Sample Q&As below
Charging over Property
Question The SMSF invested in a family company that owns a property. The superfund owns 20% of the company by virtue of 1 share and the other 80% (4 shares) are owned by related parties. The value of the investment is less than 5 % of the total assets of the fund and noted as an in house asset. They would like to put a mortgage charge on the 80% that is not owned by the superfund to support Div 7A borrowings on other related entities. Are they allowed to lodge a charged detailed above and is this a breach of the SIS Act?
Answer Luis Batalha 20 September 2018 It is unclear on the facts you have outlined whether the charge is planned to be placed over the property of the company or the shares of the related parties. Either way however it would appear that there will be no breach of superannuation law (SIS Reg 13.14). The rule in superannuation law only prevents a superannuation fund trustee from charging its property. It does not extend to property of related parties and/or companies in which the superannuation fund invests. Otherwise there does not appear to be any breach of superannuation law based on the details of the arrangement you have outlined (including in particular the in house asset rule: SIS Act ss 71 and 83).
Mixed Use Property
Question I have a client that has a smsf. they are looking at investing in a commercial property in the main street of the town with the available funds in the smsf.ie buying the property with cash the property has a commercial shop front from which the clients will operate their retail store . a At the back of the property there is a residentail unit that they intend to rent out to a 3rd party the property is on one title . Do you see any issues?
Answer Luis Batalha 20 Septemer 2018 If: no borrowing is required to acquire the property (SIS Act s 67A) (ie the property is being fully cash funded by the fund); and the arrangements are completely arm’s length (ie both the purchase and the rental arrangements) (SIS Act 109); and the arrangement falls within the terms of the SMSF deed and its investment strategy (SIS Act s 52B(2)(f)) then there should be no issues with the acquisition of the property by the fund. The property is part business property and part residential investment property. However since it was not acquired from a related party it does not need to meet the business real property exception for related party acquisitions in full (SIS Act s 66(1)). Moreover the use of the property by the related party is acceptable since the portion being used is business real property and does not fall within the in house asset rules (SIS Act s 71(1)(g) and 66(5) definition of “business real property”).
Farm restructure using CGT small business and restructure rollovers
Question We have a client that currently operates a farming enterprise through a family trust. This currently involves the parents son and his wife. The net assets of the combined business will be greater than $10M. The turnover will be less than $2M per year. The farmland is held by the parents in their personal names and the son also owns some in his name. As part of the succession planning the son is going to sell some of the farmland in his name to purchase farm land off his parents. The son will have a capital gain on the sale of his farmland. The son would like to purchase this land in a new family trust is he able to access any small business concessions to roll over the capital gain on the sale of his farm land. Is the son able to access any business restructure rules. After the succession planning the son will run the enterprise through a family trust but his parents will no longer have anything to do with this new entity. The net assets of the new business will be less than $6M and the turnover will also be less than $2M.
Answer Clifford Hughes 18 September 2018 At a high level without reviewing trust deeds and financial statements the answer is that concessions are available but the process is slightly more convoluted to achieve your final aims. Further depending upon the jurisdiction in which the clients are located there may be transaction costs. Presuming a full analysis of sub-div 328-C is carried out and aggregated turnover below $2m is confirmed for all affiliates and connected entities the son should be able to access both Div 115 and Div 152 concessions to reduce the taxable gain (on the basis the land sold by him is an active asset utilised by the current discretionary trust carrying on the farming enterprise). However acquisition of land by the son from the parents will only be eligible for Div 152-E rollover where the son acquires the land from the parents in his own name not via the proposed new discretionary trust. Once the son has done so he should be able to transfer the land acquired from the parents into the new discretionary trust utilising the rollover in Div 328-G. The critical point to obtain the SBRR is to ensure that an FTE is made based on the son. In order to support the SBRR it is necessary to ensure advice/position statement documents the genuine restructure reasons (which on the facts in your instructions would appear to be asset protection based). Ordinarily the disposal from the son to the new discretionary trust would trigger a recoupment under Div 152-E often a J2 event (see note 2 in sec.152-410). However it is possible to apply the rollover in sec.328-430 to that J2 event. Importantly to put the above together you also need to consider the transfer duty implications. If the clients are Victorian there is potential to access the Family Farm Exemption for the transfer from the son into the new discretionary trust. This is provided the range of beneficiaries and the variation clause are limited to satisfy the requirements of the SRO. FYI – I have recently completed a transaction involving farms near Wangaratta where the relevant exemptions have been obtained from the SRO. In that matter the land has ended up in a new discretionary trust controlled by a son-in-law. In my view the importance of documenting the genuine restructure arises because of the potential for the son (in your facts) to die before the 3 year safe harbour period expires. It is little recognised at present that where individuals are involved in an application of the SBRR their death results in a failing of the safe harbour period. Therefore the back up of a fully documented genuine restructure at the time of the transfer is (in my view) important to have put in place. There are also issues in this because of the restrictive ATO views on when the SBRR is available. I am currently completely a tax advice on a similar restructure in Qld where there will likely not be a duty exemption on the transfer of the land. The arbitrage then will be the transaction costs of the duty impost verses the utility of the preferred structure.
