Q&A Forum - Tax Strategies & Structures for Business Owners
Question from Sarah Price
Paul Hockridge discussed using a bucket company to ultimately pay distributions to a non-resident beneficiary in his presentation. How would the following scenario work?
Scenario: SD Pty Ltd is operating.a business with its shares being owned by a family trust. If one of the beneficaries of the trust moves overseas and becomes a non-resident, are we able to pay a fully franked dividend to the trust which then gets distributed to the non-resident beneficiary.
Please confirm whether the distribution would be subject to either withholding tax or income tax in Australia or overseas e.g., United Kingdom.
Response from Paul Hockridge, Partner, Deloitte Touche Tohamatsu
In the situation described, there should be no income tax or withholding tax
payable in Australia, provided that the franking rules, family trust election
and holding period requirements are met and neither Part IVA nor s100A apply
and subject to the ATO agreeing that there is no withholding requirement now
imposed under Div 6 (which would mean that the beneficiary would have to lodge
a return to get a full refund - I am awaiting a response from the ATO on this
point).
We are not able to advise on the tax law of other jurisdictions but can refer
you on to a fee for service basis, if requested.
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Question from Nancy Croll
What is the tax treatment for pension over age 60 in retail fund when a pensioner became non-resident? Would it still be tax-free pension income? What is the section that may provide an answer?
Response from Spyros Kotsopoulos
Section 301-10 provides that the benefit is not assessable income and is not
exempt income when recipient is aged 60 or more. (Note that if there is any
element which is untaxed, it would be included in assessable income (with a tax
offset to ensure that the rate did not exceed 15% - refer s310-95).
The fact that the pension might be excluded from being taxed in Australia does
not mean that the recipient wouldn't be taxed in their jurisdiction of
residency.
Depending on circumstances it may be preferable to take a lump sum rather than
income stream. We note this is not advice as such as we do not know all the
circumstances. The person raising the query should confirm the same with their
adviser.
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Question from Nancy Croll
How will reserve be taxed compared to super and pension? If a large
reserve is paid to a non-dependent, what is the tax rate in super and pension
phase?
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Question from anonymous
If an employee salary package and other deductible expense say accounting body membership is the company
1. Entitled to claim GST?
2. Reguired to pass the GST benefit back to the staff?
Response from Paul Hockridge, Partner, Deloitte Touche Tohamatsu
If an employer gets a tax invoice they should be able to claim the input tax
credit in the situation referred to. Any obligation to, in effect, pass the
(benefit of the) ITC on to the employee is determined by the employment
agreement.
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the right
Question from Greg Dunstan re: Personal Use Assets that are not include in the $6M SB CGT concessions test
Re - a holiday home, is it true that this has to have NEVER been rented out so as not to count for the $6M test?
Response from Andrew Noolan, SBN Lawyers
You can exclude an asset from being considered if it is an asset of an individual or the individual's affiliate. There is no time period referred to in connection with "being used" and there is no definition of personal use or enjoyment. Although the maximum net asset test is applied based on net assets determined "just before the CGT event", there is no indication that the personal use and enjoyment is tested only at that time.
The better view appears to be that if the asset has ever been used for something other than the personal use and enjoyment of the individual or the individual's affiliate then it will not be excluded.
Care needs to be taken as well as a result of the change of the definition of "affiliate". Spouses and children under 18 are no longer included be definition as "affiliates"
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Additional paper supplied by Andrew Noolan, SBN Lawyers (Masterclass Presenter)
Are your earn-out arrangements costing you too much in tax? Please
click here to download paper
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Re - Practical Tax Planning for Business Growth
Question from Dave Tombs
Paul Hockridge discussed some advantages of having a "dump" company holding lifestyle assets. Would the company be able to reclaim GST on such acquisitions? Secondly - would the assets need to be insured by the company (as opposed to the individual?)
Response from Paul Hockridge
If the company is not carrying on an enterprise, which is what the
discussion assumed, no input tax credits could be claimed. The owner of the
property would have an insurable interest. Whether they take out insurance is
up to them.
