Family tax benefit rules are up the creek

Ausprop is explaining it incorrectly, but the net effect is as described.

They do not add it back twice.

But what they do with their starting point calculations creates the anomaly.

Centrelink don't see a negative income. For the purposes of calculating eligibility for various payments, they take your taxable income as a starting point. Anything less than zero is just called zero. It is at this point any losses from rental property are added back on.

So if you earn 100000 but have 50000 real estate investment loss, your taxable income is 50000, but for purposes of calculating benefits, it will be 100000 (50000 added back on).

But if you earn 50000 and have a 100000 real estate investment loss, your taxable income will be -50000 (which can be carried forward and offest against future income. BUT Centrelink/FAO will take that -50000, call it zero (anything negative is just treated as zero). THEN they add back the real estate investment loss. So, for the purpose of calculating benefits, they say your "adjusted" income is 100000. Worst case scenario is having zero income. Taxable income = -100000, they zero this, then add the 100000 loss on to this.

Doesn't make sense? Seems stupid? That's the point...

This anomaly only exists if you have taxable income is actually a loss...



If this explanation is correct, it would be a sad reflection of the state of public service and an environment of investor bashing in Canberra.

It used to be:
Base FTB on family criteria and taxable income only

Then with the use of negative gearing, to negate negative gearing effect:

= normal declared taxable income + negative gearing claimed.

If the negative gearing comes from the same source of declared income, the negative gearing would be added twice. I THINK THIS IS INCORRECT APPLICATION OF FTB RULES OR THE ACCOUNTANT HAS PUT THE FIGURES INCORRECTLY IN THE TAX RETURNS. (Bill is right.)

Auspro: I would appeal to Centrelink regardless of the disagreements of workers united in this forum. You pay tax and has the right of equal treatment and support. You may be assets rich but cashflow poor, eg own a big family house/farm and have no income, Australia has not come to the stage of forcing people to sell everything to be entitled to help (there are already threshold limits on assets). Let the pollies sort this out at the ballot box but in the meantime, I would go along with the system. :)
 
the problem seems to be the way the ATO reports the numbers to centrelink. They are given 2 numbers... what is your taxable income and what loss did you claim for neg gearing. they add the 2 together. What centrelink is not told is that the loss created a negative income, hence the losses in effect get added back twice (Apocolypse explained it better!)

what I have done (and it's still not ideal) is invent some income to declare in her ATO return... I figure the ATO won't mind us over stating income? for every extra $1 of income that I made up for the ATO, the centrelink income fell by $2.

strange huh?!
 
I just made the numbers up - it is a public forum after all. The beauty of the example is, the more you lose, the more you are deemed to make. If I lost $1m and didn't have a scrap of wages or anything, I would be deemed to have an income of $1m. so someone that made $10k would get benefits, someone that lost $1m and was bankrupted wouldn't
 
There is no point in negative gearing on low or no income.
The whole point of negative gearing is to offset a high tax fresh hold.
It's wise to put positive cash flow properties in the lower incomer's name.
 
To hear of a group of people who bang on about financial indepedence whining about the fact that they don't receive government support because they elect to run negatively geared investments in order to take advantage of the generous (by world standards) tax treatment of their investments by the same government is more than my irony meter can accomodate.

There was a time in this country when people were proud that they weren't on the government teat.
I agree with you. But we've allowed a ridiculously complex system to evolve whereby our high taxation rates are only tolerated because the majority of people expect to claw back some of it via "welfare for people who shouldn't need welfare". It really is both inefficient and absurd, and it's time we dramatically overhauled the entire system. Until that happens, much as it is ridiculous, I can understand why people feel compelled to "play the game". I'm just glad that it's easy for me to sit it out and remain ignorant of the frustrations of dealing with Centrelink.
I firmly believe that the only purpose of the social welfare system should be to keep people above the poverty line. IMO, if you earn more than $15k per year you shouldn't be getting welfare. Maybe allow that to drift up a bit for extra children but that's it.