GST and Health
Question I have a client who operates a business that assists clients to quit smoking through a program that includes acupuncture sessions and a support program including telephone support and videos. The typical program paid for by the client consist of the following: Client is provided with 10 short videos that are watched before the appointment The client has a session with a registered acupuncturist that includes laser acupuncture and is provided education on how the treatment works The client is then provided with further support videos and telephone support a further Acupuncture session can be provided as well. The telephone support is not always provided by the acupuncturist The cost charged is all inclusive and invoiced as such. My client operated the business through a private company and invoices the client through this. The acupuncturist completing the treatment are contractors to this company and paid on a per session basis. Questions: Is the program offered by my client considered to be an eligible health service and therefore GST Free? If the session is not administered by someone who is not a registered acupuncturist but has the relevant qualifications would they still be GST free income? If they can satisfy the rules around services provided by an assistant?
Answer Tony Van Der Westhuysen 18 September 2018 The only part of this service that meets the specific requirements of s 38-10 of the GST Act would be the acupuncture service (see item 2 of the table in s 38-10(1)(a). In the case of the acupuncture the supplier needs to be a “recognised professional” in relation to that supply. The term “recognised professional” is defined in s 195-1 if the person supplying the service meets one of the following conditions: “a) where the service is supplied in a State or Territory in which the person has a permission or approval or is registered under a State law or a Territory law prohibiting the supply of services of that kind without such permission approval or registration; or (b) the service is supplied in a State or Territory in which there is no State law or Territory law requiring such permission approval or registration and the person is a member of a professional association that has uniform national registration requirements relating to the supply of services of that kind.” So whether the acupuncturist must be registered will depend on whether the State or Territory in which the servicee is provided requires such registration.
Fuel Tax Credits
Question Could you please let me know if a race horse trainer operating on a country property is eligible to claim fuel tax credits and if so what activities/ vehicle qualify. Thank you
Answer Luis Batalha 21 September 2018 Details of when fuel tax credits are available are set out on the ATO’s website see below: https://www.ato.gov.au/Business/Fuel-schemes/Fuel-tax-credits—business/For a horse trainer to be entitled to claim fuel tax credits they must be carrying on an enterprise and use the vehicle in their enterprise (Fuel Tax Act 2006 (Cth) s 41-5(1) and GST Act s 9-20). Guidance on when a horse trainer is considered to be carrying on an enterprise is found in Taxation Ruling TR 2008/2. The following factors should be considered (set out in paragraph 6): whether the activity has a significant commercial purpose or character – this indicator comprises many aspects of the other indicators set out below; whether the taxpayer has more than just an intention to engage in business or to commence in the future – an intention alone without commencement of activities is insufficient; whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity; whether there is repetition and regularity of the activity; whether the activity is of the same kind and carried out in a similar manner to that of the ordinary trade in that line of business; whether the activity is planned organised and carried on in a businesslike manner such that it is directed at making a profit; the size scale and permanency of the activity; and whether the activity is better described as a hobby a form of recreation or a sporting activity. For vehicles credits may be available for heavy vehicles and light vehicles of 4.5 tonnes gross vehicle mass (GVM) or less travelling off public roads or on private roads.
Question GST on Wine equalisation tax Say: Before TAX the price $100.00 We need to pay $29.00 for Wine Tax. After that we need to pay $12.9 for GST. My question is on BAS Return I should show $129.00 as Total sales or Still $100.00 as Sales Activity. If we should show $129 as Sales it means it will not match with my PL sales. If we show $100 as Sales it is not 10% for GST Report. Which way should we go?
Answer Mark Chapman 23 July 2018 At box G1 (total sales) you write down the total invoiced including GST and WET The WET itself is accounted for by entering the total amount of wine tax payable against Label 1C on the activity statement. The total of any wine tax credits is entered against Label 1D on the activity statement.