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Re: CGT Event E4 application to Unit trusts
Question from Greg Dunstan -
Can you please give me a practical example of how the application of CGT Event E4 will be to the detriment of benficiaries of a unit trust structure?
Response from Arthur Athanasiou, Rigby Cooke (Masterclass presenter)
The best way to deal with this is to go to:
http://www.ato.gov.au/businesses/content.asp?doc=/Content/23457.htm
That document sets out the relevant characteristics of how this CGT
event
operates.
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Re: CGT Concession Stakeholder
Question from Taryn -
My understanding is that the 15 year exemption can create an exempt amount in a company that is tax free when paid out to all CGT concession stakeholders. Can you confirm if this amount causes any cost base adjustments for the shareholder. Further, please confirm that it is not neccessary to liquidate the company in order to best get the money out and that you are simply able to pay the amount which reduces retained earnings and is neither a franked nor unfranked dividend in the hands of the CGT stakeholder?
Response from Paul Hockridge, Deloitte Re: CGT Concession
Stakeholder
The answer depends on the precise facts but as a general rule the
/"exempt amount/" will be exempt to the company the CGT concession
stakeholder (s152-125) and CGT event G1 (which can result in a cost base
adjustment) does not pick up such payments (s104-135). Whether any other CGT
event might apply will depend on the facts.
Re: New SMSF Borrowing Strategy
Question from Anonymous -
I understand the Trust (or more correctly, the Trustees) of the new entity created to hold the asset will have title to the asset, e.g., property, and the SF is the beneficial owner, gradually acquiring the asset in full. What happens when the SF has repaid all borrowings and wants to acquire the asset. Is there Stamp Duty, etc. involved in changing title?
Response from Bryce Figot, DBA - re: NEW SMSF Borrowing Strategy
At the end of a borrowing arrangement, when the property is transferred to
the trustee of the super fund from the trustee of trust that holding the
property, there may or may not be stamp duty on the transfer. This depends on a
number of factors. One factor is the jurisdiction that the property is in.
Naturally, each state has different stamp duty laws.
Some states, such as Victoria, have specific stamp duty exemptions for property being transferred from an apparent purchaser to the real purchaser provided certain addition requirements are met. It is strongly advisable that you seek stamp duty advice from a practitioner in the jurisdiction where the property is being acquired before any documentation is signed or any moneys paid.
Please post your response or comment to this question in the box to the right
Re: Anti-Detriment Provisions:
Question from Steve Blaker, Logical Financial
Management
Am I correct in recalling that a SMSF is entitled to the anti detriment deduction and can use as carried forward revenue losses PLUS the deceased's member's estate or death benefit recipient is also eligible to receive the refund of contributions tax dollar amount, subject to the SMSF being able to fund this from investment reserves, insurance or contributions?
Response from Bryce Figot, DBA Butler
The short answer is yes, you are correct in your understanding. Naturally,
this is a very simplified and generic answer to complex topic.
Supplementary question from anonymous re. "Anti-Detriment
Provisions"
Do the anti detriment provisions apply to SMSFs as well as all Super Funds?
Response from Bryce Figot, DBA Butler
Yes. The anti-detriment deduction can apply to any complying super fund
provided that the fund has always been a complying super fund. Naturally, this
generally includes SMSFs. See s 295-487 of the ITAA 1997. Naturally, the
governing rules of the fund (usually contained annexed to the trust deed) also
need to allow for the anti-detriment deduction.
There is no obligation for a trustee to offer the anti-detriment payment. So a
lot of funds who are theoretically allowed to offer it do not offer it.
Supplementary question from Kaye McDonald - Re: Anti-Detriment Provisions
If SMSF can use these provisions please advise the mechanics and actual transactions where it can produce favourable tax outcome. eg How do/can you originate a reserve if they have stopped contributing?..or all funds are required to meet the pension payments.
