tax issues update
TRANSCRIPT
Tax Issues UpdateWhere are we at
and where to from here
Peter Adams
Presenter
Peter Adams
Augmentor
Peter has more than 20 years experience as a tax practitioner having worked in senior tax management roles in the profession with both KPMG and PwC as well as in commerce Recently Peter has focused on providing tax consulting and tax training services in the SME market
DIVISION 7A ISSUES
Introduction
Division 7A of Part III of the Income Tax Assessment Act 1936 (ss 109B to 109ZE) operates to treat certain transactions by private companies on or after 4 December 1997 to be the payment of an unfranked dividend by that company Those transactions fall into three categories
bull certain loans from a private company
bull certain payments from a private company
bull forgiveness of a debt owed to a private company
Loans
bull Section 109D operates to treat certain loans made by private companies on or after 4 December 1997 to be dividends
How to approach Division 7A ndash Loans
bull Step One - Has the private company made a loan to an entity during the current year
bull Step Two - Is the entity to which the loan has been made a shareholder or associate of a shareholder
bull Step Three- Has the loan been fully repaid by the lodgement day
bull Step Four- Is the loan specifically excluded under Subdivision D
bull Step Five - What is the deemed dividend amount
bull Step Six - What is the impact on the companyrsquos franking account
bull Step Seven - Does the loan give rise to an FBT liability
Step One -Has the private company made a ldquoloanrdquo to an entity during the current year
bull With effect from 1709 a ldquoprivate companyrdquo for purposes of Div 7A includes a corporate limited partnership (CLP)
bull What is a ldquoloanrdquo
bull Under s 109D(3) a ldquoloanrdquo includes
bull an advance of money
bull a provision of credit or any other form of financial accommodation
bull a payment of an amount for another person where there is an express or implied obligation to repay that amount and
bull any transaction which is in substance a loan
bull Loan includes direct loans and indirect loans from interposed entities
Step One ndashHas the private company made a ldquoloanrdquo to an entity during the current year (continued)
ABC Co
ABC CoShareholder
Loan to
shareholder
Step One ndashHas the private company made a ldquoloanrdquo to an entity during the current year (continued)
Interposed entity loans ndash Section 109T
bull Deemed loan arises as a result of interposed entity loan
bull Deemed loan is repaid or converted to armrsquos length loan before tax return due date
bull If not repaid or converted deemed loan becomes Div 7A deemed dividend
ABC Co XYZ Co
ABC CoShareholder
Deemed Loan
(Section 109T)
Loan 2
Step One ndashHas the private company made a ldquoloanrdquo to an entity during the current year (continued)
Interposed entity loans ndash Section 109UB Subdivision EA
bull Deemed loan arises due to UPE in XYZ Trust and loan to ABC Co shareholder
bull Deemed loan is repaid or converted to armrsquos length loan before tax return due date
bull If not repaid or converted deemed loan becomes Div 7A deemed dividend
bull With effect from 1709 interposing additional trust(s) to separate the UPE holder and lender of loan will not avoid the operation of Subdiv EA
ABC CoBeneficiary of XYZ
Trust
XYZ Trust(UPE)
ABC CoShareholder
UPE exists in favour of ABC Co
Deemed Loan
(Subdivision EA)
Loan of UPE cash
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder
bull Div 7A applies to loans for current or past shareholders if reasonable to assume loan is made because of shareholding relationship
bull Div7A does not apply to loans for future shareholders
bull Loan to associate imposes Div 7A liability on associate not shareholder
ABC Co
ABC CoShareholder
Associate of ABC Co
Shareholder
Loan to Associate of shareholder
(Deemed dividend liability for associate)
Step Two - Is the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
bull An associate of an individual includesbull relative of individualbull partner of individualbull trust where individual or an associate benefits under the trust andbull company in which individual (either alone or together with associates) holds a majority voting
interest
bull An associate of a trust includesbull entity that benefits under the trust andbull entity which is an associate of another entity which benefits under the trust
bull An associate of a company includesbull partner of the company or a partnership in which the company is partnerbull trust where company or an associate of company benefits under the trust andbull entity which holds a majority voting interest in the company (either alone or together with
associates)
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co
shareholder]($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
TR 20103 ndash Section 3 Loans
bull UPE treated as Section 3 loan if inferred as a loan because of treatment of UPE funds by XYZ trust
bull Section 3 loan only Div 7A deemed dividend after 12 months ndash not immediate deemed dividend
bull Section 3 loan provide extra 12 months to repay or make armrsquoslength
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co shareholder]
($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
TR 20103 ndash Section 3 Loans
bull UPE treated as Section 3 loan if inferred as a loan because of treatment of UPE funds by XYZ trust
bull Section 3 loan only Div 7A deemed dividend after 12 months ndash not immediate deemed dividend
bull Section 3 loan provide extra 12 months to repay or make armrsquoslength
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co shareholder]
($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
Quarantine UPE
in Sub-trust
TR 20103 ndash Preservation of UPE status
bull Div 7A treatment can be avoided by preserving UPE status
bull UPE status preserved by transferring and quarantining UPE in Sub-trust
bull Preservation effective if UPE in Sub-trust held only for benefit of ABC Co
bull Return on UPE funds require minimum annual repayment distribution to ABC Co
bull Minimum annual repayment distribution can be based on section 109N benchmark interest rate and section 109NA minimum repayment formula
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co
shareholder]
ABC CoShareholder
[Associate of XYZ Trust] Sub-trust(UPE)
UPE exists in favour of ABC Co
Div 7A amp UPEs
bull TR 20103 states that where a private company has an unpaid present entitlement (UPE) from an associated trust but the trust uses the monies for its own purposes Div 7A can have application Can avoid by
bull fully paying the UPE to the corporate beneficiary before the lodgement day for the trustrsquos income tax return
bull putting a Div 7A loan agreement in place or
bull putting a sub trust in place ndash PS LA 20104
bull TD 201520 states a private company that releases all or part of its unpaid present entitlement is making a payment for Div 7A purposes to the extent that the release represents a financial benefit to an entity
Step Three - Has the loan been fully repaid by the lodgement day
bull A loan is only treated as a dividend if the loan is not fully repaid by the following time
bull loans in 2003-04 or earlier - end of the year loan was made and
bull Loans in 2004-05 year or later - the earlier of date on which company lodges income tax return and due date for such lodgement
bull Repayments must be made by way of actual cash repayment or dividend
bull Repayments made by way of journal entry ie by capitalising the repayment onto the loan balance are not accepted
bull Anti-avoidance provision in s109R - application to same or similar loans
bull Repayment by way of salary and wages or dividend not subject to s109R
Step Four - Is the loan specifically excluded under Subdivision D
The following loans are excluded from being dividends under Div 7A
bull A loan to another company (not acting in its capacity as trustee) - 109K
bull A loan included in the entitys assessable income or made exempt - 109L
bull A loan made in the ordinary course of business on same terms and conditions as loans made to other parties at arms length - 109M
bull An excluded loan that meets interest rate (53) term (725 years) and repayment criteria -109N (issues ndash written agreements converting loans not making minimum repayments Commissionerrsquos discretion)
bull A loan made in the winding up of a company by liquidator - 109NA 109D(1A)
bull A loan to acquire shares under qualifying ESS - 109NB
Step Five - What is the deemed dividend amount
bull Deemed dividend cannot exceed distributable surplus of the company at year end (s 109Y(1))
bull From 1 July 2009 distributable surplus formula is
Net assets + Division 7A amounts minus Non-commercial loans minus Paid-up share value minus Repayments of non-commercial loans
bull Net assets - amount by which companys assets exceed sum ofbull the present legal obligations of the company andbull provisions for depreciation annual leave long service leave and amortisation of
intellectual property and trademarks
bull Div 7A amounts ndash CY payments forgiven debts ndash previously excluded
bull Accounting basis ndash cannot overunder value - Commissioner can re-state
bull Fresta v FCT 2002 ATC 2061 - provision for income tax is a ldquopresent legal obligationrdquo as company is liable for income tax at year end notwithstanding that it is not due and payable until assessed
Case Study - Div 7A
bull On 1 January 2016 A Pty Ltd loaned $15000 to John a shareholder of A Pty Ltd No qualifying written agreement was in place or repayments made before the lodgment day of A Pty Ltds 2016 income tax return
bull Assume no other payments or loans to shareholders or their associates for the income year ended 30 June 2016 Assume no Div 7A amounts and that in prior years there were no loans treated as dividends under Division 7A
Case Study - Div 7A
Case Study - Div 7A
bull On 30 June 2016 A Pty Ltd is taken to pay a dividend to John
Distributable surplus formula
Net assets $20000
Less non-commercial loans (that is loans treated as
dividends in prior years)
$0
Less paid-up share capital $12000
Less repayments of non-commercial loans $0
Distributable surplus $8000
Case Study - Div 7A
bull Although $15000 was loaned to John the amount treated as a dividend will be reduced to A Pty Ltds distributable surplus of $8000 John includes $8000 in his 2016 tax return as an unfranked dividend
bull The remaining $7000 is not treated as a dividend in the income year ended 30 June 2016 and will not be treated as a dividend in a future year even if the company has a distributable surplus in that future year
Step Six - What is the impact on the companys franking account
bull From 1 July 2006 no franking debit arises in a companyrsquos franking account as a result of the operation of Division 7A
Step Seven - Does the loan give rise to an FBT liability
bull Loans that are Division 7A deemed dividends specifically excluded
bull Effective 1 April 2007 a loan that complies with the requirements of Division 7A excluded loan is not a fringe benefit
Commissionerrsquos Discretion under Division 7A
bull One-off opportunity to correct past mistakes - (Practice Statement PS LA 200720) until 30 June 2008
bull However after 300608 Commissioner can still apply discretion in cases of an honest mistake or inadvertent omissions (s 109RB)
bull Formal request for discretion required after 30 June 2008
ATO Backflip - ATO ID 201315 UPE and bad debt deduction
bull This ATO ID considers whether a beneficiary of a trust is entitled to a bad debt deduction for UPE amounts that have been written off as bad debts
bull For bad debt deduction under section 25-35 debt must be actually written off and amount must have been included in assessable income previously
bull ATO view ndash UPE is equity entitlement not a ldquodebtrdquo so cannot be bad debt
bull Even if structured as an equity debt amount not the same as included in taxpayerrsquos assessable income previously
bull No bad debt deduction available to taxpayer
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Address the individual issues and problems in Division 7A by way of specific legislative amendment
2 Statutory Interest Model
Impose requirement that loans to related entities carry a statutory rate of interest but no requirement that principal be repaid prior to termination of the loan
3 Distribution Model
Allow the retention of profits within the private group for permitted purposes and to treat any profits not so used and not distributed as deemed dividends (which would be able to be franked)
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Potential issues to be specifically fixed ndash
UPE classification
distributable surplus quantification
interposed entity identification and treatment
loan and payment definitions
categorisation of exclusions
repayment compliance requirements etc
scope and effect of Commissioners discretionary powers
bull Advantage - could deal with specifically known issues
bull However has potential to be mere piecemeal solution and may fail to significantly simplify the law or its understanding
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
2 Statutory Interest Model
bull Related party loans at legislatively prescribed interest rate
bull Progressive (actual) loan repayments may not be necessary and re-borrowings (of principal) would be permitted
bull Uncomplicated model - interest on the loans assessable to payee (whether paid or not) but not deductible to payer
bull Interest only- principal not be repaid prior to termination of loan
bull Interest rate to be at commercial rate ndash current Division 7A benchmark interest rate too low
bull Allows for retention of loans over prolonged terms
bull Issue ndash ignores that Division 7A also applies to ldquopaymentsrdquo and ldquoforgiven debtsrdquo
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
3 Distribution Model
bull Allow retention of profits within the private group for permitted purposes
bull Any profits not so used and not distributed treated as deemed dividends (but frankable)
bull Retained profits would be taxed at company tax rate
bull Deemed dividends would be taxed at the personal tax rate of relevant shareholders
bull Permitted purposes - use of profits for working capital and other active business purposes of the private company or related entity
bull Use of the profits for passive investment purposes not permitted
bull Acquisition of active assets used in an active business allowed
Board of Taxation ndash Div 7A recommendations - Supplement
bull Set of common principles for loans payments debt forgiveness
bull Simpler system in which asset revaluations will not be required and unrealised profits not taken to be distributed because company assets have been used and company profits tested each year
bull Single 10-year loan with flexibility for repayment of principal
bull A lsquotick the boxrsquo option for trading trusts to retain working capital funds taxed at corporate tax rate - trading trusts that make election denied 50 CGT discount except in relation to goodwill
bull Alternative system that removes uncertainty on the treatment of UPEs by clarifying that all UPEs are loans for Division 7A purposes