GST and Property
Question GST Margin Scheme I have a client who purchased blocks of buildings I believe they were old large commercial buildings Purchased in 2016. Purchase contract has ‘going concern’ and ‘not applicalbe’ in the margin scheme section My client has fully renovated the buildings to new residential apartment blocks. 8 apartments in total They are almost ready for sale and we are trying to determine if we will be able to use the margin scheme or not? Your assistance will be greatly appreciated
Answer Tony Van Der Westheysen 20 July 2018 It depends. An amendment was introduced in late 2008 to limit the ability of purchasers under the going concern provision to apply the margin scheme. Under this amendment you will need to detemine whether the seller of the buildings unde the going concern provision would have been eligible to apply the margin scheme to that sale. If not the purchaser under the going concern sale will also not be eligible to apply the margin scheme. Example 1 A sells property to B as a taxable supply. B sells the property to C as a going concern. In this case C would not be eligible to use the margin scheme since B would not have been eligible to use the margin scheme. Example 2 A sells property to B as an out-of-scope supply (say because A is not registered for GST). B sells the property to C as a going concern. in this case C would be eligible to apply the margin scheme since had B wanted to B could have applied the margin scheme. So in order to work out whether your client is eligible to use the margin scheme you will need to know the circumsatnce under which the entity that sold the property to your client acquired it. Given that the buildings your client purchased were “commercial buildings” it is more likely that the entity acquired those buildings as a taxable supply making your client ineligible to use the margin scheme – but that will need to be determined.
Control of a Corporate Trustee of a Trust
Question I am not sure if this is the correct area/subject for this submission but will try anyway. If it is not could you please re-direct to the most appropriate person if possible. We have a client who runs their business through a trust. Initially there were individual trustees being a husband and wife and subsequent to that a deed of variation was enacted to change the trustee to a company. When the company was set up it listed the shareholder as the wife (only) as trustee on behalf of the trust (i.e. non-beneficially held) and further when the change of trustee took place the update to the company share register didnt occur. The director of the company is the husband. The husband and wife are now experiencing marriage difficulties and it is highly likely it will end in divorce with a resulting settlement. Is there any potential problem posed for the husband (who is wanting to continue to run the business without any involvement or poitential hindrance from the wife) given the wife is currently listed as the legal owner of the shares on behalf of the trust (as beneficial owner) even though this isnt correct and doesnt correspond to the trust documentation? Is it as simple as him signing an ASIC form as director of the company to update the member details to correctly reflect what is stipulated by the trust deed (variation)?
Answer David Garde 20 July 2018 No. It isnt that simple. Based on the facts you have described I understand the wife is the shareholder and the legal owner of the share in the company. Is that reflected in the share certificate and register of members in the company register of the company? I presume yes. A notice to ASIC from the director could not deprive her of her share whether she owns the share on trust or not. On the contrary a shareholder can remove a director but not the other way around. So while the wife is the shareholder the husband may be at risk of removal as a director. What I understand the husband needs is a completed share transfer from the wife. Before taking action to get the share transfer the trust deed of the trust should be carefully considered to see if there is an appointor or similar with the power to remove and appoint the trustee of the trust. If it does and if the appointor is the husband the husband can request that the wife complete a share transfer to the husband in the knowledge that if the wife refuses to do so the husband as appointor could remove the trustee and appoint another trustee which the husband controls. If not then the husband may need to wait until he gets a settlement before the wife will be obliged to complete the share transfer assuming that in a settlement the husband will get control of the business.
Conditions of Release Post Preservation Age
Question We have a client that works less than 10 hours per week online selling Tupperware. She is over 60 but has never had any other jobs than this and has worked in this job for many years. She is 62 years old and wanting to know whether she can withdraw her super. I found the below information from http://superoracle.firststatesuper.com.au/getting-money-out-of-super/super-conditions-of-release-frequently-asked-questions This seems to indicate that she would not have met a condition of release but the situation is slightly different as she has never worked more than 10 hours per week and therefore perhaps never considered to be gainfully employed. I’m still not sure which condition of release she would satisfy if any. Could you please provide your opinion on this. Thanks. Super conditions of release frequently asked questions Section: 12.5 Retirement Question 1: My client has reached preservation age and intends to reduce her working hours to less than 10 per week. Her current employment arrangement is the only job she’s ever had. Will she meet the retirement condition of release? Answer: No. For a client who has reached preservation age the retirement condition of release has two requirements that must be satisfied: they have ceased a gainful employment arrangement and they intend not to become gainfully employed for 10 or more hours per week in the future. Although your client has reduced her work hours she has not ceased a gainful employment arrangement and therefore does not meet the retirement condition of release.