That might free up some money to provide appropriate facilities for the mentally ill who now "sleep rough" because they haven't kept up their meds and there is nowhere for them anymore...

With the money freed up from all this middle class welfare we could just make tax rates a flat 30% - the same as the company tax rate.
Let us know where we can vote. I had hoped that the Henry Review might lead to a radical overhaul of our broken tax system, but I'm not optimistic that we're talking more than "fiddling", unfortunately... :(
There is no point in negative gearing on low or no income.
The whole point of negative gearing is to offset a high tax fresh hold.
It's wise to put positive cash flow properties in the lower incomer's name.
Um, yeah, thanks for that. Hindsight is wonderful, isn't it?
 
Recently wife has just gone through the same trouble with the adding back the losses.

We have a small 2.5k loss from IP in my name and a 26k loss also in my name although IP held in a HDT.

After speaking to accountant, we applied online and we added back both amounts on the application.

Now a few weeks later we receive a few letters saying our monies of $1000 and I think $5000 will be deposited into our account.

Wife was sure we were not eligable for the payments so rang the ATO and Centerlink.

After hours on the phone and speaking to numerous people even the person who deals with trusts they all said we were entitled to the payments.

Wife even explained that on the application we added back all losses and they said that because the trust owns the property and not me (loans are in my name) the 26k was not to be added back???

So are we right in taking the money even though we have phoned and pointed the error out to them?

Regards

Regrow
 
Now a few weeks later we receive a few letters saying our monies of $1000 and I think $5000 will be deposited into our account.

Wife was sure we were not eligable for the payments so rang the ATO and Centerlink.

After hours on the phone and speaking to numerous people even the person who deals with trusts they all said we were entitled to the payments.

Wife even explained that on the application we added back all losses and they said that because the trust owns the property and not me (loans are in my name) the 26k was not to be added back???

So are we right in taking the money even though we have phoned and pointed the error out to them?

Regards

Regrow

I would document everything and not spend the money. It is quite possible that if an error has been made it will be found in an audit and you will be required to return it. If you have documented your conversations, which clarifies and confirms their discussions with you, then surely they cannot then charge you any interest or penalty.
 
I would document everything and not spend the money. It is quite possible that if an error has been made it will be found in an audit and you will be required to return it. If you have documented your conversations, which clarifies and confirms their discussions with you, then surely they cannot then charge you any interest or penalty.

As far as an error it is on there part as we added all interest back in on the application and they are the ones who have then taken it back off!

We will have the phone bill and the time spent talking to them. Not sure if she got any names though.

Not a problem with spending the money either, they can have it back any time they ask in the mean time it will offset my interest:D

Regrow
 
I would also set the money aside and not spend it.

Many years ago, before I cancelled my family tax benefit, I had a huge debt to them. Each year, I would give them the information they required and each year they would tell me that I owed money and that they would take the payments out at a certain percentage each fortnight. Sounds good so far, except at the end of each year, the debt would get higher.:eek:

I don't know how they worked that one out. So then I just cancelled it, and told them that I would just get what I was entitled to each year when I did my tax. I thought that was the easiest way to solve the problem.

Wrong! After cancelling it, I got a nasty bill in the mail, giving me a certain amount of time, maybe a fortnight, to pay up in full. At the time, we were struggling a bit financially, and could not pay it, but knew that we would have a very large tax refund when that was due, and (stupidly, I know) thought that they would just lodgically take the funds out of that, since we were entitled to a fair sum of family allowance.

I told them, that it was their own fault. I had given them all the information each time, and each time they had calculated how much I should receive, however each time they did that they were the ones that made a mistake. They overpaid me a small amount each and every fortnight for around 5 years (from memory) and now they send me a "pay now" letter.

So then, they call in the "big guns" and get a debt recovery agency involved. They didn't need to, I was paying the damn thing, but apparently that is the way they do it. Again, I give full disclosure, I tell them how much I can afford each fortnight, and I even tell them that centrelink can take the full amount out of what is due after my tax is sent in at the end of the financial year.