bull Self correction mechanism which would enable taxpayers to put in place complying loan agreements reduce compliance and administrative costs
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull No requirement for formal written agreement if evidence of loan
bull Statutory interest rate set at the start of the loan and fixed over the term of the loan and would be RBA indicator lending rate for small business immediately before start of that income year
bull The maximum loan term would be 10 years
bull Prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows
bull ndash 75 per cent of the original loan by the end of year three
bull ndash 55 per cent of the original loan by the end of year five
bull ndash 25 per cent of the original loan by the end of year eight and
bull ndash 0 per cent of original loan (ie fully repaid) by end of year 10
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Transitioning all other pre-existing Division 7A loans to the new 10-year loans from the application date of the new provisions
bull All existing complying seven-year loans would have their terms extended to the new maximum of 10 years
bull All pre-1997 loans would be deemed to be new complying Division 7A loans with a 10-year term starting from the application date of the new provisions
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Introducing a legislative amendment that allows trusts to make a once-and-for-all election for loans from companies (including UPEs owing to companies) to be excluded from the operation of Division 7A
bull ensuring that a trust that makes such an election (an excluded trust) forgoes the CGT discount on capital gains arising from assets other than goodwill and rsquointangible assets inherently connected with the business carried on by the trusteersquo
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Presenter
Peter Adams
Augmentor
Peter has more than 20 years experience as a tax practitioner having worked in senior tax management roles in the profession with both KPMG and PwC as well as in commerce Recently Peter has focused on providing tax consulting and tax training services in the SME market
DIVISION 7A ISSUES
Introduction
Division 7A of Part III of the Income Tax Assessment Act 1936 (ss 109B to 109ZE) operates to treat certain transactions by private companies on or after 4 December 1997 to be the payment of an unfranked dividend by that company Those transactions fall into three categories
bull certain loans from a private company
bull certain payments from a private company
bull forgiveness of a debt owed to a private company
Loans
bull Section 109D operates to treat certain loans made by private companies on or after 4 December 1997 to be dividends
How to approach Division 7A ndash Loans
bull Step One - Has the private company made a loan to an entity during the current year
bull Step Two - Is the entity to which the loan has been made a shareholder or associate of a shareholder
bull Step Three- Has the loan been fully repaid by the lodgement day
bull Step Four- Is the loan specifically excluded under Subdivision D
bull Step Five - What is the deemed dividend amount
bull Step Six - What is the impact on the companyrsquos franking account
bull Step Seven - Does the loan give rise to an FBT liability
Step One -Has the private company made a ldquoloanrdquo to an entity during the current year
bull With effect from 1709 a ldquoprivate companyrdquo for purposes of Div 7A includes a corporate limited partnership (CLP)
bull What is a ldquoloanrdquo
bull Under s 109D(3) a ldquoloanrdquo includes
bull an advance of money
bull a provision of credit or any other form of financial accommodation
bull a payment of an amount for another person where there is an express or implied obligation to repay that amount and
bull any transaction which is in substance a loan
bull Loan includes direct loans and indirect loans from interposed entities
Step One ndashHas the private company made a ldquoloanrdquo to an entity during the current year (continued)
ABC Co
ABC CoShareholder
Loan to
shareholder
Step One ndashHas the private company made a ldquoloanrdquo to an entity during the current year (continued)
Interposed entity loans ndash Section 109T
bull Deemed loan arises as a result of interposed entity loan
bull Deemed loan is repaid or converted to armrsquos length loan before tax return due date
bull If not repaid or converted deemed loan becomes Div 7A deemed dividend
ABC Co XYZ Co
ABC CoShareholder
Deemed Loan
(Section 109T)
Loan 2
Step One ndashHas the private company made a ldquoloanrdquo to an entity during the current year (continued)
Interposed entity loans ndash Section 109UB Subdivision EA
bull Deemed loan arises due to UPE in XYZ Trust and loan to ABC Co shareholder
bull Deemed loan is repaid or converted to armrsquos length loan before tax return due date
bull If not repaid or converted deemed loan becomes Div 7A deemed dividend
bull With effect from 1709 interposing additional trust(s) to separate the UPE holder and lender of loan will not avoid the operation of Subdiv EA
ABC CoBeneficiary of XYZ
Trust
XYZ Trust(UPE)
ABC CoShareholder
UPE exists in favour of ABC Co
Deemed Loan
(Subdivision EA)
Loan of UPE cash
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder
bull Div 7A applies to loans for current or past shareholders if reasonable to assume loan is made because of shareholding relationship
bull Div7A does not apply to loans for future shareholders
bull Loan to associate imposes Div 7A liability on associate not shareholder
ABC Co
ABC CoShareholder
Associate of ABC Co
Shareholder
Loan to Associate of shareholder
(Deemed dividend liability for associate)
Step Two - Is the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
bull An associate of an individual includesbull relative of individualbull partner of individualbull trust where individual or an associate benefits under the trust andbull company in which individual (either alone or together with associates) holds a majority voting
interest
bull An associate of a trust includesbull entity that benefits under the trust andbull entity which is an associate of another entity which benefits under the trust
bull An associate of a company includesbull partner of the company or a partnership in which the company is partnerbull trust where company or an associate of company benefits under the trust andbull entity which holds a majority voting interest in the company (either alone or together with
associates)
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co
shareholder]($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
TR 20103 ndash Section 3 Loans
bull UPE treated as Section 3 loan if inferred as a loan because of treatment of UPE funds by XYZ trust
bull Section 3 loan only Div 7A deemed dividend after 12 months ndash not immediate deemed dividend
bull Section 3 loan provide extra 12 months to repay or make armrsquoslength
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co shareholder]
($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
TR 20103 ndash Section 3 Loans
bull UPE treated as Section 3 loan if inferred as a loan because of treatment of UPE funds by XYZ trust
bull Section 3 loan only Div 7A deemed dividend after 12 months ndash not immediate deemed dividend
bull Section 3 loan provide extra 12 months to repay or make armrsquoslength
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co shareholder]
($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
Quarantine UPE
in Sub-trust
TR 20103 ndash Preservation of UPE status
bull Div 7A treatment can be avoided by preserving UPE status
bull UPE status preserved by transferring and quarantining UPE in Sub-trust
bull Preservation effective if UPE in Sub-trust held only for benefit of ABC Co
bull Return on UPE funds require minimum annual repayment distribution to ABC Co
bull Minimum annual repayment distribution can be based on section 109N benchmark interest rate and section 109NA minimum repayment formula
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co
shareholder]
ABC CoShareholder
[Associate of XYZ Trust] Sub-trust(UPE)
UPE exists in favour of ABC Co
Div 7A amp UPEs
bull TR 20103 states that where a private company has an unpaid present entitlement (UPE) from an associated trust but the trust uses the monies for its own purposes Div 7A can have application Can avoid by
bull fully paying the UPE to the corporate beneficiary before the lodgement day for the trustrsquos income tax return
bull putting a Div 7A loan agreement in place or
bull putting a sub trust in place ndash PS LA 20104
bull TD 201520 states a private company that releases all or part of its unpaid present entitlement is making a payment for Div 7A purposes to the extent that the release represents a financial benefit to an entity
Step Three - Has the loan been fully repaid by the lodgement day
bull A loan is only treated as a dividend if the loan is not fully repaid by the following time
bull loans in 2003-04 or earlier - end of the year loan was made and
bull Loans in 2004-05 year or later - the earlier of date on which company lodges income tax return and due date for such lodgement
bull Repayments must be made by way of actual cash repayment or dividend
bull Repayments made by way of journal entry ie by capitalising the repayment onto the loan balance are not accepted
bull Anti-avoidance provision in s109R - application to same or similar loans
bull Repayment by way of salary and wages or dividend not subject to s109R
Step Four - Is the loan specifically excluded under Subdivision D
The following loans are excluded from being dividends under Div 7A
bull A loan to another company (not acting in its capacity as trustee) - 109K
bull A loan included in the entitys assessable income or made exempt - 109L
bull A loan made in the ordinary course of business on same terms and conditions as loans made to other parties at arms length - 109M
bull An excluded loan that meets interest rate (53) term (725 years) and repayment criteria -109N (issues ndash written agreements converting loans not making minimum repayments Commissionerrsquos discretion)
bull A loan made in the winding up of a company by liquidator - 109NA 109D(1A)
bull A loan to acquire shares under qualifying ESS - 109NB
Step Five - What is the deemed dividend amount
bull Deemed dividend cannot exceed distributable surplus of the company at year end (s 109Y(1))
bull From 1 July 2009 distributable surplus formula is
Net assets + Division 7A amounts minus Non-commercial loans minus Paid-up share value minus Repayments of non-commercial loans
bull Net assets - amount by which companys assets exceed sum ofbull the present legal obligations of the company andbull provisions for depreciation annual leave long service leave and amortisation of
intellectual property and trademarks
bull Div 7A amounts ndash CY payments forgiven debts ndash previously excluded
bull Accounting basis ndash cannot overunder value - Commissioner can re-state
bull Fresta v FCT 2002 ATC 2061 - provision for income tax is a ldquopresent legal obligationrdquo as company is liable for income tax at year end notwithstanding that it is not due and payable until assessed
Case Study - Div 7A
bull On 1 January 2016 A Pty Ltd loaned $15000 to John a shareholder of A Pty Ltd No qualifying written agreement was in place or repayments made before the lodgment day of A Pty Ltds 2016 income tax return
bull Assume no other payments or loans to shareholders or their associates for the income year ended 30 June 2016 Assume no Div 7A amounts and that in prior years there were no loans treated as dividends under Division 7A
Case Study - Div 7A
Case Study - Div 7A
bull On 30 June 2016 A Pty Ltd is taken to pay a dividend to John
Distributable surplus formula
Net assets $20000
Less non-commercial loans (that is loans treated as
dividends in prior years)
$0
Less paid-up share capital $12000
Less repayments of non-commercial loans $0
Distributable surplus $8000
Case Study - Div 7A
bull Although $15000 was loaned to John the amount treated as a dividend will be reduced to A Pty Ltds distributable surplus of $8000 John includes $8000 in his 2016 tax return as an unfranked dividend
bull The remaining $7000 is not treated as a dividend in the income year ended 30 June 2016 and will not be treated as a dividend in a future year even if the company has a distributable surplus in that future year
Step Six - What is the impact on the companys franking account
bull From 1 July 2006 no franking debit arises in a companyrsquos franking account as a result of the operation of Division 7A
Step Seven - Does the loan give rise to an FBT liability
bull Loans that are Division 7A deemed dividends specifically excluded
bull Effective 1 April 2007 a loan that complies with the requirements of Division 7A excluded loan is not a fringe benefit
Commissionerrsquos Discretion under Division 7A
bull One-off opportunity to correct past mistakes - (Practice Statement PS LA 200720) until 30 June 2008
bull However after 300608 Commissioner can still apply discretion in cases of an honest mistake or inadvertent omissions (s 109RB)
bull Formal request for discretion required after 30 June 2008
ATO Backflip - ATO ID 201315 UPE and bad debt deduction
bull This ATO ID considers whether a beneficiary of a trust is entitled to a bad debt deduction for UPE amounts that have been written off as bad debts
bull For bad debt deduction under section 25-35 debt must be actually written off and amount must have been included in assessable income previously
bull ATO view ndash UPE is equity entitlement not a ldquodebtrdquo so cannot be bad debt
bull Even if structured as an equity debt amount not the same as included in taxpayerrsquos assessable income previously
bull No bad debt deduction available to taxpayer
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Address the individual issues and problems in Division 7A by way of specific legislative amendment
2 Statutory Interest Model
Impose requirement that loans to related entities carry a statutory rate of interest but no requirement that principal be repaid prior to termination of the loan
3 Distribution Model
Allow the retention of profits within the private group for permitted purposes and to treat any profits not so used and not distributed as deemed dividends (which would be able to be franked)
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Potential issues to be specifically fixed ndash
UPE classification
distributable surplus quantification
interposed entity identification and treatment
loan and payment definitions
categorisation of exclusions
repayment compliance requirements etc
scope and effect of Commissioners discretionary powers
bull Advantage - could deal with specifically known issues
bull However has potential to be mere piecemeal solution and may fail to significantly simplify the law or its understanding
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
2 Statutory Interest Model
bull Related party loans at legislatively prescribed interest rate
bull Progressive (actual) loan repayments may not be necessary and re-borrowings (of principal) would be permitted
bull Uncomplicated model - interest on the loans assessable to payee (whether paid or not) but not deductible to payer
