Superannuation Co-Contribution

[COOPS]

Was just having a look at the ATO site - very sad entertainment on a Saturday night - as I was planning to contribute to our super funds in order to take advantage of the government's co-contribution. The way I read the rules is, although our taxable income is below $28,000 each, we don't qualify as they base the co-contribution on assessable income. In other words they add your gross rental income to your gross salary plus any other income and do not take your deductions into account. Am I correct in this? If so I wish the banks would play by the same rules when they are assessing our loan applications.

 

[julia]

Coops,
That's right you don't get to reduce your income by the deductions against your wages. I am pretty sure you do get to include the deductions on your rental property if it is jointly owned maybe even if you are the only one who owns it. I'm sure there is an ID somewhere on this. Let me know if, after you lose the deductions against your wages, you are still in the running and whether the rental is joint or solely owned and I will look for the ID.

Julia Hartman
[email protected]
www.bantacs.com.au

 

[COOPS]

Thanks Julia - On top of my modest salary my share of rental income is over $50,000 per annum and all properties are on interest only loans so I desparately need to claim my property expenses to qualify. We are asset rich and cash poor so this little bonus would help out at retirement. If you can find the answer for me I would be grateful.

 

[COOPS]

Julia, I have repeatedly searched the ATO site and here is the only definition of assessable income I can find which mentions rental income:

"Gross income including salary and wages, dividends, interest and rent before any deductions are allowed. Assessable income also includes net capital gains, ETP and other amounts that are not ordinarily classed as income."

Based on that definition we would not receive any superannuation co-contribution. If you are able to find another reference which is in our favour I would like to see it.

 

[julia]

COOPS,
For years I have been justifying the piles of papers and books I work amongst by saying I know where everything is and regularly proving it. Not so in your case but. I think anyone at the ATO will confirm that if you were in a business partnership then the only income from the partnership to be included in your assessable income would be only your share of the net income of the partnership. In other words you do get to claim the partnership expenses before including the income in assessable income. Now the same should apply if you own the rental properties in partnership with someone else. There is no reason other than convenience for you not to lodge a partnership tax return for these rental properties. If they are included as partnership income at item 12 of your tax return rather than rental income the net amount will be all that is included in your assessable income. Note no matter what you do a loss cannot be used to reduce your assessable income. Any jointly owned rental properties returning a loss will just have a zero effect on your assessable income.
I have seen an ATO ruling saying this. I will keep on looking. Do any of the other accountant's on this site recall this ruling I have not been able to find it in the ATO data base?

Julia Hartman
[email protected]
www.bantacs.com.au

 

[COOPS]

Julia, I do appreciate your looking into this superannuation co contribution issue for me. I have spent hours on the ATO site and can't find any clarification. I do not want to phone them as you receive different answers depending who you speak to.

Just to make sure I have understood you correctly I have set out a simple example below for 2004/2005. If this is correct you have just scored us $1,250 each and we will be eternally grateful.

Gross salary of $28,000 each.
No deductions against that salary.
Gross rent of $50,000 on property jointly owned.
Deductions of $60,000 against property jointly owned.
Each contributes $1,000 to super.

Scenario 1: Each do an individual return in which assessable income (under the ATO definition) is $53,000 (28,000 + 1/2 the $50,000 rent) and taxable income is $23,000 per person. Outcome is $250 super co contribution each.


Scenario 2: Do a partnership return showing a loss of $10,000 which we transfer to our individual tax returns. This loss does not reduce our assessable income which will now only be $28,000 each and our taxable income will be $23,000 per person once the partnership loss has been applied. Outcome is full super co contribution of $1500 each.

 

[julia]

Coops,
Yep scenario 2 should work but I can't find the binding evidence and I hate giving advice like this without documentation to back it up. Are any of the other accountants out there reading this?

Julia

 

[Mry]

The problem with Super Co-Contribution is that the ATO is not very forthcoming with info on the matter. Its like they are saying "Trust us, we are the ATO. You don't need to know much, heck, you don't even need to lodge any forms. We will get this 100% right, in fact, we have no checking mechanisms on this at all since we are so confident." They don't usually do this to accountants.

I did call up the ATO's super line (13 10 20) with the question - "How does negative gearing with rental properties or partnership losses affect eligibility for co-contribution?" and they guy at the front lines couldn't answer me. It took me some time to stop him giving me the ATO blurb and listen to my question. Anyway, the specialist is getting back to me. Apparently. Its been 2 days now.