Response from Bryce Figot, DBA Butler
There are various methods to originate a reserve where members have stopped
contributing. The most popular is an investment reserve. If the trustee
commences such a reserve, broadly, the trustee decides that for example every
period every member should receive a 4% return and if assets returns over 4%
that excess is allocated to the investment reserve instead of to member
accounts. In periods with the fund assets return less than 4%, the investment
reserves is dipped into and top up amounts are allocated to members to ensure
that they receive a 4% return.
Supplementary question from anonymous - re: Anti-detriment Strategy
If the deduction from an anti-detriment strategy causes a loss within the fund, how easily can that loss be carried forward? Is the loss subject to the trust loss measures and can that loss be used to off set, say, assessable contributions?
Response from Bryce Figot, DBA Butler
The short answer is very easily yes, because complying super funds are
broadly exempted from the trust loss measure (ITAA 1936 sch 2F). The loss is a
"revenue loss" and so generally is able to be offset any assessable
contributions.
Supplementary question from Steven McCosker, Prime Partners - re: Anti-detriment Strategy
Can the children of the deceased member be added to the fund after date of death or must they be members of the fund prior to the anti detriment claim? If so, apart from them being trustees, is there any issue with them being members with a nil balance?
Response from Bryce Figot, DBA Butler
The short answers are yes to your first question and no to your second.
There is no restriction on a super fund admitting members after having claimed
an anti-detriment deduction, and these new members could include the children
of the deceased member. Theoretically, you can have a fund member with a nil
member account. However, this is far from ideal. Remember that the paperwork
(eg, the trust deed) should expressly allow for members with nil balances
(often called 'non-financial members').
Re. "Independent Appointor"
Question from anonymous
Should independent appointors be used in discretionary trusts for asset
protection purposes in light of the Richstar decision?
Response from George Kolliou, Logie-Smith Lanyon
The use of independent appointors in light of the Richstar decision is, I think an over reaction. The question raises some very interesting issues on the use and abuse of trust structures that gives rise to the issue of independent appointors. A properly administered trust should not require an independent appointor.
Follow-up question from anonymous
If you used an independent appointor what is to stop the independent appointor sacking the old trustee and appointing a trustee controlled by themselves?
Comment from Kaye McDonald - Re: Independent
Appointor
re independent appointor. To the best of my knowledge there is nothing to stop the independent appointor sacking the trustee and appointing a trustee controlled by themselves - other than possibly a fiduciary responsibility to the beneficiaries and common law.
Comment from George Kolliou- Re: Independent Appointor
An independent appointor certainly has the power to remove trustees but
using this power to the detriment of the objects of the trusts (the
beneficiaries) would constitute a fraud on a power. The power must be exercised
in good faith for the purpose for which it was given. Having said that I do not
advocate the use of independent appointors.
Re. "Risk due to presence of derivatives in SMSF"
Question from Feng Liang, ADX -
A superfund has total member funds of say $1,000,000. The fund holds derivatives - option trading with exposure to say $400,000 if puts were called in. The trustee has an investment strategy outlining the strategy and risk of the option derivatives. Would you consider this fund to be carrying a high risk and would a qualified audit report be required? Is the trustee required to inform the ATO of the percentage of the fund at risk before 30 June?
Response from Bryce Figot, DBA Butler
Yes, I would consider the fund to be of a high risk, however, none of the
facts presented per se require a qualified audit report. Certainly, make sure
that the investment strategy is 100% in order with respect to the requirements
in s 52(2)(f)?
(http://www.austlii.edu.au/au/legis/cth/consol_act/sia1993473/s52.html) -- on
its face it appears that the trustee might be speculating instead of investing
(which leads to other concerns as well, such as whether the sole purpose test
is being met).
Resources:
Paperwork and SMSF - By Bryce Figot, DBA Butler
Common mistakes surrounding SMSF paperwork - crucial information
Succession planning & passing the baton - By Bstar
Case Study looking at tips and traps for succession planning
Check-list for joint venture - By Andrew Logie-Smith and George Kolliou
Checklist for forning a joint venture