bull Interest only- principal not be repaid prior to termination of loan
bull Interest rate to be at commercial rate ndash current Division 7A benchmark interest rate too low
bull Allows for retention of loans over prolonged terms
bull Issue ndash ignores that Division 7A also applies to ldquopaymentsrdquo and ldquoforgiven debtsrdquo
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
3 Distribution Model
bull Allow retention of profits within the private group for permitted purposes
bull Any profits not so used and not distributed treated as deemed dividends (but frankable)
bull Retained profits would be taxed at company tax rate
bull Deemed dividends would be taxed at the personal tax rate of relevant shareholders
bull Permitted purposes - use of profits for working capital and other active business purposes of the private company or related entity
bull Use of the profits for passive investment purposes not permitted
bull Acquisition of active assets used in an active business allowed
Board of Taxation ndash Div 7A recommendations - Supplement
bull Set of common principles for loans payments debt forgiveness
bull Simpler system in which asset revaluations will not be required and unrealised profits not taken to be distributed because company assets have been used and company profits tested each year
bull Single 10-year loan with flexibility for repayment of principal
bull A lsquotick the boxrsquo option for trading trusts to retain working capital funds taxed at corporate tax rate - trading trusts that make election denied 50 CGT discount except in relation to goodwill
bull Alternative system that removes uncertainty on the treatment of UPEs by clarifying that all UPEs are loans for Division 7A purposes
bull Self correction mechanism which would enable taxpayers to put in place complying loan agreements reduce compliance and administrative costs
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull No requirement for formal written agreement if evidence of loan
bull Statutory interest rate set at the start of the loan and fixed over the term of the loan and would be RBA indicator lending rate for small business immediately before start of that income year
bull The maximum loan term would be 10 years
bull Prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows
bull ndash 75 per cent of the original loan by the end of year three
bull ndash 55 per cent of the original loan by the end of year five
bull ndash 25 per cent of the original loan by the end of year eight and
bull ndash 0 per cent of original loan (ie fully repaid) by end of year 10
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Transitioning all other pre-existing Division 7A loans to the new 10-year loans from the application date of the new provisions
bull All existing complying seven-year loans would have their terms extended to the new maximum of 10 years
bull All pre-1997 loans would be deemed to be new complying Division 7A loans with a 10-year term starting from the application date of the new provisions
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Introducing a legislative amendment that allows trusts to make a once-and-for-all election for loans from companies (including UPEs owing to companies) to be excluded from the operation of Division 7A
bull ensuring that a trust that makes such an election (an excluded trust) forgoes the CGT discount on capital gains arising from assets other than goodwill and rsquointangible assets inherently connected with the business carried on by the trusteersquo
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
DIVISION 7A ISSUES
Introduction
Division 7A of Part III of the Income Tax Assessment Act 1936 (ss 109B to 109ZE) operates to treat certain transactions by private companies on or after 4 December 1997 to be the payment of an unfranked dividend by that company Those transactions fall into three categories
bull certain loans from a private company
bull certain payments from a private company
bull forgiveness of a debt owed to a private company
Loans
bull Section 109D operates to treat certain loans made by private companies on or after 4 December 1997 to be dividends
How to approach Division 7A ndash Loans
bull Step One - Has the private company made a loan to an entity during the current year
bull Step Two - Is the entity to which the loan has been made a shareholder or associate of a shareholder
bull Step Three- Has the loan been fully repaid by the lodgement day
bull Step Four- Is the loan specifically excluded under Subdivision D
bull Step Five - What is the deemed dividend amount
bull Step Six - What is the impact on the companyrsquos franking account
bull Step Seven - Does the loan give rise to an FBT liability
Step One -Has the private company made a ldquoloanrdquo to an entity during the current year
bull With effect from 1709 a ldquoprivate companyrdquo for purposes of Div 7A includes a corporate limited partnership (CLP)
bull What is a ldquoloanrdquo
bull Under s 109D(3) a ldquoloanrdquo includes
bull an advance of money
bull a provision of credit or any other form of financial accommodation
bull a payment of an amount for another person where there is an express or implied obligation to repay that amount and
bull any transaction which is in substance a loan
bull Loan includes direct loans and indirect loans from interposed entities
Step One ndashHas the private company made a ldquoloanrdquo to an entity during the current year (continued)
ABC Co
ABC CoShareholder
Loan to
shareholder
Step One ndashHas the private company made a ldquoloanrdquo to an entity during the current year (continued)
Interposed entity loans ndash Section 109T
bull Deemed loan arises as a result of interposed entity loan
bull Deemed loan is repaid or converted to armrsquos length loan before tax return due date
bull If not repaid or converted deemed loan becomes Div 7A deemed dividend
ABC Co XYZ Co
ABC CoShareholder
Deemed Loan
(Section 109T)
Loan 2
Step One ndashHas the private company made a ldquoloanrdquo to an entity during the current year (continued)
Interposed entity loans ndash Section 109UB Subdivision EA
bull Deemed loan arises due to UPE in XYZ Trust and loan to ABC Co shareholder
bull Deemed loan is repaid or converted to armrsquos length loan before tax return due date
bull If not repaid or converted deemed loan becomes Div 7A deemed dividend
bull With effect from 1709 interposing additional trust(s) to separate the UPE holder and lender of loan will not avoid the operation of Subdiv EA
ABC CoBeneficiary of XYZ
Trust
XYZ Trust(UPE)
ABC CoShareholder
UPE exists in favour of ABC Co
Deemed Loan
(Subdivision EA)
Loan of UPE cash
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder
bull Div 7A applies to loans for current or past shareholders if reasonable to assume loan is made because of shareholding relationship
bull Div7A does not apply to loans for future shareholders
bull Loan to associate imposes Div 7A liability on associate not shareholder
ABC Co
ABC CoShareholder
Associate of ABC Co
Shareholder
Loan to Associate of shareholder
(Deemed dividend liability for associate)
Step Two - Is the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
bull An associate of an individual includesbull relative of individualbull partner of individualbull trust where individual or an associate benefits under the trust andbull company in which individual (either alone or together with associates) holds a majority voting
interest
bull An associate of a trust includesbull entity that benefits under the trust andbull entity which is an associate of another entity which benefits under the trust
bull An associate of a company includesbull partner of the company or a partnership in which the company is partnerbull trust where company or an associate of company benefits under the trust andbull entity which holds a majority voting interest in the company (either alone or together with
associates)
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co
shareholder]($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
TR 20103 ndash Section 3 Loans
bull UPE treated as Section 3 loan if inferred as a loan because of treatment of UPE funds by XYZ trust
bull Section 3 loan only Div 7A deemed dividend after 12 months ndash not immediate deemed dividend
bull Section 3 loan provide extra 12 months to repay or make armrsquoslength
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co shareholder]
($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
TR 20103 ndash Section 3 Loans
bull UPE treated as Section 3 loan if inferred as a loan because of treatment of UPE funds by XYZ trust
bull Section 3 loan only Div 7A deemed dividend after 12 months ndash not immediate deemed dividend
bull Section 3 loan provide extra 12 months to repay or make armrsquoslength
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co shareholder]
($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
Quarantine UPE
in Sub-trust
TR 20103 ndash Preservation of UPE status
bull Div 7A treatment can be avoided by preserving UPE status
bull UPE status preserved by transferring and quarantining UPE in Sub-trust
bull Preservation effective if UPE in Sub-trust held only for benefit of ABC Co
bull Return on UPE funds require minimum annual repayment distribution to ABC Co
bull Minimum annual repayment distribution can be based on section 109N benchmark interest rate and section 109NA minimum repayment formula
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co
shareholder]
ABC CoShareholder
[Associate of XYZ Trust] Sub-trust(UPE)
UPE exists in favour of ABC Co
Div 7A amp UPEs
bull TR 20103 states that where a private company has an unpaid present entitlement (UPE) from an associated trust but the trust uses the monies for its own purposes Div 7A can have application Can avoid by
bull fully paying the UPE to the corporate beneficiary before the lodgement day for the trustrsquos income tax return
bull putting a Div 7A loan agreement in place or
bull putting a sub trust in place ndash PS LA 20104
bull TD 201520 states a private company that releases all or part of its unpaid present entitlement is making a payment for Div 7A purposes to the extent that the release represents a financial benefit to an entity
Step Three - Has the loan been fully repaid by the lodgement day
bull A loan is only treated as a dividend if the loan is not fully repaid by the following time
bull loans in 2003-04 or earlier - end of the year loan was made and
bull Loans in 2004-05 year or later - the earlier of date on which company lodges income tax return and due date for such lodgement
bull Repayments must be made by way of actual cash repayment or dividend
bull Repayments made by way of journal entry ie by capitalising the repayment onto the loan balance are not accepted
bull Anti-avoidance provision in s109R - application to same or similar loans
bull Repayment by way of salary and wages or dividend not subject to s109R
Step Four - Is the loan specifically excluded under Subdivision D
The following loans are excluded from being dividends under Div 7A
bull A loan to another company (not acting in its capacity as trustee) - 109K
bull A loan included in the entitys assessable income or made exempt - 109L
bull A loan made in the ordinary course of business on same terms and conditions as loans made to other parties at arms length - 109M
bull An excluded loan that meets interest rate (53) term (725 years) and repayment criteria -109N (issues ndash written agreements converting loans not making minimum repayments Commissionerrsquos discretion)
bull A loan made in the winding up of a company by liquidator - 109NA 109D(1A)
bull A loan to acquire shares under qualifying ESS - 109NB
Step Five - What is the deemed dividend amount
bull Deemed dividend cannot exceed distributable surplus of the company at year end (s 109Y(1))
bull From 1 July 2009 distributable surplus formula is
Net assets + Division 7A amounts minus Non-commercial loans minus Paid-up share value minus Repayments of non-commercial loans
bull Net assets - amount by which companys assets exceed sum ofbull the present legal obligations of the company andbull provisions for depreciation annual leave long service leave and amortisation of
intellectual property and trademarks
bull Div 7A amounts ndash CY payments forgiven debts ndash previously excluded
bull Accounting basis ndash cannot overunder value - Commissioner can re-state
bull Fresta v FCT 2002 ATC 2061 - provision for income tax is a ldquopresent legal obligationrdquo as company is liable for income tax at year end notwithstanding that it is not due and payable until assessed
Case Study - Div 7A
bull On 1 January 2016 A Pty Ltd loaned $15000 to John a shareholder of A Pty Ltd No qualifying written agreement was in place or repayments made before the lodgment day of A Pty Ltds 2016 income tax return
bull Assume no other payments or loans to shareholders or their associates for the income year ended 30 June 2016 Assume no Div 7A amounts and that in prior years there were no loans treated as dividends under Division 7A
Case Study - Div 7A
Case Study - Div 7A
bull On 30 June 2016 A Pty Ltd is taken to pay a dividend to John
Distributable surplus formula
Net assets $20000
Less non-commercial loans (that is loans treated as
dividends in prior years)
$0
Less paid-up share capital $12000
Less repayments of non-commercial loans $0
Distributable surplus $8000
Case Study - Div 7A
bull Although $15000 was loaned to John the amount treated as a dividend will be reduced to A Pty Ltds distributable surplus of $8000 John includes $8000 in his 2016 tax return as an unfranked dividend
bull The remaining $7000 is not treated as a dividend in the income year ended 30 June 2016 and will not be treated as a dividend in a future year even if the company has a distributable surplus in that future year
Step Six - What is the impact on the companys franking account
bull From 1 July 2006 no franking debit arises in a companyrsquos franking account as a result of the operation of Division 7A
Step Seven - Does the loan give rise to an FBT liability
bull Loans that are Division 7A deemed dividends specifically excluded
bull Effective 1 April 2007 a loan that complies with the requirements of Division 7A excluded loan is not a fringe benefit
Commissionerrsquos Discretion under Division 7A
bull One-off opportunity to correct past mistakes - (Practice Statement PS LA 200720) until 30 June 2008
bull However after 300608 Commissioner can still apply discretion in cases of an honest mistake or inadvertent omissions (s 109RB)
bull Formal request for discretion required after 30 June 2008
ATO Backflip - ATO ID 201315 UPE and bad debt deduction
bull This ATO ID considers whether a beneficiary of a trust is entitled to a bad debt deduction for UPE amounts that have been written off as bad debts
bull For bad debt deduction under section 25-35 debt must be actually written off and amount must have been included in assessable income previously
bull ATO view ndash UPE is equity entitlement not a ldquodebtrdquo so cannot be bad debt
bull Even if structured as an equity debt amount not the same as included in taxpayerrsquos assessable income previously
bull No bad debt deduction available to taxpayer