The thing that bugs the hell out of me is this page -

http://www.ato.gov.au/super/content.asp?doc=/content/42616.htm&page=24&H24

Your assessable income is your total income before deductions are allowed. This amount will generally be the amount you write at TOTAL INCOME OR LOSS on your tax return, unless:

*you have a distribution from a partnership or trust, income or losses from rent or business (including personal services income), a capital gain or foreign source income, or
*you claimed a deductible amount for a pension or annuity

in which case....wha? What happens if you have rental property? Does it still go towards reducing your income or is it ignored? Its quite strange the page doesn't say anything else.

If I get an answer from the ATO, I'll let you know.

 

[COOPS]

Yes, that thread is bugging me also. On one hand they are defining assessable income as follows (this is from http://www.ato.gov.au/super/content.asp?doc=/content/42616.htm&page=25&H25 ):

"Assessable income is total income before deductions are allowed. Assessable income includes:

salary and wages
bank interest
dividends and other income from investments
bonuses and overtime paid to an employee
business profits
commission paid to a salesperson
pensions
rent
other amounts that are not ordinarily classed as income including:
net capital gains
eligible termination payments"

On the other hand, in a link from the same area of the site there is the quote that Mry mentioned in the previous post.

Sounds to me like they are having an each way bet or trying to keep down their co-contributions by letting us think we don't qualify.

By the way, in the Partnership section of the ATO website they seem to actively discourage joint owners of a rental property from submitting a partnership return by saying:

"If you receive investment income jointly, for example:

rent
interest or dividends from the co-ownership of property
other assets

you do not need to lodge a partnership return."

I presume the above statement does not mean you can't lodge a partnership return, just that you are not required to do so.

By the way, Julia, I do understand that you are just tossing your thoughts into the ring at this point and that it needs to be checked out - I'm just grateful to yourself and Mry for trying to solve the conundrum. Actually, I'm surprised that Dale hasn't commented also. Here's hoping Mry receives an answer from the ATO as I'm sure I have looked at just about every topic and ruling on the ATO site and I keep going around in circles.

 

[Mry]

I just spoke to "J" from the Moonie Ponds ATO office. I asked if there was further documentation on this matter but she said that there was none as these matters had not really been considered and that I should write in to get the advice in writing.

She stated that -

Rental Income - is added to your other assessable income to work out the Total Income. No rental deductions are allowed in working out the total income. So if you earn a gross salary of $28,000 and have $50,000 in rental income and $60,000 in rental deductions, your "total" income is $78,000.

Partnership Income - The profit is added to your assessable income. But if the partnership has a loss, the partnership loss is treated as being zero for the purposes of this test.

As for rental property partnerships and if you can have them, you have a wonderful statement in TR93/32 which states that in "the extended income tax definition of partnership, it is not necessary that persons carry on a business for their association to be treated as a partnership for income tax purposes. They need only to be in receipt of income jointly. Therefore, co-owners of rental property come within the definition of "partnership" for income tax purposes, not because they are necessarily partners at general law, but because they are in receipt of income jointly."

In other words, you can have a partnership of rental properties in a "P" return. I would also recommend that you consider TR94/8 and TR93/32 and ensure you have such things as a partnership agreement and perhaps minutes to explain the formalising of your co-ownership into a partnership for tax purposes. But do remember that Part 4A will be hanging over your heads at all times and that you can't escape that.

Its a bit of a storm in a teacup for the ATO to get back $3,000, but you never know.

Just remember that the above responses are not "formal" documented responses and the ATO are not bound by them but they sound about right to me. I'd be putting in writing questions to send to the ATO. And I disclaim any responsibility for reliance on this advice.

 

[COOPS]

Many thanks to Mry for the above and to Julia for suggesting the partnership return as a possible solution. You have both given generously of your time and knowledge. This might benefit quite a few low income earners who have used the equity in their PPOR to jointly buy investment property. We actually have an agreement in place as to our intentions.

 

[Mry]

The expert just called. I get a 2nd confirmation, yay!