Answer Clifford Hughes 20 July 2018 Your question “withdraw super” is imprecise and very difficult to answer as such.On the information you have supplied your client is ineligible to start an account based pension. The starting point is that as a person born prior to 1 July 1960 your client has a preservation age of 55years: see SISR 6.01(2). The end point is that upon your client attaining the age of 65 years she will satisfy an unqualified condition of release such that she will be able to withdraw all of her super balance if she wishes. Between the starting point and end point whether or not your client is able to commence an income stream is a factor of: (1) the particular rules of the fund(s) of which she is a member – which means all such deeds need to be reviewed; and (2) whether she retires – it is in respect of this issue where you have misunderstood the material you have located. NOTE – there are other conditions of release – such as TPD terminal illness etc. They are ignored for the purposes of this response. To start an income stream between 55 to 65 years your client has to relevantly retire from gainful employment. On your instructions she has only one income earning activity the Tuperware sales. Unless she ceases that activity completely she cannot start an income stream until she turns 65. Often fund deeds will not only require the member to cease gainful employment but also require the trustee to be satisfied the person is not going to restart employment or if they do start a new employment it will be less than 10 hours per week (hence the State Super FAQ you found on an internet search and why its facts are confusing you). Where you are most likely mistaken is that often people in similar situations to your client start income streams. However that is because they have multiple sources of employment and it is relatively easy to cease 1 or more of them. For example a directorship of a family business company. On the facts you have instructed your clients only options are to either cease her Tupperware role completely or wait until she turns 65. Preservation Issues Separate to “retirement” there is a further issue that you appear unaware of that arises if your client’s super balance contains any elements which were contributed prior to 1 July 1999. Per SISR Pt 6 reg 6.01 to 6.46 and Schedule 1 your client’s super balance (which will need to be investigated via the fund trustee(s)) may comprise: preserved benefits (PBs) restricted non-preserved benefits (RNPBs) unrestricted non-preserved benefits (UNPBs) As a broad proposition PBs and RNPBs can only be removed from a super fund when your client satisfies a condition of release (ie turns 65 or “retires” beforehand). However as your client is now well in excess of her preservation age (ie 7 years post now) she should (subject to fund deed rules) be able to withdraw any UNPBs component of her super balance if any exist.
New Zealand Resident in Australia
Question I have a client who was living in New Zealand for a few years leading up to May 2017. As of May 2017 they moved to Australia with the intent to reside here. They worked in New Zealand during their time there and on arrival in Australia found work and has been working since. My question is for the 2017 financial year are they considered an Australian Resident for tax purposes?
Answer Mark Chapman 20 July 2018 I assume that the taxpayer is originally from New Zealand (not from Australia) and they did not arrive on a 417 or 462 working holidaymaker visa (in which case different rules apply) Assuming that the taxpayer moved here with the intent to remain permanently it is very likely that they became Australian resident for tax purposes from the date of arrival in May 2017. They would not be regarded as Australian resident for the portion of the tax year prior to that (hence they qualify for a part year tax-free threshold). Note also that some New Zealand citizens are able to take advantage of the tax exemptions for temporary residents even if they stay in Australia for good. This means that although they are taxes as residents on Australian sourced income they are largely exempt from tax on foreign income. This is because when New Zealand citizens enter Australia using their New Zealand passport they are issued a ‘Special Category Visa’ allowing them to remain and work in Australia but not re-enter Australia if they leave (hence it is a temporary visa). In most cases New Zealand citizens who migrated to Australia after 26 February 2001 (and entered on a special category visa) and have not applied for a permanent resident visa or Australian citizenship are not Australian resident for the purpose of the Social Security Act 1991. These individuals who do not have an Australian resident spouse will be deemed Temporary Residents for Australian tax purposes. Accordingly for a New Zealand citizen who came here after 26 February 2001 overseas income (from anywhere in the world not just New Zealand) will not be taxable here and they will not pay Australian capital gains tax on the disposal of overseas assets. Not all NZ citizens qualify as temporary residents. Ones who are married (or in a de-facto relationship) to an Australian resident or who have taken out Australian citizenship do not qualify.
Implications of establishing partnership
Question Husband presently carries on business as a sole proprietor as a self-employed carpenter. Wife presently carries on business as a sole proprietor of a business offering administration/secretarial services to 3rd parties usually on a short-term locum style basis. The income from the husband’s business is substantially in excess of that from the wife’s business. Asset protection issues aside is there any tax law reason why both businesses cannot be put into a partnership to be conducted between husband and wife?
Answer Clifford Hughes 19 July 2019 if the intention of the partnership is to ‘smooth’ the income difference between H & W (ie reduced H’s taxable income by passing some to W via a 50/50 partnership) then the simple answer is Pt IVA will likely apply. The creation of the partnership will be the scheme with the existing state of affairs the counterfactual. Presuming both H & W each have sufficient numbers of clients then the PSI rules will likely not be relevant.