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Address the individual issues and problems in Division 7A by way of specific legislative amendment
2 Statutory Interest Model
Impose requirement that loans to related entities carry a statutory rate of interest but no requirement that principal be repaid prior to termination of the loan
3 Distribution Model
Allow the retention of profits within the private group for permitted purposes and to treat any profits not so used and not distributed as deemed dividends (which would be able to be franked)
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Potential issues to be specifically fixed ndash
UPE classification
distributable surplus quantification
interposed entity identification and treatment
loan and payment definitions
categorisation of exclusions
repayment compliance requirements etc
scope and effect of Commissioners discretionary powers
bull Advantage - could deal with specifically known issues
bull However has potential to be mere piecemeal solution and may fail to significantly simplify the law or its understanding
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
2 Statutory Interest Model
bull Related party loans at legislatively prescribed interest rate
bull Progressive (actual) loan repayments may not be necessary and re-borrowings (of principal) would be permitted
bull Uncomplicated model - interest on the loans assessable to payee (whether paid or not) but not deductible to payer
bull Interest only- principal not be repaid prior to termination of loan
bull Interest rate to be at commercial rate ndash current Division 7A benchmark interest rate too low
bull Allows for retention of loans over prolonged terms
bull Issue ndash ignores that Division 7A also applies to ldquopaymentsrdquo and ldquoforgiven debtsrdquo
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
3 Distribution Model
bull Allow retention of profits within the private group for permitted purposes
bull Any profits not so used and not distributed treated as deemed dividends (but frankable)
bull Retained profits would be taxed at company tax rate
bull Deemed dividends would be taxed at the personal tax rate of relevant shareholders
bull Permitted purposes - use of profits for working capital and other active business purposes of the private company or related entity
bull Use of the profits for passive investment purposes not permitted
bull Acquisition of active assets used in an active business allowed
Board of Taxation ndash Div 7A recommendations - Supplement
bull Set of common principles for loans payments debt forgiveness
bull Simpler system in which asset revaluations will not be required and unrealised profits not taken to be distributed because company assets have been used and company profits tested each year
bull Single 10-year loan with flexibility for repayment of principal
bull A lsquotick the boxrsquo option for trading trusts to retain working capital funds taxed at corporate tax rate - trading trusts that make election denied 50 CGT discount except in relation to goodwill
bull Alternative system that removes uncertainty on the treatment of UPEs by clarifying that all UPEs are loans for Division 7A purposes
bull Self correction mechanism which would enable taxpayers to put in place complying loan agreements reduce compliance and administrative costs
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull No requirement for formal written agreement if evidence of loan
bull Statutory interest rate set at the start of the loan and fixed over the term of the loan and would be RBA indicator lending rate for small business immediately before start of that income year
bull The maximum loan term would be 10 years
bull Prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows
bull ndash 75 per cent of the original loan by the end of year three
bull ndash 55 per cent of the original loan by the end of year five
bull ndash 25 per cent of the original loan by the end of year eight and
bull ndash 0 per cent of original loan (ie fully repaid) by end of year 10
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Transitioning all other pre-existing Division 7A loans to the new 10-year loans from the application date of the new provisions
bull All existing complying seven-year loans would have their terms extended to the new maximum of 10 years
bull All pre-1997 loans would be deemed to be new complying Division 7A loans with a 10-year term starting from the application date of the new provisions
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Introducing a legislative amendment that allows trusts to make a once-and-for-all election for loans from companies (including UPEs owing to companies) to be excluded from the operation of Division 7A
bull ensuring that a trust that makes such an election (an excluded trust) forgoes the CGT discount on capital gains arising from assets other than goodwill and rsquointangible assets inherently connected with the business carried on by the trusteersquo
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Introduction
Division 7A of Part III of the Income Tax Assessment Act 1936 (ss 109B to 109ZE) operates to treat certain transactions by private companies on or after 4 December 1997 to be the payment of an unfranked dividend by that company Those transactions fall into three categories
bull certain loans from a private company
bull certain payments from a private company
bull forgiveness of a debt owed to a private company
Loans
bull Section 109D operates to treat certain loans made by private companies on or after 4 December 1997 to be dividends
How to approach Division 7A ndash Loans
bull Step One - Has the private company made a loan to an entity during the current year
bull Step Two - Is the entity to which the loan has been made a shareholder or associate of a shareholder
bull Step Three- Has the loan been fully repaid by the lodgement day
bull Step Four- Is the loan specifically excluded under Subdivision D
bull Step Five - What is the deemed dividend amount
bull Step Six - What is the impact on the companyrsquos franking account
bull Step Seven - Does the loan give rise to an FBT liability
Step One -Has the private company made a ldquoloanrdquo to an entity during the current year
bull With effect from 1709 a ldquoprivate companyrdquo for purposes of Div 7A includes a corporate limited partnership (CLP)
bull What is a ldquoloanrdquo
bull Under s 109D(3) a ldquoloanrdquo includes
bull an advance of money
bull a provision of credit or any other form of financial accommodation
bull a payment of an amount for another person where there is an express or implied obligation to repay that amount and
bull any transaction which is in substance a loan
bull Loan includes direct loans and indirect loans from interposed entities
Step One ndashHas the private company made a ldquoloanrdquo to an entity during the current year (continued)
ABC Co
ABC CoShareholder
Loan to
shareholder
Step One ndashHas the private company made a ldquoloanrdquo to an entity during the current year (continued)
Interposed entity loans ndash Section 109T
bull Deemed loan arises as a result of interposed entity loan
bull Deemed loan is repaid or converted to armrsquos length loan before tax return due date
bull If not repaid or converted deemed loan becomes Div 7A deemed dividend
ABC Co XYZ Co
ABC CoShareholder
Deemed Loan
(Section 109T)
Loan 2
Step One ndashHas the private company made a ldquoloanrdquo to an entity during the current year (continued)
Interposed entity loans ndash Section 109UB Subdivision EA
bull Deemed loan arises due to UPE in XYZ Trust and loan to ABC Co shareholder
bull Deemed loan is repaid or converted to armrsquos length loan before tax return due date
bull If not repaid or converted deemed loan becomes Div 7A deemed dividend
bull With effect from 1709 interposing additional trust(s) to separate the UPE holder and lender of loan will not avoid the operation of Subdiv EA
ABC CoBeneficiary of XYZ
Trust
XYZ Trust(UPE)
ABC CoShareholder
UPE exists in favour of ABC Co
Deemed Loan
(Subdivision EA)
Loan of UPE cash
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder
bull Div 7A applies to loans for current or past shareholders if reasonable to assume loan is made because of shareholding relationship
bull Div7A does not apply to loans for future shareholders
bull Loan to associate imposes Div 7A liability on associate not shareholder
ABC Co
ABC CoShareholder
Associate of ABC Co
Shareholder
Loan to Associate of shareholder
(Deemed dividend liability for associate)
Step Two - Is the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
bull An associate of an individual includesbull relative of individualbull partner of individualbull trust where individual or an associate benefits under the trust andbull company in which individual (either alone or together with associates) holds a majority voting
interest
bull An associate of a trust includesbull entity that benefits under the trust andbull entity which is an associate of another entity which benefits under the trust
bull An associate of a company includesbull partner of the company or a partnership in which the company is partnerbull trust where company or an associate of company benefits under the trust andbull entity which holds a majority voting interest in the company (either alone or together with
associates)
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co
shareholder]($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
TR 20103 ndash Section 3 Loans
bull UPE treated as Section 3 loan if inferred as a loan because of treatment of UPE funds by XYZ trust
bull Section 3 loan only Div 7A deemed dividend after 12 months ndash not immediate deemed dividend
bull Section 3 loan provide extra 12 months to repay or make armrsquoslength
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co shareholder]
($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
TR 20103 ndash Section 3 Loans
bull UPE treated as Section 3 loan if inferred as a loan because of treatment of UPE funds by XYZ trust
bull Section 3 loan only Div 7A deemed dividend after 12 months ndash not immediate deemed dividend
bull Section 3 loan provide extra 12 months to repay or make armrsquoslength
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co shareholder]
($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
Quarantine UPE
in Sub-trust
TR 20103 ndash Preservation of UPE status
bull Div 7A treatment can be avoided by preserving UPE status
bull UPE status preserved by transferring and quarantining UPE in Sub-trust
bull Preservation effective if UPE in Sub-trust held only for benefit of ABC Co
bull Return on UPE funds require minimum annual repayment distribution to ABC Co
bull Minimum annual repayment distribution can be based on section 109N benchmark interest rate and section 109NA minimum repayment formula
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co
shareholder]
ABC CoShareholder
[Associate of XYZ Trust] Sub-trust(UPE)
UPE exists in favour of ABC Co
Div 7A amp UPEs
bull TR 20103 states that where a private company has an unpaid present entitlement (UPE) from an associated trust but the trust uses the monies for its own purposes Div 7A can have application Can avoid by
bull fully paying the UPE to the corporate beneficiary before the lodgement day for the trustrsquos income tax return
bull putting a Div 7A loan agreement in place or
bull putting a sub trust in place ndash PS LA 20104
bull TD 201520 states a private company that releases all or part of its unpaid present entitlement is making a payment for Div 7A purposes to the extent that the release represents a financial benefit to an entity
Step Three - Has the loan been fully repaid by the lodgement day
bull A loan is only treated as a dividend if the loan is not fully repaid by the following time
bull loans in 2003-04 or earlier - end of the year loan was made and
bull Loans in 2004-05 year or later - the earlier of date on which company lodges income tax return and due date for such lodgement
bull Repayments must be made by way of actual cash repayment or dividend
bull Repayments made by way of journal entry ie by capitalising the repayment onto the loan balance are not accepted
bull Anti-avoidance provision in s109R - application to same or similar loans
bull Repayment by way of salary and wages or dividend not subject to s109R
Step Four - Is the loan specifically excluded under Subdivision D
The following loans are excluded from being dividends under Div 7A
bull A loan to another company (not acting in its capacity as trustee) - 109K
bull A loan included in the entitys assessable income or made exempt - 109L
bull A loan made in the ordinary course of business on same terms and conditions as loans made to other parties at arms length - 109M
bull An excluded loan that meets interest rate (53) term (725 years) and repayment criteria -109N (issues ndash written agreements converting loans not making minimum repayments Commissionerrsquos discretion)
bull A loan made in the winding up of a company by liquidator - 109NA 109D(1A)
bull A loan to acquire shares under qualifying ESS - 109NB
Step Five - What is the deemed dividend amount
bull Deemed dividend cannot exceed distributable surplus of the company at year end (s 109Y(1))
bull From 1 July 2009 distributable surplus formula is
Net assets + Division 7A amounts minus Non-commercial loans minus Paid-up share value minus Repayments of non-commercial loans
bull Net assets - amount by which companys assets exceed sum ofbull the present legal obligations of the company andbull provisions for depreciation annual leave long service leave and amortisation of
intellectual property and trademarks
bull Div 7A amounts ndash CY payments forgiven debts ndash previously excluded
bull Accounting basis ndash cannot overunder value - Commissioner can re-state
bull Fresta v FCT 2002 ATC 2061 - provision for income tax is a ldquopresent legal obligationrdquo as company is liable for income tax at year end notwithstanding that it is not due and payable until assessed
Case Study - Div 7A
bull On 1 January 2016 A Pty Ltd loaned $15000 to John a shareholder of A Pty Ltd No qualifying written agreement was in place or repayments made before the lodgment day of A Pty Ltds 2016 income tax return
bull Assume no other payments or loans to shareholders or their associates for the income year ended 30 June 2016 Assume no Div 7A amounts and that in prior years there were no loans treated as dividends under Division 7A
Case Study - Div 7A
Case Study - Div 7A
bull On 30 June 2016 A Pty Ltd is taken to pay a dividend to John
Distributable surplus formula
Net assets $20000
Less non-commercial loans (that is loans treated as
dividends in prior years)
$0
Less paid-up share capital $12000
Less repayments of non-commercial loans $0
Distributable surplus $8000
Case Study - Div 7A
bull Although $15000 was loaned to John the amount treated as a dividend will be reduced to A Pty Ltds distributable surplus of $8000 John includes $8000 in his 2016 tax return as an unfranked dividend
bull The remaining $7000 is not treated as a dividend in the income year ended 30 June 2016 and will not be treated as a dividend in a future year even if the company has a distributable surplus in that future year
