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Anita Cohen
There has been much debate recently around the carbon pricing model proposed by the Federal Government, which has caused great confusion to many.
In essence, a carbon price is effectively a tax on energy uses which emit carbon dioxide (and certain other pollutants). It is a pollution tax.
As with any new major tax introduction, there is an intensive level of detail which we will interpret and advise on in due course, but in the interim, we provide a snapshot of the key features below.
Start date
From 1 July 2012, the Federal Government will impose a price on carbon.
Fixed price stage
For the first 3 years the price is fixed. The carbon price will start at $23 per tonne and rise to $25 per tonne in the third year.
Flexible price stage
After 3 years the carbon price will be flexible – determined by the open market. There will be a floor price and ceiling price during the first 3 years of this flexible price stage. The suppliers of permits will be the Australian Federal Government, international entities and local certified farming projects. A secondary trading market in permits will be established.
General assistance packages
There are a number of detailed efficiency assistance packages and clean technology programs that are targeted at specific industries. More detail can be accessed from Clean Energy Future For the sake of convenience the following commentary is of a general nature.
Importantly small business will not have to count or monitor their carbon pollution or electricity use, i.e. there will be no additional reporting requirement on this sector of the economy.
Example of big business assistance
All businesses in the food processing, metal forging and foundry industries will be able to apply for grants for energy efficiency improvements under the $200 million Clean Technology Food and Foundries Investment Program.
A Jobs and Competitiveness Program will be introduced. Trade-exposed activities will initially be eligible for free permits to cover 94.5% of their industry average carbon costs. This will apply to manufacturing activities like aluminium smelting, steel manufacturing, flat glass making, zinc smelting and most pulp and paper manufacturing activities.
Activities which have lower levels of carbon pollution, such as some plastics and chemical manufacturing, tissue paper manufacturing and ethanol production will be eligible for free permits to cover 66 per cent of the industry average carbon costs.
Liquefied Natural Gas projects will also receive a supplementary allocation to ensure an effective assistance rate of 50 per cent.
Transport fuel
In the transport sector, many businesses receive tax credits that currently mean they do not pay fuel excise in the same way as households. From 2012-13, fuel tax credits will be reduced for businesses – with some exceptions – so that they face an effective carbon price like other heavy polluters.
Businesses in the agriculture, fisheries and forestry industries will be exempt from the reduction in fuel tax credits and therefore shielded from the effective carbon price on their transport fuel costs.
Heavy on-road vehicles like semi-trailers will also initially be exempt from the fuel tax credit reductions. The Government intends to apply these arrangements to the heavy on-road vehicle industry from 2014-15.
As aviation fuels do not receive fuel tax credits, domestic aviation fuel excise will be increased by an amount equivalent to the carbon price to provide an effective carbon price from 2012-13.
Low income individuals
From 1 July 2012, every taxpayer earning up to $80,000 a year will receive a tax cut, with most getting at least $300 annually.
A second round of tax cuts will apply from 1 July 2015, increasing this annual saving for most taxpayers earning below $80,000 a year to at least $380. The tax-free threshold will increase from $6,000 to $18,200 from 1 July 2012, and to $19,400 from 1 July 2015.
Under the new tax scales, every taxpayer below $80,000 gets a tax cut, and no Australian taxpayer will pay a cent more personal income tax.
Pensioners and self funded retirees
Pensioners will receive a new Clean Energy Supplement equal to a 1.7% increase in the maximum rate of pension. This is an annual increase of up to $338 for singles and $510 for couples combined.
Pensioners will receive lump sum advance payments of up to $250 for a single pensioner before the carbon price begins.
Self-funded retirees who hold a Commonwealth Seniors Health Card will receive an annual increase of up to $338 for singles and $510 for couples combined and will also receive the first 9 months of assistance as a lump-sum advance payment.
Medical equipment assistance
For those with high electricity costs due to their use of essential medical equipment, such as those using a dialysis machine or other life-support equipment at home (i.e. those who hold a Commonwealth concession card and who rely on certain medical equipment) will be eligible for this payment.
Federal government will provide an annual cash payment of $140 a year, in addition to their other assistance, which will cover the average electricity price increase from the use of their medical equipment due to the carbon price.