Two interesting things from that discussion-
1 - The ATO guidelines state that if you own a rental property in your own name, the rental income is added to your assessable income for working out the total income, and it ignores the deductions. But if you have a property held jointly, whether it is in a "P" form or shown on your individual return, the net income is added as assessable income (the loss is of course discounted as 0). Rental income from partnerships where the property is held jointly is deemed to be partnership income despite having no official partnership declared. So you may not have to set up that partnership after all.... if you can trust the ATO.
2 - The ATO messed up on the 2004 year for taxpayers with ETPs. They will be doing another run through to make sure that ETPs from employers are considered as employment income so that people can satisfy the 10% test. I saw someone about that this morning, better give them a call.

All this information came through from internal ATO docs. I expressed a desire to see them but they would not release them.

Now, I'd better get back to work.

 

[julia]

Coops & Mry,

Thanks Mry for not taking the standard blurb from the ATO. But Coops I would still lodge a partnership return. You see it will be a computer that will detirmine whether the gross rent goes in or not. Just thinking about how the returns are set up I really don't think it will check for joint ownership first. It will simply go to the rental income box. By doing the partnership return it will not get a look at the gross rent. Only the net loss and disregard it. Hopefully your co contribution will be automatic without it ever touching human hands. And as you can see from Mry's research you are entitled to do a partnership tax return.

Julia

 

[COOPS]

Good thinking Julia - will do that and hopefully won't have any queries. If the result is positive that will be great but if they change the rules then at least we've each put $1,000 into super we may have otherwise frittered away. Sorry if I sound sceptical about the ATO.

You and Mry have spent a lot of time on this so it's nice to have a positive outcome. Hopefully this will help a few other investors too.

Wish there were more accountants (and other professionals) prepared to think outside the square.

 

[gad]

Glad I read this thread.

Last year I put $1000 into my wife's super account so she could get the $1000 from the Co-contribution scheme & I was about to do the same this year but after reading this thread I doubt I will.
This bit makes me wonder though:
My wife had wages of $11,115, rental income from an IP in her name of $13546, distributions from the Navra fund of $5742 plus some other minor dividend payments etc. A total of over $30000 & the Co-contribution still paid the full $1000.

Her taxable income was only $3181 though.

I had worked out that her taxable income this year would be app. $9000 so I was going to do the same this year but if what I have read in this thread is right she wouldn't get the full amount as her income before tax & deductions will be app $36000.

Does that sound right?

 

[COOPS]

Hi Gad

I would double check with your accountant - print this thread out and supply it to them as it details the ATO blurb e.g.

http://www.ato.gov.au/super/content...htm&page=24&H24


Quote:
Your assessable income is your total income before deductions are allowed. This amount will generally be the amount you write at TOTAL INCOME OR LOSS on your tax return, unless:

*you have a distribution from a partnership or trust, income or losses from rent or business (including personal services income), a capital gain or foreign source income, or
*you claimed a deductible amount for a pension or annuity



You may get an answer from the ATO by June 30 if you apply quickly. It looks like they did not count the rental income as assessable income last year which is what we feel to be correct.

In any case, an assessable income of $36,000 would give her a co contribution of $1,100 this year so it's still worthwhile. By the way, make sure that 10% of her income is from eligible income

 

[gad]

Thanks Coops

 

[julia]

Gad,

Your wife will still get some co contribution and there is still the advantage of putting super away for her so why not. Can't quiet work out why she got the full amount last year. You might be onto a glitch in the ATO's computer.

Julia Hartman
[email protected]
www.bantacs.com.au

 

[DD1]

Super?

With such a complex set of rulings and determinations from the ATO, and the govt changing the rules for super regularly, your comment about the "advantage in putting super away", makes me wonder that if you put $20k in super and couldnt get to it or change what you can do with it once its locked in, wouldnt another small IP ($20k deposit) be the better option in the immediate term? Sulrely super should be maximised near to retirement, but available cash and investing now would surely give you better componding than 5%-10% you may get from a super fund.

I agree that getting the co-contribution is a very valid argument, but funds above the basics, I believe, should be funnelled into better investments than super unless you intend to retire in the next 5 years.

Please correct me if I am wrong.

DD1

 

[Aceyducey]

Frankly I don't trust the government over superannuation.

And I don't trust most superannuation fund managers to act in my best interests.

The regular rule changes, poor management and moving goalposts mean that I cannot assess the risk.

I would NEVER put money I don't have to into a vehicle which I cannot actively manage.

The issue isn't the individual funds, it's the system.

Cheers,

Aceducey