Tax on Pre Retirement Age superannuation benefits following Permanent Incapacity
Question Our client is age 47. His super fund held a Life and TPD policy on his behalf. He suffers from severe depression and a TPD payment was made to his super fund under the policy terms. Our client would like to access some of the TPD payment by making a withdrawal from his super fund under the permanent incapacity condition of release. We have been advised his total super benefit today consists only of a taxable (taxed component) i.e. no tax free component. We would like to confirm our understanding of how the withdrawal will be taxed if taken as follows: If a lump sum withdrawal is made the following will apply A tax free component will be calculated using the formula under s307-145(3). The remaining balance will be taxable (taxed) component. As our client is below his preservation age of 60 the taxable (taxed) component will be taxed at 20% plus medicare levy? If the withdrawal is taken as a pension income stream There is no tax free component calculation as per 1 above? The taxable (taxed) component will be taxed at our clients marginal tax rate less 15% tax rebate?
Answer David Garde 19 July 2018 What you have said matches the rates and the rebates that apply which appear on the ATO website for lump sum benefits here https://is.gd/WaC6ev and pension benefits here https://is.gd/SvDlTt However there are two other important considerations which will drive the tax the client will pay. Firstly how likely it is that the client may work again in work to which he is suited by education training or experience. To qualify for release of benefits from the fund under the permanent incapacity ground it must be unlikely (and confirmed by doctors if the client is relying on my second important consideration which is ) Secondly the client should ensure that the components of the benefits are recalculated to achieve a substantial tax free component for him. The above tax scales only apply to the taxable component. This website of industry fund MediaSuper usefully summarises how a substantial tax free component can be obtained where the client has suffered permanent incapacity: https://is.gd/NZE49P – including the necessity for certification by doctors that it is unlikely that the client can ever be gainfully employed in a capacity for which the client is reasonably qualified by education training or experience.
Main Residence Exemption
Question Our clients purchased their principal place of residence (PPR) in July 1996 and lived in there until March 2011 when property was rented out. In November 2012 property was vacated and repaired. In April 2013 property was re-tenanted until March 2017. After repairs have been done in May 2017 clients moved back into the property in June 2017. Two months later in August 2017 the property was sold. Overall our clients have been absent from their PPR for 6 years and 2 months and they did not have another PPR (i.e. they have been renting). Questions: Did this property lose its main residence exemption as the clients were absent for more than six years and the property was rented out? If yes does the propertyÕs market value at the time when it was first rented out become the cost base and should the gain be apportioned as clients moved back prior to the sale?
Answer Mark Chapman 19 July 2018 I believe the main residence exemption will be available for the whole ownership period. As you know the owners of a property can be away for up to six years and still retain the main residence exemption where the property was earning assessable income. The period of absence is indefinite where the property is vacant but not earning assessable income. In this case the period that the property was earning assessable income commenced in March 2011 and ended in March 2017 (exactly 6 years). Although the couple did not move back in until June 2017 based on the facts it appears that the repairs in the period between March 2017 and June 2017 were undertaken to make the property habitable again by the couple and hence that period would qualify as a period of habitation by the couple (and hence be covered by the MRE). Alternatively the property was empty between March 2017 and June 2017 but not earning (or available to earn) assessable income and hence is covered by the indefinite absence period where a property is vacant but not earning income (and also covered by the MRE). In the event that the MRE was not available for that period from March 2017 to June 2017 the base cost of the property would be reset to market value at the date the property was first used to produce income (March 2011).There are no set rules on the dormant trust in asset protection structures (ie ask 2 lawyers for their advice & get 5 different opinions sadly). The essential nature of the dormant trust is that because there is a person who
Ownership of shares, asset protection trusts
Question Thank you for your assistance. You mentioned using a dormant trust to hold the shares in company B rather that the wife of the director. Can you please clarify who should be the appointor and trustee of the dormant trust? Is there an issue if that person is the director’s wife or should it be both the director and his wife? Or another party altogether? Thank you.
Answer Clifford Hughes 18 July 2018 There are no set rules on the dormant trust in asset protection structures (ie ask 2 lawyers for their advice & get 5 different opinions sadly). The essential nature of the dormant trust is that because there is a person who is the trustee and the only asset is the shares in Company B there is no need for a trust bank account a TFN to lodge ITRs no annual financial statements required no ASIC annuall returns (ie if there was a corporate trustee). This of course changes if the clients decide that Company B is going to declare a dividend to the trust shareholder. My view is that in determining the structure the 2 factors are: (1) who is available? (2) what is the quality of the trust deed? (1) the wife is likely suitable to be trustee whilst she remains compliant retains mental capacity and is willing. I tend not to use the husband to be trustee as any search of his name would show the shares in company B as an asset on the ASIC register. The husband can subject to (2) below be the appointor/principal of the dormant trust if desired. (2) this is the very important issue in my view. The appointor/principal mechanism in the trust deed needs to be robust and take account of multitude potential possibilities so that there is no possibility of the appointor position becoming vacant. It needs to specifically provide that if the current appointor is declared bankrupt then they lose the position until their bankruptcy is discharged and that the trustee in bankruptcy cannot exercise the appointor’s powers (there are cases which say this is the case but having it clearly stated in the trust deed removes possible arguments). Similarly if the current appointor loses mental capacity etc (ie dementia) they cease to act as appointor. Importantly the appointor provisions must also provide for a backup person to automatically assume the position where the current occupant is disqualified because of bankruptcy/criminal conviction/lack of capacity (and also death).