Aged care providers bear many costs for their residents, including electricity, and will receive around half of the assistance paid through the age pension. Age pensioners living in aged care will receive the balance of the payment to help them with increases in their other costs of living.
Family tax benefit changes
A new Clean Energy Supplement will be paid, equal to a 1.7% increase in pensions, allowances and family payments.
The assistance will mean:
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Up to $338 extra per year for single pensioners and self-funded retirees, and up to $510 per year for pensioner couples combined.
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Up to $110 per child for a family that receives Family Tax Benefit Part A.
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Up to $69 extra for families that receive Family Tax Benefit Part B.
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Up to $218 extra per year for single income support recipients and $390 per year for couples combined for people on allowances.
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Up to $234 per year for single parents in addition to the increased family payments they receive.
A special Single Income Family Supplement of up to $300 will assist single income families with income between $68,000 and $150,000, as unlike dual income families, single income families only receive one personal income tax cut.
We will keep our clients updated as these measures progress through the legislative process – no doubt there will be substantial debate before these measures become legislation.
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Gary Mottau
Background
Councils in NSW are now required to report all of their assets at fair value in the financial statements.
‘Fair Value’ is the best estimate of the price reasonably obtainable in the market at the date of valuation. Where there is no market for the assets in question, fair value is estimated using a depreciated replacement cost approach.
Depreciated replacement cost is defined as “the current replacement cost of an asset, less where applicable, accumulated depreciation calculated on the basis of such cost to reflect the already consumed or expired future economic benefits of the asset”
The Department of Premier & Cabinet, Division of Local Government (DLG) has mandated that the ‘Gross Restatement Method’ be adopted when revaluing depreciable assets.
This method requires that both the gross book value and accumulated depreciation be disclosed with accumulated depreciation being “restated proportionately with the change in the gross carrying amount of the asset so that the carrying amount of the asset after revaluation equals its revalued amount. This method is often used when an asset is revalued by means of applying an index to its depreciated replacement cost”.
The Local Government Code of Accounting Practice and Financial Reporting (Code) includes a worked example detailing the application of this method and the related journal entries required.
Whilst nearly all asset categories have been transitioned to fair value over the last four years, Councils are required to assess at each balance date whether there is any indication that an assets’ carrying amount differs materially from that which would be determined if the asset were revalued at the reporting date.
If any such indication exists, Council should determine the asset’s fair value and revalue the asset to that amount. It is recommended that revaluations occur every three to five years.
Accordingly, Councils should develop a plan for assessing the need for any revaluations, allowing sufficient time to undertake the revaluation process and meet reporting requirements.
In the absence of a revaluation being required as per above, Councils are not required to index previous valuations except for water and sewerage infrastructure assets.
One asset category that is generating a lot of questions for our office is Community Land. Generally, all land is community land unless it has been classified as Operational Land.
Community land
Community land is to be revalued to fair value by 30 June 2011.
The DLG has reviewed its position on the use of the Valuer General’s valuations of community land and determined that community land may be valued as follows:
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The NSW Valuer General’s valuations may be used to initially recognise community land acquired at no cost or nominal cost. It is considered that the valuations represent the fair value of such land in lieu of actual cost.
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Community land acquired at market price fulfils the requirement of recognition as an asset under clause 7 of AASB 116. Such land should be recorded initially at cost as per clause 15 of AASB 116. Therefore, the Valuer General’s valuations for the initial recognition of the land acquired at market price should not be used.
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The NSW Valuer General’s valuations may be used under the revaluation model to represent fair value for the revaluation of community land under Clause 31 of AASB 116.
In the case where community land has not been valued by the Valuer General, Council may request a valuation under section 20 of the Valuation of Lands Act 1916.
Another area of Council’s operations generating a lot of enquiries is the changes to the method of calculating car fringe benefits announced in this year’s budget.
FBT Update
Motor vehicles
The current Statutory Formula method that uses a 4-tiered rate scale for valuing car fringe benefits will be replaced with a single statutory rate of 20%.
