April 2023

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Welcome to our April newsletter. In this quarter’s issue, we have provided articles on the following topics:

Staff and Office Updates

With the onset of the colder months which usually see people suffer from the seasonal illnesses we hope everyone is staying safe and healthy.

We are fast approaching the deadline for lodgements of Tax Returns for the 2022 financial year. If you need any help finalising these please contact us in the office.

Planning perspective pre 30-6-2023. If interested in managing strategies please make an appointment.

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Government Proposes Changes to Tax Concessions for Large Superannuation Balances

In the lead-up to the May budget, the Albanese Government has announced a major change to taxes on superannuation earnings for balances over $3 million.

Current superannuation taxes:

An individual’s retirement savings, held in a complying superannuation fund, is subject to concessional taxation on earnings of income and capital gains. The extent of the tax concession on the super fund earnings will depend on whether the individual has satisfied the conditions for release – this will generally be based on your age and whether you have retired or met a condition of release.

Individuals that are yet to satisfy their condition of release will have their superannuation fund earnings subject to tax at 15% on income. Individuals that have satisfied the super funds condition of release, and have elected to convert some or all of their super fund balance to support a pension, will not be taxed on the earnings arising on that balance. 

Importantly the balance that is tax free is limited by the transfer balance cap, which is currently up to $1.7m. Earnings arising on amounts not supporting their pension, or above the transfer balance cap, are subject to 15% tax.

Proposed changes to superannuation taxes:

The government is now proposing to limit the concessional 15% tax rate to member balances less than $3m.

It is proposed that, starting from 1 July 2025, for individuals with total superannuation account balances of more than $3m, an additional tax of 15% on earnings will be charged on the balance over $3m.

Earnings on the balance below $3m will continue to be taxed at 15% or 0% depending on whether the fund is in accumulation or pension phase, whereas earnings on funds over the $3m will be taxed at 30%.

For the purposes of administering the additional 15% tax, earnings are calculated as the difference in the total superannuation balance at the start and the end of the financial year, adjusting for withdrawals and contributions.

This means that earnings will include unrealised gains.  It also means that any realised capital gains included in the earnings above $3m will potentially not attract the one third CGT discount which applies to superannuation funds.

Where a superannuation fund makes an earnings loss in a financial year, this can be carried forward to reduce the additional tax liability in future years.

Limited details are available on how this tax will be collected, but the announcement provides that:

  • individuals will have a choice of either paying this additional tax themselves or from their superannuation funds, and
  • this tax will be separate from an individual’s personal income tax, similar to the existing Division 293 tax regime.

Impact of the changes:

This proposed change will impact Australians with superannuation account balances greater than $3m.

Estimates provided by the government suggest this will be around 80,000 superannuation members.

Should this change be passed into law, large and small superannuation trustees will also need to consider how their systems will operate to comply with the law.

Below is an example from the fact sheet released by the Treasury:

Carlos is 69 and retired. His SMSF has a superannuation balance of $9 million on 30 June 2025, which grows to $10 million on 30 June 2026.

He draws down $150,000 during the year and makes no additional contributions to the fund.

This means Carlos’s calculated earnings are:

$10 million – $9 million + $150,000 = $1.15 million

His proportion of earnings corresponding to funds above $3 million is:

($10 million – $3 million) ÷ $10 million = 70%

Therefore, his tax liability for 2025-26 is:

15% × $1.15 million × 70% = $120,750

This is a proposal only, nothing have been passed.

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Instant Tax Write-off for Capital Expenses

Temporary full expensing, or TFE for short – allows businesses to deduct the full cost of eligible capital assets from their profits for the year, rather than depreciating the cost over several years. TFE is scheduled to last until 30 June 2023 so it’s vital that businesses take advantage now.

For small businesses in particular, the measures could, with some fairly significant caveats, represent a significant opportunity to boost your bottom line.

What assets are included in the write-off?

Most Australian businesses can now immediately deduct the full business-related costs of all purchases of capital items – typically depreciating assets bought for the business, which could include:

  • fixtures and fittings (such as shop or cafe fit-outs)
  • technology, such as laptops, computers, EFTPOS systems and security equipment
  • tools, plant and equipment
  • office furniture
  • motor vehicles such as utes, delivery vans and most cars (deductions for these are capped at a certain limit each financial year – $64,741 in 2022/23)
  • motorbikes
  • solar systems.

What eligibility criteria apply for instant tax write-offs?

