions and penalising those making fraudulent claims with renewed vigour.

Before making a deduction, ask yourself the following:

Did I pay out of my own pocket?
Has my employer reimbursed me?
Was the expense necessary in order to earn income?
Do I have the receipt?

If you unsure whether something can be deducted, best practice is to check with your Financial Decisions adviser as the ramifications for claiming dubious deductions are stiff and definitely best avoided.

Pulse – November 2016