Step Six - What is the impact on the companys franking account
bull From 1 July 2006 no franking debit arises in a companyrsquos franking account as a result of the operation of Division 7A
Step Seven - Does the loan give rise to an FBT liability
bull Loans that are Division 7A deemed dividends specifically excluded
bull Effective 1 April 2007 a loan that complies with the requirements of Division 7A excluded loan is not a fringe benefit
Commissionerrsquos Discretion under Division 7A
bull One-off opportunity to correct past mistakes - (Practice Statement PS LA 200720) until 30 June 2008
bull However after 300608 Commissioner can still apply discretion in cases of an honest mistake or inadvertent omissions (s 109RB)
bull Formal request for discretion required after 30 June 2008
ATO Backflip - ATO ID 201315 UPE and bad debt deduction
bull This ATO ID considers whether a beneficiary of a trust is entitled to a bad debt deduction for UPE amounts that have been written off as bad debts
bull For bad debt deduction under section 25-35 debt must be actually written off and amount must have been included in assessable income previously
bull ATO view ndash UPE is equity entitlement not a ldquodebtrdquo so cannot be bad debt
bull Even if structured as an equity debt amount not the same as included in taxpayerrsquos assessable income previously
bull No bad debt deduction available to taxpayer
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Address the individual issues and problems in Division 7A by way of specific legislative amendment
2 Statutory Interest Model
Impose requirement that loans to related entities carry a statutory rate of interest but no requirement that principal be repaid prior to termination of the loan
3 Distribution Model
Allow the retention of profits within the private group for permitted purposes and to treat any profits not so used and not distributed as deemed dividends (which would be able to be franked)
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Potential issues to be specifically fixed ndash
UPE classification
distributable surplus quantification
interposed entity identification and treatment
loan and payment definitions
categorisation of exclusions
repayment compliance requirements etc
scope and effect of Commissioners discretionary powers
bull Advantage - could deal with specifically known issues
bull However has potential to be mere piecemeal solution and may fail to significantly simplify the law or its understanding
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
2 Statutory Interest Model
bull Related party loans at legislatively prescribed interest rate
bull Progressive (actual) loan repayments may not be necessary and re-borrowings (of principal) would be permitted
bull Uncomplicated model - interest on the loans assessable to payee (whether paid or not) but not deductible to payer
bull Interest only- principal not be repaid prior to termination of loan
bull Interest rate to be at commercial rate ndash current Division 7A benchmark interest rate too low
bull Allows for retention of loans over prolonged terms
bull Issue ndash ignores that Division 7A also applies to ldquopaymentsrdquo and ldquoforgiven debtsrdquo
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
3 Distribution Model
bull Allow retention of profits within the private group for permitted purposes
bull Any profits not so used and not distributed treated as deemed dividends (but frankable)
bull Retained profits would be taxed at company tax rate
bull Deemed dividends would be taxed at the personal tax rate of relevant shareholders
bull Permitted purposes - use of profits for working capital and other active business purposes of the private company or related entity
bull Use of the profits for passive investment purposes not permitted
bull Acquisition of active assets used in an active business allowed
Board of Taxation ndash Div 7A recommendations - Supplement
bull Set of common principles for loans payments debt forgiveness
bull Simpler system in which asset revaluations will not be required and unrealised profits not taken to be distributed because company assets have been used and company profits tested each year
bull Single 10-year loan with flexibility for repayment of principal
bull A lsquotick the boxrsquo option for trading trusts to retain working capital funds taxed at corporate tax rate - trading trusts that make election denied 50 CGT discount except in relation to goodwill
bull Alternative system that removes uncertainty on the treatment of UPEs by clarifying that all UPEs are loans for Division 7A purposes
bull Self correction mechanism which would enable taxpayers to put in place complying loan agreements reduce compliance and administrative costs
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull No requirement for formal written agreement if evidence of loan
bull Statutory interest rate set at the start of the loan and fixed over the term of the loan and would be RBA indicator lending rate for small business immediately before start of that income year
bull The maximum loan term would be 10 years
bull Prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows
bull ndash 75 per cent of the original loan by the end of year three
bull ndash 55 per cent of the original loan by the end of year five
bull ndash 25 per cent of the original loan by the end of year eight and
bull ndash 0 per cent of original loan (ie fully repaid) by end of year 10
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Transitioning all other pre-existing Division 7A loans to the new 10-year loans from the application date of the new provisions
bull All existing complying seven-year loans would have their terms extended to the new maximum of 10 years
bull All pre-1997 loans would be deemed to be new complying Division 7A loans with a 10-year term starting from the application date of the new provisions
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Introducing a legislative amendment that allows trusts to make a once-and-for-all election for loans from companies (including UPEs owing to companies) to be excluded from the operation of Division 7A
bull ensuring that a trust that makes such an election (an excluded trust) forgoes the CGT discount on capital gains arising from assets other than goodwill and rsquointangible assets inherently connected with the business carried on by the trusteersquo
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Loans
bull Section 109D operates to treat certain loans made by private companies on or after 4 December 1997 to be dividends
How to approach Division 7A ndash Loans
bull Step One - Has the private company made a loan to an entity during the current year
bull Step Two - Is the entity to which the loan has been made a shareholder or associate of a shareholder
bull Step Three- Has the loan been fully repaid by the lodgement day
bull Step Four- Is the loan specifically excluded under Subdivision D
bull Step Five - What is the deemed dividend amount
bull Step Six - What is the impact on the companyrsquos franking account
bull Step Seven - Does the loan give rise to an FBT liability
Step One -Has the private company made a ldquoloanrdquo to an entity during the current year
bull With effect from 1709 a ldquoprivate companyrdquo for purposes of Div 7A includes a corporate limited partnership (CLP)
bull What is a ldquoloanrdquo
bull Under s 109D(3) a ldquoloanrdquo includes
bull an advance of money
bull a provision of credit or any other form of financial accommodation
bull a payment of an amount for another person where there is an express or implied obligation to repay that amount and
bull any transaction which is in substance a loan
bull Loan includes direct loans and indirect loans from interposed entities
Step One ndashHas the private company made a ldquoloanrdquo to an entity during the current year (continued)
ABC Co
ABC CoShareholder
Loan to
shareholder
Step One ndashHas the private company made a ldquoloanrdquo to an entity during the current year (continued)
Interposed entity loans ndash Section 109T
bull Deemed loan arises as a result of interposed entity loan
bull Deemed loan is repaid or converted to armrsquos length loan before tax return due date
bull If not repaid or converted deemed loan becomes Div 7A deemed dividend
ABC Co XYZ Co
ABC CoShareholder
Deemed Loan
(Section 109T)
Loan 2
Step One ndashHas the private company made a ldquoloanrdquo to an entity during the current year (continued)
Interposed entity loans ndash Section 109UB Subdivision EA
bull Deemed loan arises due to UPE in XYZ Trust and loan to ABC Co shareholder
bull Deemed loan is repaid or converted to armrsquos length loan before tax return due date
bull If not repaid or converted deemed loan becomes Div 7A deemed dividend
bull With effect from 1709 interposing additional trust(s) to separate the UPE holder and lender of loan will not avoid the operation of Subdiv EA
ABC CoBeneficiary of XYZ
Trust
XYZ Trust(UPE)
ABC CoShareholder
UPE exists in favour of ABC Co
Deemed Loan
(Subdivision EA)
Loan of UPE cash
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder
bull Div 7A applies to loans for current or past shareholders if reasonable to assume loan is made because of shareholding relationship
bull Div7A does not apply to loans for future shareholders
bull Loan to associate imposes Div 7A liability on associate not shareholder
ABC Co
ABC CoShareholder
Associate of ABC Co
Shareholder
Loan to Associate of shareholder
(Deemed dividend liability for associate)
Step Two - Is the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
bull An associate of an individual includesbull relative of individualbull partner of individualbull trust where individual or an associate benefits under the trust andbull company in which individual (either alone or together with associates) holds a majority voting
interest
bull An associate of a trust includesbull entity that benefits under the trust andbull entity which is an associate of another entity which benefits under the trust
bull An associate of a company includesbull partner of the company or a partnership in which the company is partnerbull trust where company or an associate of company benefits under the trust andbull entity which holds a majority voting interest in the company (either alone or together with
associates)
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co
shareholder]($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
TR 20103 ndash Section 3 Loans
bull UPE treated as Section 3 loan if inferred as a loan because of treatment of UPE funds by XYZ trust
bull Section 3 loan only Div 7A deemed dividend after 12 months ndash not immediate deemed dividend
bull Section 3 loan provide extra 12 months to repay or make armrsquoslength
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co shareholder]
($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
TR 20103 ndash Section 3 Loans
bull UPE treated as Section 3 loan if inferred as a loan because of treatment of UPE funds by XYZ trust
bull Section 3 loan only Div 7A deemed dividend after 12 months ndash not immediate deemed dividend
bull Section 3 loan provide extra 12 months to repay or make armrsquoslength
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co shareholder]
($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
Quarantine UPE
in Sub-trust
TR 20103 ndash Preservation of UPE status
bull Div 7A treatment can be avoided by preserving UPE status
bull UPE status preserved by transferring and quarantining UPE in Sub-trust
bull Preservation effective if UPE in Sub-trust held only for benefit of ABC Co
bull Return on UPE funds require minimum annual repayment distribution to ABC Co
bull Minimum annual repayment distribution can be based on section 109N benchmark interest rate and section 109NA minimum repayment formula
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co
shareholder]
ABC CoShareholder
[Associate of XYZ Trust] Sub-trust(UPE)
UPE exists in favour of ABC Co
Div 7A amp UPEs
bull TR 20103 states that where a private company has an unpaid present entitlement (UPE) from an associated trust but the trust uses the monies for its own purposes Div 7A can have application Can avoid by
bull fully paying the UPE to the corporate beneficiary before the lodgement day for the trustrsquos income tax return
bull putting a Div 7A loan agreement in place or
bull putting a sub trust in place ndash PS LA 20104
bull TD 201520 states a private company that releases all or part of its unpaid present entitlement is making a payment for Div 7A purposes to the extent that the release represents a financial benefit to an entity
Step Three - Has the loan been fully repaid by the lodgement day
bull A loan is only treated as a dividend if the loan is not fully repaid by the following time
bull loans in 2003-04 or earlier - end of the year loan was made and
bull Loans in 2004-05 year or later - the earlier of date on which company lodges income tax return and due date for such lodgement
bull Repayments must be made by way of actual cash repayment or dividend
bull Repayments made by way of journal entry ie by capitalising the repayment onto the loan balance are not accepted
bull Anti-avoidance provision in s109R - application to same or similar loans
bull Repayment by way of salary and wages or dividend not subject to s109R
Step Four - Is the loan specifically excluded under Subdivision D
The following loans are excluded from being dividends under Div 7A
bull A loan to another company (not acting in its capacity as trustee) - 109K
bull A loan included in the entitys assessable income or made exempt - 109L
bull A loan made in the ordinary course of business on same terms and conditions as loans made to other parties at arms length - 109M
bull An excluded loan that meets interest rate (53) term (725 years) and repayment criteria -109N (issues ndash written agreements converting loans not making minimum repayments Commissionerrsquos discretion)
bull A loan made in the winding up of a company by liquidator - 109NA 109D(1A)
bull A loan to acquire shares under qualifying ESS - 109NB
Step Five - What is the deemed dividend amount
bull Deemed dividend cannot exceed distributable surplus of the company at year end (s 109Y(1))
bull From 1 July 2009 distributable surplus formula is
Net assets + Division 7A amounts minus Non-commercial loans minus Paid-up share value minus Repayments of non-commercial loans
bull Net assets - amount by which companys assets exceed sum ofbull the present legal obligations of the company andbull provisions for depreciation annual leave long service leave and amortisation of
intellectual property and trademarks
bull Div 7A amounts ndash CY payments forgiven debts ndash previously excluded
bull Accounting basis ndash cannot overunder value - Commissioner can re-state
bull Fresta v FCT 2002 ATC 2061 - provision for income tax is a ldquopresent legal obligationrdquo as company is liable for income tax at year end notwithstanding that it is not due and payable until assessed
Case Study - Div 7A
bull On 1 January 2016 A Pty Ltd loaned $15000 to John a shareholder of A Pty Ltd No qualifying written agreement was in place or repayments made before the lodgment day of A Pty Ltds 2016 income tax return