Members Mezzanine Financing on top of LRBA and giving Personal Guarantees
Question Good morning We have a client proposing to purchase a commercial property in their SMSF for $2.0M. The will need to take out a loan in the SMSF for $1.5M to complete the acquisition. This loan to valuation ratio is outside the banks standard lending rations (LVR) and they have requested additional security. Our questions are as follows: Under the SIS act: Can the members provide personal guarantees for the loan? The members have unencumbered assets (other property) outside their superannuation fund. Can this additional property be provided as security for the SMSF loan? Can the members get the maximum loan from the bank through the SMSF (using the property being acquired as security) but then make a further loan to the superannuation fund from personal funds to make up the shortfall (note all non-concessional contribution caps have been utilized)? Any other thoughts or suggestions.
ANSWER Clifford Hughes July 18 2018 Re your 4 questions: Yes subject to comments below re Q4. Yes subject to comments below re Q4. Yes subject to compliance with the ATO’s views in PCG 2016/5. Query though whether the fact the members will also need to lend money to the fund (ie in addition to what the bank will lend) means that such member mezzanine financing is non-commercial because it is more than the bank will lend? I am aware these issues have been raised in discussion of ATO views but am unaware of any ATO statements on mez financing (as opposed to the primary loan being in excess of bank LVRs). Further there will be commercial law issues in respect of bank priority for first loan/mortgage subserviance of member’s loan and then whether failure to make repayments on time on the member’s loan is uncommercial etc. In respect of Q1&Q2 should the bank call upon the guarantees and/or exercise security over the non-SMSF assets the amounts paid to the bank or realised by it will (on ATO views) constitute contributions by the members to the SMSF which may well breach NCC caps etc and result in extra taxation. Warnings should be given in writting to members now so that they are aware for the future and you have covered your liability issues.
Family Trust Distribution
QUESTION We have a client with a discretionary family trust that distributes to family members. If some of these family members owned their own company (that was independent of our client) can we still make distributions to this company as part of the family trust. Ideally we want this comapny to have the family members as the sole directors and shareholders. We are just concerned about the nexus between the family trust and company. If this is not possible would it be ok if our client is still a director and / or different class of shareholder of this company to allow us to still distribute to the company?
ANSWER Mark Chapman September 26, 2018 The answer depends on whether the trust deed permits it and secondly whether there is a family trust election in place. If the companies in question are listed as potential beneficiaries in the trust deed then distributions can be made. If the companies are not listed (either specifically or indirectly by way of a general clause giving the trustees general power to distribute beyond named beneficiaries) then the distributions cannot be made. It is important to check whether a family trust election is in place. A family trust election is a choice by a trustee to specify a particular individual (the test individual) around whom a family group is formed. This family group then sets the maximum range of beneficiaries amongst whom the trustee can distribute to without triggering significant adverse tax outcomes such as family trust distributions tax.
The choice as to who will be the test individual is crucial as not all family members will be part of the family group for tax purposes. Broadly the family group includes: The test individual and their spouse; Any parent grandparent brother or sister of the test individual (or the test individuals spouse); Any nephew niece or child of the test individual or their spouse and any lineal descendent of these individuals; The spouse of anyone mentioned above. Entities such as companies partnerships and trusts can also be members of the family group although this will generally only be the case where the family members listed above have an entitlement to all of the capital and income of the entity.
Accounting for Taxation
QUESTION I am auditing an SMSF and the accountant has prepared financials on an accrual basis and prepared the tax return on a cash basis. Is it acceptable and if yes then how do we reconcile member balances/financials moving forward to future years? As the balances as per ITR will be different to what balance sheet will have.
ANSWER Ashley Course September 28 2018 This question would appear to relate to the Part A auditors report. According to the ATO SMSF auditors report the responsibility of the SMSF auditor is to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement. The auditors responsibility does not extend to forming an opinion on whether the funds tax return is correct. This is the responsibility of the person lodging the return not the auditor. As the financial report of a SMSF is generally a special purpose financial report (GPFR) and as there are no legislative requirements or Australian accounting standards which prescribe how the funds financial statements are to be prepared it is generally up to the trustees to ensure the financial statements are prepared in accordance with the needs of the users (the members). The trustees / accountant therefore can essentially account for tax on either an accrual or cash basis in the financial statements.