End result was that the debt recovery agency said that I had to pay
$X per fortnight, which was less than half what I had already been paying, and the amount was so small, it would have taken years to pay back. Due to it now being an external debt, they didn't expect it to be paid in full when my tax came in.:confused:
 
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There is a shocking loophole at present that has been going on for some time involving family tax benefit. It involves small business owners (mum and dad owners) living off their company or trust money. Instead of taking wages like normal people do, they take the money as a loan from the company or trust to them - which realistically should be paid back over time under complying loan agreements. These loans are also tax free and often run up to $100k in value or more.

The husband and wife then lodge tax returns with nil income, and receive 15k FTB for all their 3 children. The company goes into liquidation some years later as the husband and wife took all the companies money for themselves, yet they still receive that $15k each year thanks to the stupidity of the system not questioning how these people lived on no income with three children.

So yes, the rules are up the creek and I sympathise with previous posters.
 
There is a shocking loophole at present that has been going on for some time involving family tax benefit. It involves small business owners (mum and dad owners) living off their company or trust money. Instead of taking wages like normal people do, they take the money as a loan from the company or trust to them - which realistically should be paid back over time under complying loan agreements. These loans are also tax free and often run up to $100k in value or more.

The husband and wife then lodge tax returns with nil income, and receive 15k FTB for all their 3 children. The company goes into liquidation some years later as the husband and wife took all the companies money for themselves, yet they still receive that $15k each year thanks to the stupidity of the system not questioning how these people lived on no income with three children.

So yes, the rules are up the creek and I sympathise with previous posters.

Um, as a small company owner I can say that if you do as you are saying, then your loan, unless done through a formal agreement and on a COMMERCIAL basis (eg say 7% interest) will be treated as a dividend to you, and unless your company has been in profit for years before, paid as an unfranked dividend. You will therefore pay exactly the same amount of tax as everyone else in this scenario. That loophole does not exist for centrelink benefits at all, as you will be required to file a Trust Distribution notice with them. And they can access the ATO database. Been there, done that with Youth Allowance.
 
You are one of the few who abides by the rules.

I refer to those who do not abide by the Division 7A loan agreement rules and simply ignore lodgement of their company returns for a number of years whilst lodging individual returns.

You'd be suprised how many do it.
 
You are one of the few who abides by the rules.

I refer to those who do not abide by the Division 7A loan agreement rules and simply ignore lodgement of their company returns for a number of years whilst lodging individual returns.

You'd be suprised how many do it.

Yep. Actually funny you should say that - I almost put that rider into my post. I guess I like my sleep at night.:p
 
Recently wife has just gone through the same trouble with the adding back the losses.

We have a small 2.5k loss from IP in my name and a 26k loss also in my name although IP held in a HDT.

After speaking to accountant, we applied online and we added back both amounts on the application.

Now a few weeks later we receive a few letters saying our monies of $1000 and I think $5000 will be deposited into our account.

Wife was sure we were not eligable for the payments so rang the ATO and Centerlink.

After hours on the phone and speaking to numerous people even the person who deals with trusts they all said we were entitled to the payments.

Wife even explained that on the application we added back all losses and they said that because the trust owns the property and not me (loans are in my name) the 26k was not to be added back???

So are we right in taking the money even though we have phoned and pointed the error out to them?

Regards

Regrow
Hi Regrow, I've been through this before and what the ATO and Centrelink are telling you is correct, the accountant you spoke to is wrong. It all comes down to where the information is recorded in your tax return:

If the property is held in the individuals name the income is entered at Item 21 on your tax return and the loss is added back for assessment by Centrelink (so your income according to Centrelink is higher than your ATO taxable income).

If the property (or managed funds) are held in a trust the income is entered at item 13 on your tax return and Centrelink do not add the loss back from this section.