bull Assume no other payments or loans to shareholders or their associates for the income year ended 30 June 2016 Assume no Div 7A amounts and that in prior years there were no loans treated as dividends under Division 7A
Case Study - Div 7A
Case Study - Div 7A
bull On 30 June 2016 A Pty Ltd is taken to pay a dividend to John
Distributable surplus formula
Net assets $20000
Less non-commercial loans (that is loans treated as
dividends in prior years)
$0
Less paid-up share capital $12000
Less repayments of non-commercial loans $0
Distributable surplus $8000
Case Study - Div 7A
bull Although $15000 was loaned to John the amount treated as a dividend will be reduced to A Pty Ltds distributable surplus of $8000 John includes $8000 in his 2016 tax return as an unfranked dividend
bull The remaining $7000 is not treated as a dividend in the income year ended 30 June 2016 and will not be treated as a dividend in a future year even if the company has a distributable surplus in that future year
Step Six - What is the impact on the companys franking account
bull From 1 July 2006 no franking debit arises in a companyrsquos franking account as a result of the operation of Division 7A
Step Seven - Does the loan give rise to an FBT liability
bull Loans that are Division 7A deemed dividends specifically excluded
bull Effective 1 April 2007 a loan that complies with the requirements of Division 7A excluded loan is not a fringe benefit
Commissionerrsquos Discretion under Division 7A
bull One-off opportunity to correct past mistakes - (Practice Statement PS LA 200720) until 30 June 2008
bull However after 300608 Commissioner can still apply discretion in cases of an honest mistake or inadvertent omissions (s 109RB)
bull Formal request for discretion required after 30 June 2008
ATO Backflip - ATO ID 201315 UPE and bad debt deduction
bull This ATO ID considers whether a beneficiary of a trust is entitled to a bad debt deduction for UPE amounts that have been written off as bad debts
bull For bad debt deduction under section 25-35 debt must be actually written off and amount must have been included in assessable income previously
bull ATO view ndash UPE is equity entitlement not a ldquodebtrdquo so cannot be bad debt
bull Even if structured as an equity debt amount not the same as included in taxpayerrsquos assessable income previously
bull No bad debt deduction available to taxpayer
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Address the individual issues and problems in Division 7A by way of specific legislative amendment
2 Statutory Interest Model
Impose requirement that loans to related entities carry a statutory rate of interest but no requirement that principal be repaid prior to termination of the loan
3 Distribution Model
Allow the retention of profits within the private group for permitted purposes and to treat any profits not so used and not distributed as deemed dividends (which would be able to be franked)
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Potential issues to be specifically fixed ndash
UPE classification
distributable surplus quantification
interposed entity identification and treatment
loan and payment definitions
categorisation of exclusions
repayment compliance requirements etc
scope and effect of Commissioners discretionary powers
bull Advantage - could deal with specifically known issues
bull However has potential to be mere piecemeal solution and may fail to significantly simplify the law or its understanding
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
2 Statutory Interest Model
bull Related party loans at legislatively prescribed interest rate
bull Progressive (actual) loan repayments may not be necessary and re-borrowings (of principal) would be permitted
bull Uncomplicated model - interest on the loans assessable to payee (whether paid or not) but not deductible to payer
bull Interest only- principal not be repaid prior to termination of loan
bull Interest rate to be at commercial rate ndash current Division 7A benchmark interest rate too low
bull Allows for retention of loans over prolonged terms
bull Issue ndash ignores that Division 7A also applies to ldquopaymentsrdquo and ldquoforgiven debtsrdquo
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
3 Distribution Model
bull Allow retention of profits within the private group for permitted purposes
bull Any profits not so used and not distributed treated as deemed dividends (but frankable)
bull Retained profits would be taxed at company tax rate
bull Deemed dividends would be taxed at the personal tax rate of relevant shareholders
bull Permitted purposes - use of profits for working capital and other active business purposes of the private company or related entity
bull Use of the profits for passive investment purposes not permitted
bull Acquisition of active assets used in an active business allowed
Board of Taxation ndash Div 7A recommendations - Supplement
bull Set of common principles for loans payments debt forgiveness
bull Simpler system in which asset revaluations will not be required and unrealised profits not taken to be distributed because company assets have been used and company profits tested each year
bull Single 10-year loan with flexibility for repayment of principal
bull A lsquotick the boxrsquo option for trading trusts to retain working capital funds taxed at corporate tax rate - trading trusts that make election denied 50 CGT discount except in relation to goodwill
bull Alternative system that removes uncertainty on the treatment of UPEs by clarifying that all UPEs are loans for Division 7A purposes
bull Self correction mechanism which would enable taxpayers to put in place complying loan agreements reduce compliance and administrative costs
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull No requirement for formal written agreement if evidence of loan
bull Statutory interest rate set at the start of the loan and fixed over the term of the loan and would be RBA indicator lending rate for small business immediately before start of that income year
bull The maximum loan term would be 10 years
bull Prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows
bull ndash 75 per cent of the original loan by the end of year three
bull ndash 55 per cent of the original loan by the end of year five
bull ndash 25 per cent of the original loan by the end of year eight and
bull ndash 0 per cent of original loan (ie fully repaid) by end of year 10
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Transitioning all other pre-existing Division 7A loans to the new 10-year loans from the application date of the new provisions
bull All existing complying seven-year loans would have their terms extended to the new maximum of 10 years
bull All pre-1997 loans would be deemed to be new complying Division 7A loans with a 10-year term starting from the application date of the new provisions
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Introducing a legislative amendment that allows trusts to make a once-and-for-all election for loans from companies (including UPEs owing to companies) to be excluded from the operation of Division 7A
bull ensuring that a trust that makes such an election (an excluded trust) forgoes the CGT discount on capital gains arising from assets other than goodwill and rsquointangible assets inherently connected with the business carried on by the trusteersquo
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Step One -Has the private company made a ldquoloanrdquo to an entity during the current year
bull With effect from 1709 a ldquoprivate companyrdquo for purposes of Div 7A includes a corporate limited partnership (CLP)
bull What is a ldquoloanrdquo
bull Under s 109D(3) a ldquoloanrdquo includes
bull an advance of money
bull a provision of credit or any other form of financial accommodation
bull a payment of an amount for another person where there is an express or implied obligation to repay that amount and
bull any transaction which is in substance a loan
bull Loan includes direct loans and indirect loans from interposed entities
Step One ndashHas the private company made a ldquoloanrdquo to an entity during the current year (continued)
ABC Co
ABC CoShareholder
Loan to
shareholder
Step One ndashHas the private company made a ldquoloanrdquo to an entity during the current year (continued)
Interposed entity loans ndash Section 109T
bull Deemed loan arises as a result of interposed entity loan
bull Deemed loan is repaid or converted to armrsquos length loan before tax return due date
bull If not repaid or converted deemed loan becomes Div 7A deemed dividend
ABC Co XYZ Co
ABC CoShareholder
Deemed Loan
(Section 109T)
Loan 2
Step One ndashHas the private company made a ldquoloanrdquo to an entity during the current year (continued)
Interposed entity loans ndash Section 109UB Subdivision EA
bull Deemed loan arises due to UPE in XYZ Trust and loan to ABC Co shareholder
bull Deemed loan is repaid or converted to armrsquos length loan before tax return due date
bull If not repaid or converted deemed loan becomes Div 7A deemed dividend
bull With effect from 1709 interposing additional trust(s) to separate the UPE holder and lender of loan will not avoid the operation of Subdiv EA
ABC CoBeneficiary of XYZ
Trust
XYZ Trust(UPE)
ABC CoShareholder
UPE exists in favour of ABC Co
Deemed Loan
(Subdivision EA)
Loan of UPE cash
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder
bull Div 7A applies to loans for current or past shareholders if reasonable to assume loan is made because of shareholding relationship
bull Div7A does not apply to loans for future shareholders
bull Loan to associate imposes Div 7A liability on associate not shareholder
ABC Co
ABC CoShareholder
Associate of ABC Co
Shareholder
Loan to Associate of shareholder
(Deemed dividend liability for associate)
Step Two - Is the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
bull An associate of an individual includesbull relative of individualbull partner of individualbull trust where individual or an associate benefits under the trust andbull company in which individual (either alone or together with associates) holds a majority voting
interest
bull An associate of a trust includesbull entity that benefits under the trust andbull entity which is an associate of another entity which benefits under the trust
bull An associate of a company includesbull partner of the company or a partnership in which the company is partnerbull trust where company or an associate of company benefits under the trust andbull entity which holds a majority voting interest in the company (either alone or together with
associates)
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co
shareholder]($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
TR 20103 ndash Section 3 Loans
bull UPE treated as Section 3 loan if inferred as a loan because of treatment of UPE funds by XYZ trust
bull Section 3 loan only Div 7A deemed dividend after 12 months ndash not immediate deemed dividend
bull Section 3 loan provide extra 12 months to repay or make armrsquoslength
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co shareholder]
($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
TR 20103 ndash Section 3 Loans
bull UPE treated as Section 3 loan if inferred as a loan because of treatment of UPE funds by XYZ trust
bull Section 3 loan only Div 7A deemed dividend after 12 months ndash not immediate deemed dividend
bull Section 3 loan provide extra 12 months to repay or make armrsquoslength
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co shareholder]
($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
Quarantine UPE
in Sub-trust
TR 20103 ndash Preservation of UPE status
bull Div 7A treatment can be avoided by preserving UPE status
bull UPE status preserved by transferring and quarantining UPE in Sub-trust
bull Preservation effective if UPE in Sub-trust held only for benefit of ABC Co
bull Return on UPE funds require minimum annual repayment distribution to ABC Co
bull Minimum annual repayment distribution can be based on section 109N benchmark interest rate and section 109NA minimum repayment formula
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co
shareholder]
ABC CoShareholder
[Associate of XYZ Trust] Sub-trust(UPE)
UPE exists in favour of ABC Co
Div 7A amp UPEs
bull TR 20103 states that where a private company has an unpaid present entitlement (UPE) from an associated trust but the trust uses the monies for its own purposes Div 7A can have application Can avoid by
bull fully paying the UPE to the corporate beneficiary before the lodgement day for the trustrsquos income tax return
bull putting a Div 7A loan agreement in place or
bull putting a sub trust in place ndash PS LA 20104
bull TD 201520 states a private company that releases all or part of its unpaid present entitlement is making a payment for Div 7A purposes to the extent that the release represents a financial benefit to an entity
Step Three - Has the loan been fully repaid by the lodgement day
bull A loan is only treated as a dividend if the loan is not fully repaid by the following time
bull loans in 2003-04 or earlier - end of the year loan was made and
bull Loans in 2004-05 year or later - the earlier of date on which company lodges income tax return and due date for such lodgement
bull Repayments must be made by way of actual cash repayment or dividend
bull Repayments made by way of journal entry ie by capitalising the repayment onto the loan balance are not accepted
bull Anti-avoidance provision in s109R - application to same or similar loans
bull Repayment by way of salary and wages or dividend not subject to s109R
Step Four - Is the loan specifically excluded under Subdivision D
The following loans are excluded from being dividends under Div 7A
bull A loan to another company (not acting in its capacity as trustee) - 109K
bull A loan included in the entitys assessable income or made exempt - 109L
bull A loan made in the ordinary course of business on same terms and conditions as loans made to other parties at arms length - 109M
bull An excluded loan that meets interest rate (53) term (725 years) and repayment criteria -109N (issues ndash written agreements converting loans not making minimum repayments Commissionerrsquos discretion)
bull A loan made in the winding up of a company by liquidator - 109NA 109D(1A)
bull A loan to acquire shares under qualifying ESS - 109NB
Step Five - What is the deemed dividend amount
bull Deemed dividend cannot exceed distributable surplus of the company at year end (s 109Y(1))
bull From 1 July 2009 distributable surplus formula is
Net assets + Division 7A amounts minus Non-commercial loans minus Paid-up share value minus Repayments of non-commercial loans
bull Net assets - amount by which companys assets exceed sum ofbull the present legal obligations of the company andbull provisions for depreciation annual leave long service leave and amortisation of
intellectual property and trademarks
bull Div 7A amounts ndash CY payments forgiven debts ndash previously excluded
bull Accounting basis ndash cannot overunder value - Commissioner can re-state
bull Fresta v FCT 2002 ATC 2061 - provision for income tax is a ldquopresent legal obligationrdquo as company is liable for income tax at year end notwithstanding that it is not due and payable until assessed