The auditors responsibility is therefore to form an opinion on the appropriateness of the tax treatment based on whichever method the notes to the financial statements state has been used. i.e. if the notes to the accounts state than tax has been accounted for on an accrual basis then the auditor is to form an opinion on whether this is reasonably correct. If the notes to the financial statements state that tax has been accounted for in the financials on a cash basis then the auditor should confirm this is reasonably correct. Whether the tax is accounted for in the tax return in the same manner is not the responsibility of the auditor. Whoever is responsible for the lodgement of the tax return shall ensure this has been accounted for correctly.
Duty on Put and Call Option arrangement in NSW
QUESTION Put and call option deed query A put and call deed commonly specifies that the call option is exerciseable within a certain period and thereafter the put option is exerciseable if the call option has not been exercised. Is there any reason why the call option period and the put option period can’t be exactly the same?
ANSWER Willian Cannon November 25 2018 I am not sure if there is a property law reason. Cant really think of one except that if the put is exercised during the call period does that terminate the call. I assume the call and put could be drafted so that the exercise of one terminates the other. For stamp duty purposes under the stamp duties Act put and calls were treated as an agreement for sale. I recall if the put period was after the call period the put and call was not caught by the legislation. Put and calls are no longer treated as agreements for sale in NSW (other than for lanholder purposes). Subject to the operation of the anti avoidance provision discussed below if the put is exercised and the call is not it seems section section 22(4) may not apply so the consideration paid for the call would not be included in the consideration.
There might be an argument it should be included in any event applying Chief Commissioner of State Revenue v Dick Smith Electronics Holdings Pty Ltd  HCA 3. Care would need to be taken to ensure that the fact that the call and put period are the same does not result in the agreement in fact constituting an agreement for sale or transfer. As noted above the other consideration is whether the anti avoidance provision would treat such an agreement as an agreement for sale. There must be some risk that they would. If the normal arrangement is that the put period only commences after expiration of the call period apart from delaying the time from which duty is payable the question would be what is the commercial purpose for having the put and call period the same? The risk of the anti avoidance provision applying would be increased if say the amount paid for the call option exceeds what might reasonably be expected to be paid with a view to the call option fee falling outside section 22(4).
QUESTION I have a new Company resident client and the company received a contract from foreign company to work here at the mine. The foreign company provides everything only the company received the labour or services payment working at the mining. The company income received from foreign company for first year is $150,000 and 2nd year is $246,000.
Does the company require to register for GST for the income received from the foreign company? Just need to confirm and if you can give me some GST rulings for foreign resident contracting Australian company to work with them would be a great help for my future reference.
ANSWER by Tony van der Westhuysen BA LLB (Tax Law) MBA November 8 2016
Where a non-resident makes a supply in Australia, that supply will be connected with the Indirect Tax Zone under s 9-27 of the GST Act. For all practical purposes, the Indirect Tax Zone is simply another name for “Australia”. On the face of it therefore, that non-resident company would have an obligation to register for GST if the value of their taxable supplies met or exceeded the registration turnover threshold of $75,000. In your case, the value clearly exceeds this limit.
A non-resident can avoid this requirement if they enter into a reverse charge agreement with the resident company (see s 83-5(1) (d) of the GST Act). Where such an agreement is in place, the GST is “reverse charged” so that the recipient of the supply (the resident company) agrees to pay the GST on behalf of the non-resident supplier. The GST in this case would be 10% of the price of the supply (in your case $15,000 in the first year and $24,600 in the second year). If the supply represents a creditable acquisition for the resident company under s 11-5 of the GST Act, then they will be entitled to an equal and offsetting input tax credit for the GST that was reverse charged.
Capital Works Amortisation
QUESTION My client owned half share of a commercial rental property (acquisition date 21/6/1999) and recently purchased the other half share. When the commercial property was initially bought it was used in the printing industry (construction date 19/03/93). The building capital works rate used for the first purchase was 4% PC. On purchase of the remaining half share the client has completed an office fitout for commercial office rental. What rate should the following items be:
- Initial half share – is this still 4%?
- Purchase of the remaining half share?
- Building construction costs associated with office fitout?
ANSWER by Mark Chapman B.Comm LLM (Tax Law) January 18 2017
The capital works deduction is not spread over a fixed term but is calculated according to the use of the building. The 4% rate will only apply where the building is being used for an eligible industrial activity. A commercial office rental does not qualify as an industrial activity and therefore for the purposes of Div 43, the building is no longer an industrial building. Accordingly, all three elements (the original 50%, the newly acquired 50% and the recent office fit-out) should be depreciated at the 2.5% rate.
Deduction for Gift Donation
QUESTION A question for commentary/case law on S 30-222 Income Tax Assessment Act to do with GST deductions on gifts (in this case artwork). Particularly interested in sub section below:
(2) In deciding what is a reasonable amount, have regard to the effect of those terms and conditions, or that *arrangement, on the *GST inclusive market value of the gift.