The change will be phased in over a four year period with the statutory rates for each mileage band being gradually altered, resulting in a single rate of 20% applying from 1 April 2014. This change will only apply to vehicle acquisition contracts entered into after 7:30pm (AEST) on 10 May 2011 with pre-existing vehicle contracts to be grandfathered.
The Operating Cost (log-book) Method will continue to be available and remain unchanged. The in-built assumption behind the old 4-tiered rate scale for the Statutory Formula Method was that more kilometres driven in a year implied a higher business use of the car (therefore lower FBT expense).
Accordingly, the rough rule of thumb previously applied in choosing between the Statutory Formula Method or the Operating Cost Method was as follows:
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High total km & low business km = use Statutory Formula Method
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Low total km & high business km = use Operating Cost Method
With the Statutory Formula percentage being flat lined at 20%, the above in-built assumption and the old rule of thumb no longer apply.
Action required
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Review current use of the Statutory Formula Method and the projected impact the flat rate of 20% will have on Council’s FBT liability.
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Review the impact on current “leaseback” arrangements and the implied FBT costs built into the quantum of the lease back payments.
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Recalculate remuneration packaging components where FBT is met by the employee and a car is acquired after 10 May 2011.
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Graham Steer
Business operators spend a great deal of time working in the business, making strategic and operating decisions yet often fail to consider the importance or the implications of an exit strategy. The problem lies with the fact that many fail to provide adequate plans that will best allow them to realise the true value of their business investment when they want to dispose of it.
With this in mind I thought it appropriate to look at this decision making process to aid in what will hopefully result in a more satisfactory exit strategy.
What are the salient points in the disposal of a business:
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When is the best time for me to sell?
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Who should be my target in any sale?
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Why would someone buy my business?
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The most widely asked question - how much will I get?
One of the most important issues to satisfy any potential buyer is:
Will they be able to continue to achieve the profit results currently enjoyed and can they improve them. An awareness of that satisfaction level will go a long way to maximising the value of your business and result in better returns than would be achieved by the sale of a similar business with the same profits.
To achieve the best result in each and every business you should consider in broad terms some of the following:
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The past, including the ownership history - how long has the business been owned for and has there been a series of ownership changes in recent years? What are you selling i.e. the business out of the trading entity, or shares/units?
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The assets supporting the business - does the business require a significant investment in capital equipment or are there intangible assets that drive the business?
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The image and brand - is there brand awareness known in the market place, and who owns that branding?
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Who are your clients or customers - details of age, length of time as a client. These are important to consider for the continued trading of the business
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The security of the tenancy for the premises from which the company operates, especially if it is currently owned by the business owner
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Reasons for the sale – a detailed reason for sale e.g. retirement.
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Employees and employment history – how long have they been employed, what influence do they have on the business going forward? Do they have a current employment contract?
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How important is the owner to the ongoing success of the business?
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Technology and systems
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Relationship with your financier
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Financial data accuracy and timeliness of financial reporting, including meeting all taxation lodgements and payments
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Plant and equipment age and quality
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Inventory and the policy with regard to slow moving stock
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Security of existing data and records
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Competition – is there a market threat from major competitors?
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Is the internet a threat or opportunity to the business?
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Are the systems and manuals accurate and up to date? Does the business hold all the necessary registrations to operate the business?
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Has a business plan been developed?
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Has a plan been developed for the sale of the business?
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Who should be on the team to sell the business?
From this list, a business owner can consider the critical issues that should be addressed before the business goes onto the market.
Within the broad headings above, there are considerable issues that need to be considered before the business is offered for sale. You should be mindful to include your key advisors, financial and legal, in this process before proceeding to market. If you require assistance or wish to discuss your business and future please contact the office and we will be happy to discuss this further.
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Garvin Jones
The new regulations for self-managed super funds (SMSF's) investing in collectables and personal use assets have been implemented to ensure SMSF investments do not give rise to a current day benefit and so are made for genuine retirement purposes.
These regulations apply to all new collectables and personal use assets acquired by SMSFs from 1 July 2011 and all existing holdings must comply with these regulations by 1 July 2016.
The new regulations represent a middle ground position since the investments are permitted, however SMSF’s are subject to extra and more onerous regulations about their purchase, maintence and disposal.