To be eligible, businesses must have an aggregated annual turnover of less than $5 billion. This high turnover threshold means almost every Australian business is included in the scheme, although if you’re a medium to large business, bear in mind that ‘aggregated’ turnover means the turnover of any parent companies (including overseas parents) and subsidiaries need to be included.

That said, businesses whose aggregated turnover is more than $5 billion but whose Australian income is less than $5 billion can also claim the tax break, provided their aggregate turnover was less than $5 billion in either 2018/19 or 2019/20, and provided they have previously invested more than $100 million in tangible, depreciating assets in the period 2016/17 through to 2018/19.

TFE applies to new depreciable assets and the cost of improvements to existing eligible assets (even if the existing assets were acquired before the scheme started).

What happens if I make a purchase greater than a write-off amount?

There is no limit on the cost of assets that can be deducted. So, provided deductions for the asset are not specifically excluded or limited under the scheme (see below), it doesn’t matter what the cost of the asset is.

Whether the asset you purchase is $100 or $1 million, the full cost can be written off against your profits, provided both the asset and your business are eligible for full expensing.

Are there exclusions or limits for instant tax write-offs?

The main categories of assets that are not eligible for full expensing are:

  • ‘expensive’ cars (for the 2022/23 financial year, this means cars costing more than $64,741)
  • buildings and other assets that are eligible for capital works deductions
  • assets located overseas
  • some primary production assets (such as fencing and water facilities) that already have an existing instant write-off scheme in place
  • assets that are not used in a business.

What timing applies for instant tax write-offs?

The tax break applies to assets acquired through to 30 June 2023.

It is worth pointing out that any assets purchased must either be in use or installed and ready for use by 30 June 2023 in order to qualify. If assets have been ordered and paid for but haven’t actually arrived at your premises (or they have arrived but they are still sitting in boxes in a corner of your workplace), the instant deduction cannot be claimed on them.

How do I claim the instant tax write-off?

Claims need to be made through your tax return, so the first opportunity to make a claim will arise when you lodge your return.

Make sure you keep all the purchase documentation you need to prove your purchase.

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Thoughts on recent developments in the US banking sector (SIVB)

On the 10th of March, US regulators (the Federal Deposit Insurance Corporation) took control of Silicon Valley Bank (SIVB) and placed it into receivership. This is the largest US bank failure since Washington Mutual in 2008.

Why did it happen?

SIVB was a bank with very high geographic and customer concentration; it effectively exclusively banked the US West Coast tech sector. This meant it had a very undiversified deposit base; few retail investors, many business deposits, all from the same industry and region. As the Fed lifted interest rates and funding costs rose, many of the tech start-ups banked by SIVB found it increasingly difficult to obtain funding from traditional sources (such as Venture Capital funds). They started to draw on cash deposits instead. Reports suggest that SIVB lost ~USD20bn in deposits in 2022. This process – deposit drain – accelerated in 2023. In order to facilitate these deposit withdrawals, SVB had to sell bonds from its “Hold to Maturity” (HTM) portfolio. SIVB held a large amount of bonds because somewhat unusually, it didn’t lend very much of its deposit base. Instead, it invested excess deposits in fixed income securities. Unfortunately, many of these bonds were purchased at very low interest rates, exposing the bank to a significant risk of loss if interest rates rose. Somewhat unusually, SIVB appeared not to hedge any of this interest rate risk.

Observations and Implications:

In many respects, this is not a usual bank failure. Normally, banks fail due to credit issues which negatively impact asset quality (the loans they issued are unable to be repaid). This time, the bank failed due to a combination of

1) geographic and industry concentration; and

2) asset and liability mismatch (long duration assets vs. very short duration liabilities).

However, regardless of the cause of the failure, there are some important observations we can make. First, the root cause of SIVB’s failure was the rising cost of capital. Second, there will be runs on other smaller banks and distress in the tech start-up sector. Third, Venture Capital (VC) and Private Equity (PE) funds who have invested in the tech start-up sector will find themselves the subject of intense scrutiny as valuations in that sector are called into question. Fourth, markets will remain in risk-off mode, wary of further headline risk and nervous about movements in front end funding spreads in US dollar markets.

Conclusion:

At this point, it is hard to know whether recent developments represent a tiny crack or a major fracture in the US financial system and economy. However, we think that there are a number of implications that will sustain regardless of developments in coming days; namely

1) Valuation pressures for sectors, companies, and asset classes that are vulnerable to structurally higher interest rates and / or cost of capital;

2) A shift in the distribution of risks around economic growth in the US to the downside as the ramifications of SIVB’s collapse are fully understood; and

3) A potential rethink about the likely duration of the Fed’s tightening cycle and balance sheet shrinkage.

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