ANSWER by Tony van der Westhuysen BA LLB (Tax Law) MBA January 17 2017
The definition of “market value” is modified to account for any input tax credit that a donor would be entitled to if he orshe purchased the thing being valued. So the net effect on an entity’s resources in acquiring something that is donated must allow for the fact that the cost to the donor is partly offset by the input tax credit that he or she is entitled to.
The term” GST-inclusive market value”, as defined in the GST Act will be inserted in the Dictionary to the ITAA 1997, so when this term is used it expressly includes the GST component without adjusting for any input tax creditentitlement. Accordingly s 30-220(2) inserts a specific rule for adjusting that value that the donor can claim as a deduction to account for the input tax credit entitlement.
CGT on Sale of Retirement Unit
QUESTION The question is capital gains arising on disposal of a retirement home unit.
For the owner it was her main residence however 7 years ago the owner moved into high care nursing home and so the retirement unit was then rented. The owner has now passed away and the executer of the deceased estate will now put the retirement unit up for sale. Given the property has earned assessable income for over 6 years will the sale of the unit be subject to capital gains tax.
If the unit is subject to tax will the special rule in s118-192 not apply as the retirement unit was not in use as a main residence by the owner at time of death, in which case the executor will need to allow for capital gains tax based on number days used as the principal place of residence.
ANSWER by Mark Chapman B.Comm LLM (Tax Law) 2nd Dec 2016
PBR 61605 addresses substantially the same facts (understanding that the home was acquired after 19 September 1985). As the same provisions in s118-145 can still apply then, as the unit was rented out, a maximum 6 years of absence in the nursing home can apply to the unit as her main residence if the owner had no other main residence. CGT would apply pro rata (1/7) in relation to the seventh year to which the main residence exemption cannot apply.
In regard to the second question I agree with the member’s observation which also matches the ruling. Neither way of attracting the effective exemption for the two year period following death in s118-195 is attracted so CGT applies pro rata to the period of ownership by the estate following death also.
It follows that the period of occupation prior to going into care and no more than 6 years of the absence in the nursing home, during which the unit was rented out, attract a (partial) CGT main residence exemption. The remainder of the period of ownership by the owner and her estate attracts CGT.
Residency of Trust and CGT
QUESTION Our question concerns the residency of a trust with a corporate trustee and the related capital gains tax implications (if any). The relevant background facts are as follows:
Our client (individual) ceased to be an Australian tax resident (permanent move to Singapore) from January 2015; He is the sole shareholder and director of a company. This company was incorporated in Australia; The company is also the trustee of a discretionary trust. We note the following:
Under Australian taxation law, a trust is deemed to be a resident trust if the trustee is a resident OR the central management and control of the trust is located in Australia; and Under the Corporation law, a company is deemed to be a resident where it is incorporated in Australia OR the central management and control is in Australia. The Double Tax Treaty between Australia and Singapore is not clear on the capital gains tax impact of a change in residency.
Given the above, does the trust ever cease to be an Australian resident under domestic tax law and, if so, would capital gains tax event I2 be triggered?
ANSWER by Clifford Hughes Bjuris, LLM (Tax Law) FTIA December 14 2016
On the facts that you have instructed it is most likely that the trust will remain an Australian resident and not cease. However, the client has other issues in that the company is in breach of the Corporations Act.
Under Sec.6(1) ITAA36, “resident trust for CGT purposes” is referred to the meaning under the ITAA97.
In sec.995-1 ITAA97, “resident trust for CGT purposes” is relevantly defined on the basis that:
(a) for a trust that is not a unit trust, a trustee is an Australian resident or the central management and control of the trust is in Australia; or
As the trust in your query has a corporate trustee, we then need to revert to sec.6(1) ITAA36 where para (b) to the definition of “resident” provides that:
(b) a company which is incorporated in Australia, or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia.
Given your instructions that the corporate trustee is incorporated in Australia, the result of combining those definitions is that, whilst the same company remains the corporate trustee, the trust could never cease to be a “resident trust for CGT purposes”.
Note that residency of a company determined under the Corporations Act is not relevant for the purposes of determining tax residency of that company.
In order for your client trust to cease being a resident trust for CGT purposes the present corporate trustee would need to be placed with a company incorporated overseas (and which does not have it’ central management & control in Australia), or with an individual who is not tax resident of Australia.
Section 201A Corporations Act provides that at least 1 director of a company must be ordinarily resident in Australia. On the facts you have instructed, your client is in breach of that provision.
Where the resident director requirement is breached, the company is required to remedy the breach as soon as possible. If it does not, ASIC can decide to issue a penalty notice (currently $1,062.50) or commence prosecution for breach of the Act.
You should therefore make your client aware of the above requirement and recommend they rectify as soon as possible.
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