Many of the new rules revolve around prohibiting interactions with ‘related parties’ which includes fund members, trustees and their relatives (and spouses of relatives), and a company or trust owned or controlled by the family group.
The regulations apply to the following items:
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artwork (painting, sculpture, drawing, engraving or photograph; a reproduction of such a thing; or property of a similar description or use)
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jewellery
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antiques
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artefacts
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coins, medallions or bank notes
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postage stamps or first day covers
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rare folios, manuscripts or books
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memorabilia
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wine or spirits
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motor vehicles
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recreational boats
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memberships of sporting or social clubs.
What are the new rules?
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The asset must not be leased to, or form part of a lease arrangement with, a related party, or a member.
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The asset must not be used by a related party, or a member. There is no concession for ‘incidental use’ and it does not matter that the trustee can find a sound commercial reason to do these things, they are simply prohibited.
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The asset must not be stored in a private residence of a related party, or a member.
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A written record must be made about the reason for the decision on where the item is to be stored. This documentation must be kept for at least 10 years after the decision is made. This is to ensure the SMSF trustee has given consideration to what is appropriate storage for maintaining an investment.
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The investment must be insured in the name of the SMSF within seven days of acquiring the investment. You do not have the option to choose not to insure particular articles, regardless of their value or insurability.
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If the investment is sold to a related party, it must be sold at the market price, determined by a qualified independent valuer. This is to ensure the value of the investment is maintained.
Summary
The new rules apply only to SMSFs and they apply to:
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Any investment made in artwork and collectables after 1 July 2011; and
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Any investment held in artwork and collectables at 30 June 2011 from 1 July 2016 (i.e. a transitional period of five years).
Note that for investments in artwork and collectables held at 30 June 2011 the 7 day timeframe on insurance will have elapsed when the rules take effect on 1 July 2016 and hence all assets held at 1 July 2011 will need to be insured by no later than 1 July 2016.
Garvin Jones
When does a pension begin and end
The recently released ATO draft ruling (TR2011/D3) has attracted a great deal of media exposure, and for good reason.
In brief, the significance of when a pension (income stream) starts a, nd stops , is that, to the extent the SMSF assets are supporting pensions, the SMSF income and capital gains are tax exempt.
It follows that when a pension stops the tax exemption also stops.
A classic scenario to illustrate this is that as soon as a SMSF pensioner dies, the SMSF loses some or all of its tax exemption unless the deceased’s pension automatically continues to be paid upon the pensioner’s death (i.e. ‘auto- reversionary’).
Other examples include when:
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a SMSF fails to make the minimum pension payment,
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a SMSF that is in pension phase is wound up, or rolls over to a public offer fund.
Probably the most significant impact occurs on the death of the last spouse. This is because children over 25 typically cannot receive death be, , nefits by way of pension and any lump sum payment of death benefits made to adult children or the Estate by way of transfer or sale of a fund asset will trigger taxable capital gains in the fund.
The capital gains will be calculated based on the original purchase price of the asset rather than its va, lue at the time of death. This is the reverse of the rule that makes it attractive to commence a pension immediately before selling a fund as, se,, t which has a large accrued gain, which allows the gain to be realised tax free.
Planning Tips
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Where possible refresh cost bases of assets with large unrealised gains (not always possible with real property assets);
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Surviving spouse to start a pension as soon as possible after death, then realise assets in pension phase (assuming there is a surviving spouse and he/she is the recipient of the deceased’s benefit).
Conclusion
The ATO’s draft ruling formalises their long held view and provides SMSF Trustees and Advisers with a reference point to revisit the potential impact of tax triggered on payment of death benefits and overall estate planning strategies for SMSF members.
Hill Rogers Spencer Steer Chartered Accountants
Telephone: (02) 9232 5111
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Disclaimer
The material contained in this publication is general commentary only for distribution to clients of Hill Rogers Spencer Steer. None of the material is, or should be regarded as advice. Accordingly, no person should rely on any of the contents of this publication without first obtaining specific advice from Hill Rogers Spencer Steer. Hill Rogers Spencer Steer, its Principals and agents accept no responsibility to any person who acts or relies in any way on any of the material without first obtaining such specific advice.
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