Case Study - Div 7A
bull On 1 January 2016 A Pty Ltd loaned $15000 to John a shareholder of A Pty Ltd No qualifying written agreement was in place or repayments made before the lodgment day of A Pty Ltds 2016 income tax return
bull Assume no other payments or loans to shareholders or their associates for the income year ended 30 June 2016 Assume no Div 7A amounts and that in prior years there were no loans treated as dividends under Division 7A
Case Study - Div 7A
Case Study - Div 7A
bull On 30 June 2016 A Pty Ltd is taken to pay a dividend to John
Distributable surplus formula
Net assets $20000
Less non-commercial loans (that is loans treated as
dividends in prior years)
$0
Less paid-up share capital $12000
Less repayments of non-commercial loans $0
Distributable surplus $8000
Case Study - Div 7A
bull Although $15000 was loaned to John the amount treated as a dividend will be reduced to A Pty Ltds distributable surplus of $8000 John includes $8000 in his 2016 tax return as an unfranked dividend
bull The remaining $7000 is not treated as a dividend in the income year ended 30 June 2016 and will not be treated as a dividend in a future year even if the company has a distributable surplus in that future year
Step Six - What is the impact on the companys franking account
bull From 1 July 2006 no franking debit arises in a companyrsquos franking account as a result of the operation of Division 7A
Step Seven - Does the loan give rise to an FBT liability
bull Loans that are Division 7A deemed dividends specifically excluded
bull Effective 1 April 2007 a loan that complies with the requirements of Division 7A excluded loan is not a fringe benefit
Commissionerrsquos Discretion under Division 7A
bull One-off opportunity to correct past mistakes - (Practice Statement PS LA 200720) until 30 June 2008
bull However after 300608 Commissioner can still apply discretion in cases of an honest mistake or inadvertent omissions (s 109RB)
bull Formal request for discretion required after 30 June 2008
ATO Backflip - ATO ID 201315 UPE and bad debt deduction
bull This ATO ID considers whether a beneficiary of a trust is entitled to a bad debt deduction for UPE amounts that have been written off as bad debts
bull For bad debt deduction under section 25-35 debt must be actually written off and amount must have been included in assessable income previously
bull ATO view ndash UPE is equity entitlement not a ldquodebtrdquo so cannot be bad debt
bull Even if structured as an equity debt amount not the same as included in taxpayerrsquos assessable income previously
bull No bad debt deduction available to taxpayer
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Address the individual issues and problems in Division 7A by way of specific legislative amendment
2 Statutory Interest Model
Impose requirement that loans to related entities carry a statutory rate of interest but no requirement that principal be repaid prior to termination of the loan
3 Distribution Model
Allow the retention of profits within the private group for permitted purposes and to treat any profits not so used and not distributed as deemed dividends (which would be able to be franked)
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Potential issues to be specifically fixed ndash
UPE classification
distributable surplus quantification
interposed entity identification and treatment
loan and payment definitions
categorisation of exclusions
repayment compliance requirements etc
scope and effect of Commissioners discretionary powers
bull Advantage - could deal with specifically known issues
bull However has potential to be mere piecemeal solution and may fail to significantly simplify the law or its understanding
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
2 Statutory Interest Model
bull Related party loans at legislatively prescribed interest rate
bull Progressive (actual) loan repayments may not be necessary and re-borrowings (of principal) would be permitted
bull Uncomplicated model - interest on the loans assessable to payee (whether paid or not) but not deductible to payer
bull Interest only- principal not be repaid prior to termination of loan
bull Interest rate to be at commercial rate ndash current Division 7A benchmark interest rate too low
bull Allows for retention of loans over prolonged terms
bull Issue ndash ignores that Division 7A also applies to ldquopaymentsrdquo and ldquoforgiven debtsrdquo
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
3 Distribution Model
bull Allow retention of profits within the private group for permitted purposes
bull Any profits not so used and not distributed treated as deemed dividends (but frankable)
bull Retained profits would be taxed at company tax rate
bull Deemed dividends would be taxed at the personal tax rate of relevant shareholders
bull Permitted purposes - use of profits for working capital and other active business purposes of the private company or related entity
bull Use of the profits for passive investment purposes not permitted
bull Acquisition of active assets used in an active business allowed
Board of Taxation ndash Div 7A recommendations - Supplement
bull Set of common principles for loans payments debt forgiveness
bull Simpler system in which asset revaluations will not be required and unrealised profits not taken to be distributed because company assets have been used and company profits tested each year
bull Single 10-year loan with flexibility for repayment of principal
bull A lsquotick the boxrsquo option for trading trusts to retain working capital funds taxed at corporate tax rate - trading trusts that make election denied 50 CGT discount except in relation to goodwill
bull Alternative system that removes uncertainty on the treatment of UPEs by clarifying that all UPEs are loans for Division 7A purposes
bull Self correction mechanism which would enable taxpayers to put in place complying loan agreements reduce compliance and administrative costs
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull No requirement for formal written agreement if evidence of loan
bull Statutory interest rate set at the start of the loan and fixed over the term of the loan and would be RBA indicator lending rate for small business immediately before start of that income year
bull The maximum loan term would be 10 years
bull Prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows
bull ndash 75 per cent of the original loan by the end of year three
bull ndash 55 per cent of the original loan by the end of year five
bull ndash 25 per cent of the original loan by the end of year eight and
bull ndash 0 per cent of original loan (ie fully repaid) by end of year 10
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Transitioning all other pre-existing Division 7A loans to the new 10-year loans from the application date of the new provisions
bull All existing complying seven-year loans would have their terms extended to the new maximum of 10 years
bull All pre-1997 loans would be deemed to be new complying Division 7A loans with a 10-year term starting from the application date of the new provisions
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Introducing a legislative amendment that allows trusts to make a once-and-for-all election for loans from companies (including UPEs owing to companies) to be excluded from the operation of Division 7A
bull ensuring that a trust that makes such an election (an excluded trust) forgoes the CGT discount on capital gains arising from assets other than goodwill and rsquointangible assets inherently connected with the business carried on by the trusteersquo
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Step One ndashHas the private company made a ldquoloanrdquo to an entity during the current year (continued)
ABC Co
ABC CoShareholder
Loan to
shareholder
Step One ndashHas the private company made a ldquoloanrdquo to an entity during the current year (continued)
Interposed entity loans ndash Section 109T
bull Deemed loan arises as a result of interposed entity loan
bull Deemed loan is repaid or converted to armrsquos length loan before tax return due date
bull If not repaid or converted deemed loan becomes Div 7A deemed dividend
ABC Co XYZ Co
ABC CoShareholder
Deemed Loan
(Section 109T)
Loan 2
Step One ndashHas the private company made a ldquoloanrdquo to an entity during the current year (continued)
Interposed entity loans ndash Section 109UB Subdivision EA
bull Deemed loan arises due to UPE in XYZ Trust and loan to ABC Co shareholder
bull Deemed loan is repaid or converted to armrsquos length loan before tax return due date
bull If not repaid or converted deemed loan becomes Div 7A deemed dividend
bull With effect from 1709 interposing additional trust(s) to separate the UPE holder and lender of loan will not avoid the operation of Subdiv EA
ABC CoBeneficiary of XYZ
Trust
XYZ Trust(UPE)
ABC CoShareholder
UPE exists in favour of ABC Co
Deemed Loan
(Subdivision EA)
Loan of UPE cash
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder
bull Div 7A applies to loans for current or past shareholders if reasonable to assume loan is made because of shareholding relationship
bull Div7A does not apply to loans for future shareholders
bull Loan to associate imposes Div 7A liability on associate not shareholder
ABC Co
ABC CoShareholder
Associate of ABC Co
Shareholder
Loan to Associate of shareholder
(Deemed dividend liability for associate)
Step Two - Is the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
bull An associate of an individual includesbull relative of individualbull partner of individualbull trust where individual or an associate benefits under the trust andbull company in which individual (either alone or together with associates) holds a majority voting
interest
bull An associate of a trust includesbull entity that benefits under the trust andbull entity which is an associate of another entity which benefits under the trust
bull An associate of a company includesbull partner of the company or a partnership in which the company is partnerbull trust where company or an associate of company benefits under the trust andbull entity which holds a majority voting interest in the company (either alone or together with
associates)
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co
shareholder]($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
TR 20103 ndash Section 3 Loans
bull UPE treated as Section 3 loan if inferred as a loan because of treatment of UPE funds by XYZ trust
bull Section 3 loan only Div 7A deemed dividend after 12 months ndash not immediate deemed dividend
bull Section 3 loan provide extra 12 months to repay or make armrsquoslength
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co shareholder]
($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
TR 20103 ndash Section 3 Loans
bull UPE treated as Section 3 loan if inferred as a loan because of treatment of UPE funds by XYZ trust
bull Section 3 loan only Div 7A deemed dividend after 12 months ndash not immediate deemed dividend
bull Section 3 loan provide extra 12 months to repay or make armrsquoslength
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co shareholder]
($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
Quarantine UPE
in Sub-trust
TR 20103 ndash Preservation of UPE status
bull Div 7A treatment can be avoided by preserving UPE status
bull UPE status preserved by transferring and quarantining UPE in Sub-trust
bull Preservation effective if UPE in Sub-trust held only for benefit of ABC Co
bull Return on UPE funds require minimum annual repayment distribution to ABC Co
bull Minimum annual repayment distribution can be based on section 109N benchmark interest rate and section 109NA minimum repayment formula
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co
shareholder]
ABC CoShareholder
[Associate of XYZ Trust] Sub-trust(UPE)
UPE exists in favour of ABC Co
Div 7A amp UPEs
bull TR 20103 states that where a private company has an unpaid present entitlement (UPE) from an associated trust but the trust uses the monies for its own purposes Div 7A can have application Can avoid by
bull fully paying the UPE to the corporate beneficiary before the lodgement day for the trustrsquos income tax return
bull putting a Div 7A loan agreement in place or
bull putting a sub trust in place ndash PS LA 20104
bull TD 201520 states a private company that releases all or part of its unpaid present entitlement is making a payment for Div 7A purposes to the extent that the release represents a financial benefit to an entity
Step Three - Has the loan been fully repaid by the lodgement day
bull A loan is only treated as a dividend if the loan is not fully repaid by the following time
bull loans in 2003-04 or earlier - end of the year loan was made and
bull Loans in 2004-05 year or later - the earlier of date on which company lodges income tax return and due date for such lodgement
bull Repayments must be made by way of actual cash repayment or dividend
bull Repayments made by way of journal entry ie by capitalising the repayment onto the loan balance are not accepted
bull Anti-avoidance provision in s109R - application to same or similar loans
bull Repayment by way of salary and wages or dividend not subject to s109R
Step Four - Is the loan specifically excluded under Subdivision D
The following loans are excluded from being dividends under Div 7A
bull A loan to another company (not acting in its capacity as trustee) - 109K
bull A loan included in the entitys assessable income or made exempt - 109L
bull A loan made in the ordinary course of business on same terms and conditions as loans made to other parties at arms length - 109M
bull An excluded loan that meets interest rate (53) term (725 years) and repayment criteria -109N (issues ndash written agreements converting loans not making minimum repayments Commissionerrsquos discretion)
bull A loan made in the winding up of a company by liquidator - 109NA 109D(1A)
bull A loan to acquire shares under qualifying ESS - 109NB
Step Five - What is the deemed dividend amount
bull Deemed dividend cannot exceed distributable surplus of the company at year end (s 109Y(1))
bull From 1 July 2009 distributable surplus formula is
Net assets + Division 7A amounts minus Non-commercial loans minus Paid-up share value minus Repayments of non-commercial loans
bull Net assets - amount by which companys assets exceed sum ofbull the present legal obligations of the company andbull provisions for depreciation annual leave long service leave and amortisation of
intellectual property and trademarks
bull Div 7A amounts ndash CY payments forgiven debts ndash previously excluded
bull Accounting basis ndash cannot overunder value - Commissioner can re-state
bull Fresta v FCT 2002 ATC 2061 - provision for income tax is a ldquopresent legal obligationrdquo as company is liable for income tax at year end notwithstanding that it is not due and payable until assessed
Case Study - Div 7A
bull On 1 January 2016 A Pty Ltd loaned $15000 to John a shareholder of A Pty Ltd No qualifying written agreement was in place or repayments made before the lodgment day of A Pty Ltds 2016 income tax return