It's just one of the benefits of owning property in a trust rather than your own name. :)

Don't take my word for it though, maybe you should find a new accountant or get a second opinion? Maybe one of the tax gurus on the forum can confirm what I'm saying is true?

Oh yeah...if it turns out that I am wrong make sure you let me know first because I've been spending the money for the last 5 years! :D
 
Recently wife has just gone through the same trouble with the adding back the losses.

We have a small 2.5k loss from IP in my name and a 26k loss also in my name although IP held in a HDT.

After speaking to accountant, we applied online and we added back both amounts on the application.

Now a few weeks later we receive a few letters saying our monies of $1000 and I think $5000 will be deposited into our account.

Wife was sure we were not eligable for the payments so rang the ATO and Centerlink.

After hours on the phone and speaking to numerous people even the person who deals with trusts they all said we were entitled to the payments.

Wife even explained that on the application we added back all losses and they said that because the trust owns the property and not me (loans are in my name) the 26k was not to be added back???

So are we right in taking the money even though we have phoned and pointed the error out to them?

Regards

Regrow

Tax losses in personal names can rightly be added to your personal tax returns when Centrelink assess your entitlement. It would not be right to add tax losses of your Trust or company as your personal income is not affected directly by the losses of another tax entity. Only the distribution that has been made to you from the Trust and company has already appeared in Centrelink's assessment of your income. The negative gearing losses of the Trust or company may relate to not just you alone.

Hypothetically, if negative gearing losses appear in the Trust how much should be split between the beneficiaries if there is no distribution?
 
Tax losses in personal names can rightly be added to your personal tax returns when Centrelink assess your entitlement. It would not be right to add tax losses of your Trust or company as your personal income is not affected directly by the losses of another tax entity. Only the distribution that has been made to you from the Trust and company has already appeared in Centrelink's assessment of your income. The negative gearing losses of the Trust or company may relate to not just you alone.

Hypothetically, if negative gearing losses appear in the Trust how much should be split between the beneficiaries if there is no distribution?
Hi Francesco, the difference in this case is that it is a Hybrid Trust so the loss is not in the trust itself but a loss to the individual.

The trust has made a profit and distributed the income to the individual at Item 13U, but since the loan is in the individuals name the interest (which is higher than the income received from the trust) is claimed as a deduction at Item 13Y, which leaves the "net non-primary production distribution" as a Loss to the individual.

Unlike when there is a net rental loss in Item 21, Centrelink does not add the losses back in Item 13.
 
Hi Francesco, the difference in this case is that it is a Hybrid Trust so the loss is not in the trust itself but a loss to the individual.

The trust has made a profit and distributed the income to the individual at Item 13U, but since the loan is in the individuals name the interest (which is higher than the income received from the trust) is claimed as a deduction at Item 13Y, which leaves the "net non-primary production distribution" as a Loss to the individual.

Unlike when there is a net rental loss in Item 21, Centrelink does not add the losses back in Item 13.

The principle is still there ie income received less expenses incurred on an investment owned by you, not a trust that owns the IP. Hence, losses claimed by trust should not be added back to personal, which is owned in personal names. The hybrid trust vehicle for an IP is like a management trust where distribution of the management fund is added to the personal income after deducting any interest on borrowing to buy the management fund units.
 
The principle is still there ie income received less expenses incurred on an investment owned by you, not a trust that owns the IP. Hence, losses claimed by trust should not be added back to personal, which is owned in personal names. The hybrid trust vehicle for an IP is like a management trust where distribution of the management fund is added to the personal income after deducting any interest on borrowing to buy the management fund units.
Agreed, neither losses made by the trust itself nor losses made by the individual (due to the interest costs of investing in the trust) are added back by Centrelink. :)
 
okay - i'm going to go out on a limb here and say that anyone living above the poverty line shouldn't be getting any family benefit.

before i get howled down - i do receive around $800/yr in family benefit at tax time as there is no point in being a maytar and letting the government spend it on lunch instead, but i don't agree with it. just breeds the middle class government entitlement.
 
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