bull Assume no other payments or loans to shareholders or their associates for the income year ended 30 June 2016 Assume no Div 7A amounts and that in prior years there were no loans treated as dividends under Division 7A
Case Study - Div 7A
Case Study - Div 7A
bull On 30 June 2016 A Pty Ltd is taken to pay a dividend to John
Distributable surplus formula
Net assets $20000
Less non-commercial loans (that is loans treated as
dividends in prior years)
$0
Less paid-up share capital $12000
Less repayments of non-commercial loans $0
Distributable surplus $8000
Case Study - Div 7A
bull Although $15000 was loaned to John the amount treated as a dividend will be reduced to A Pty Ltds distributable surplus of $8000 John includes $8000 in his 2016 tax return as an unfranked dividend
bull The remaining $7000 is not treated as a dividend in the income year ended 30 June 2016 and will not be treated as a dividend in a future year even if the company has a distributable surplus in that future year
Step Six - What is the impact on the companys franking account
bull From 1 July 2006 no franking debit arises in a companyrsquos franking account as a result of the operation of Division 7A
Step Seven - Does the loan give rise to an FBT liability
bull Loans that are Division 7A deemed dividends specifically excluded
bull Effective 1 April 2007 a loan that complies with the requirements of Division 7A excluded loan is not a fringe benefit
Commissionerrsquos Discretion under Division 7A
bull One-off opportunity to correct past mistakes - (Practice Statement PS LA 200720) until 30 June 2008
bull However after 300608 Commissioner can still apply discretion in cases of an honest mistake or inadvertent omissions (s 109RB)
bull Formal request for discretion required after 30 June 2008
ATO Backflip - ATO ID 201315 UPE and bad debt deduction
bull This ATO ID considers whether a beneficiary of a trust is entitled to a bad debt deduction for UPE amounts that have been written off as bad debts
bull For bad debt deduction under section 25-35 debt must be actually written off and amount must have been included in assessable income previously
bull ATO view ndash UPE is equity entitlement not a ldquodebtrdquo so cannot be bad debt
bull Even if structured as an equity debt amount not the same as included in taxpayerrsquos assessable income previously
bull No bad debt deduction available to taxpayer
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Address the individual issues and problems in Division 7A by way of specific legislative amendment
2 Statutory Interest Model
Impose requirement that loans to related entities carry a statutory rate of interest but no requirement that principal be repaid prior to termination of the loan
3 Distribution Model
Allow the retention of profits within the private group for permitted purposes and to treat any profits not so used and not distributed as deemed dividends (which would be able to be franked)
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Potential issues to be specifically fixed ndash
UPE classification
distributable surplus quantification
interposed entity identification and treatment
loan and payment definitions
categorisation of exclusions
repayment compliance requirements etc
scope and effect of Commissioners discretionary powers
bull Advantage - could deal with specifically known issues
bull However has potential to be mere piecemeal solution and may fail to significantly simplify the law or its understanding
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
2 Statutory Interest Model
bull Related party loans at legislatively prescribed interest rate
bull Progressive (actual) loan repayments may not be necessary and re-borrowings (of principal) would be permitted
bull Uncomplicated model - interest on the loans assessable to payee (whether paid or not) but not deductible to payer
bull Interest only- principal not be repaid prior to termination of loan
bull Interest rate to be at commercial rate ndash current Division 7A benchmark interest rate too low
bull Allows for retention of loans over prolonged terms
bull Issue ndash ignores that Division 7A also applies to ldquopaymentsrdquo and ldquoforgiven debtsrdquo
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
3 Distribution Model
bull Allow retention of profits within the private group for permitted purposes
bull Any profits not so used and not distributed treated as deemed dividends (but frankable)
bull Retained profits would be taxed at company tax rate
bull Deemed dividends would be taxed at the personal tax rate of relevant shareholders
bull Permitted purposes - use of profits for working capital and other active business purposes of the private company or related entity
bull Use of the profits for passive investment purposes not permitted
bull Acquisition of active assets used in an active business allowed
Board of Taxation ndash Div 7A recommendations - Supplement
bull Set of common principles for loans payments debt forgiveness
bull Simpler system in which asset revaluations will not be required and unrealised profits not taken to be distributed because company assets have been used and company profits tested each year
bull Single 10-year loan with flexibility for repayment of principal
bull A lsquotick the boxrsquo option for trading trusts to retain working capital funds taxed at corporate tax rate - trading trusts that make election denied 50 CGT discount except in relation to goodwill
bull Alternative system that removes uncertainty on the treatment of UPEs by clarifying that all UPEs are loans for Division 7A purposes
bull Self correction mechanism which would enable taxpayers to put in place complying loan agreements reduce compliance and administrative costs
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull No requirement for formal written agreement if evidence of loan
bull Statutory interest rate set at the start of the loan and fixed over the term of the loan and would be RBA indicator lending rate for small business immediately before start of that income year
bull The maximum loan term would be 10 years
bull Prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows
bull ndash 75 per cent of the original loan by the end of year three
bull ndash 55 per cent of the original loan by the end of year five
bull ndash 25 per cent of the original loan by the end of year eight and
bull ndash 0 per cent of original loan (ie fully repaid) by end of year 10
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Transitioning all other pre-existing Division 7A loans to the new 10-year loans from the application date of the new provisions
bull All existing complying seven-year loans would have their terms extended to the new maximum of 10 years
bull All pre-1997 loans would be deemed to be new complying Division 7A loans with a 10-year term starting from the application date of the new provisions
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Introducing a legislative amendment that allows trusts to make a once-and-for-all election for loans from companies (including UPEs owing to companies) to be excluded from the operation of Division 7A
bull ensuring that a trust that makes such an election (an excluded trust) forgoes the CGT discount on capital gains arising from assets other than goodwill and rsquointangible assets inherently connected with the business carried on by the trusteersquo
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Step One ndashHas the private company made a ldquoloanrdquo to an entity during the current year (continued)
Interposed entity loans ndash Section 109T
bull Deemed loan arises as a result of interposed entity loan
bull Deemed loan is repaid or converted to armrsquos length loan before tax return due date
bull If not repaid or converted deemed loan becomes Div 7A deemed dividend
ABC Co XYZ Co
ABC CoShareholder
Deemed Loan
(Section 109T)
Loan 2
Step One ndashHas the private company made a ldquoloanrdquo to an entity during the current year (continued)
Interposed entity loans ndash Section 109UB Subdivision EA
bull Deemed loan arises due to UPE in XYZ Trust and loan to ABC Co shareholder
bull Deemed loan is repaid or converted to armrsquos length loan before tax return due date
bull If not repaid or converted deemed loan becomes Div 7A deemed dividend
bull With effect from 1709 interposing additional trust(s) to separate the UPE holder and lender of loan will not avoid the operation of Subdiv EA
ABC CoBeneficiary of XYZ
Trust
XYZ Trust(UPE)
ABC CoShareholder
UPE exists in favour of ABC Co
Deemed Loan
(Subdivision EA)
Loan of UPE cash
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder
bull Div 7A applies to loans for current or past shareholders if reasonable to assume loan is made because of shareholding relationship
bull Div7A does not apply to loans for future shareholders
bull Loan to associate imposes Div 7A liability on associate not shareholder
ABC Co
ABC CoShareholder
Associate of ABC Co
Shareholder
Loan to Associate of shareholder
(Deemed dividend liability for associate)
Step Two - Is the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
bull An associate of an individual includesbull relative of individualbull partner of individualbull trust where individual or an associate benefits under the trust andbull company in which individual (either alone or together with associates) holds a majority voting
interest
bull An associate of a trust includesbull entity that benefits under the trust andbull entity which is an associate of another entity which benefits under the trust
bull An associate of a company includesbull partner of the company or a partnership in which the company is partnerbull trust where company or an associate of company benefits under the trust andbull entity which holds a majority voting interest in the company (either alone or together with
associates)
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co
shareholder]($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
TR 20103 ndash Section 3 Loans
bull UPE treated as Section 3 loan if inferred as a loan because of treatment of UPE funds by XYZ trust
bull Section 3 loan only Div 7A deemed dividend after 12 months ndash not immediate deemed dividend
bull Section 3 loan provide extra 12 months to repay or make armrsquoslength
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co shareholder]
($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
TR 20103 ndash Section 3 Loans
bull UPE treated as Section 3 loan if inferred as a loan because of treatment of UPE funds by XYZ trust
bull Section 3 loan only Div 7A deemed dividend after 12 months ndash not immediate deemed dividend
bull Section 3 loan provide extra 12 months to repay or make armrsquoslength
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co shareholder]
($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
Quarantine UPE
in Sub-trust
TR 20103 ndash Preservation of UPE status
bull Div 7A treatment can be avoided by preserving UPE status
bull UPE status preserved by transferring and quarantining UPE in Sub-trust
bull Preservation effective if UPE in Sub-trust held only for benefit of ABC Co
bull Return on UPE funds require minimum annual repayment distribution to ABC Co
bull Minimum annual repayment distribution can be based on section 109N benchmark interest rate and section 109NA minimum repayment formula
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co
shareholder]
ABC CoShareholder
[Associate of XYZ Trust] Sub-trust(UPE)
UPE exists in favour of ABC Co
Div 7A amp UPEs
bull TR 20103 states that where a private company has an unpaid present entitlement (UPE) from an associated trust but the trust uses the monies for its own purposes Div 7A can have application Can avoid by
bull fully paying the UPE to the corporate beneficiary before the lodgement day for the trustrsquos income tax return
bull putting a Div 7A loan agreement in place or
bull putting a sub trust in place ndash PS LA 20104
bull TD 201520 states a private company that releases all or part of its unpaid present entitlement is making a payment for Div 7A purposes to the extent that the release represents a financial benefit to an entity
Step Three - Has the loan been fully repaid by the lodgement day
bull A loan is only treated as a dividend if the loan is not fully repaid by the following time
bull loans in 2003-04 or earlier - end of the year loan was made and
bull Loans in 2004-05 year or later - the earlier of date on which company lodges income tax return and due date for such lodgement
bull Repayments must be made by way of actual cash repayment or dividend
bull Repayments made by way of journal entry ie by capitalising the repayment onto the loan balance are not accepted
bull Anti-avoidance provision in s109R - application to same or similar loans
bull Repayment by way of salary and wages or dividend not subject to s109R
Step Four - Is the loan specifically excluded under Subdivision D
The following loans are excluded from being dividends under Div 7A
bull A loan to another company (not acting in its capacity as trustee) - 109K
bull A loan included in the entitys assessable income or made exempt - 109L
bull A loan made in the ordinary course of business on same terms and conditions as loans made to other parties at arms length - 109M
bull An excluded loan that meets interest rate (53) term (725 years) and repayment criteria -109N (issues ndash written agreements converting loans not making minimum repayments Commissionerrsquos discretion)
bull A loan made in the winding up of a company by liquidator - 109NA 109D(1A)
bull A loan to acquire shares under qualifying ESS - 109NB
Step Five - What is the deemed dividend amount
bull Deemed dividend cannot exceed distributable surplus of the company at year end (s 109Y(1))
bull From 1 July 2009 distributable surplus formula is
Net assets + Division 7A amounts minus Non-commercial loans minus Paid-up share value minus Repayments of non-commercial loans
bull Net assets - amount by which companys assets exceed sum ofbull the present legal obligations of the company andbull provisions for depreciation annual leave long service leave and amortisation of
intellectual property and trademarks
bull Div 7A amounts ndash CY payments forgiven debts ndash previously excluded
bull Accounting basis ndash cannot overunder value - Commissioner can re-state
bull Fresta v FCT 2002 ATC 2061 - provision for income tax is a ldquopresent legal obligationrdquo as company is liable for income tax at year end notwithstanding that it is not due and payable until assessed
Case Study - Div 7A
bull On 1 January 2016 A Pty Ltd loaned $15000 to John a shareholder of A Pty Ltd No qualifying written agreement was in place or repayments made before the lodgment day of A Pty Ltds 2016 income tax return
bull Assume no other payments or loans to shareholders or their associates for the income year ended 30 June 2016 Assume no Div 7A amounts and that in prior years there were no loans treated as dividends under Division 7A
Case Study - Div 7A
Case Study - Div 7A
bull On 30 June 2016 A Pty Ltd is taken to pay a dividend to John
Distributable surplus formula
Net assets $20000
Less non-commercial loans (that is loans treated as
dividends in prior years)
$0
Less paid-up share capital $12000
Less repayments of non-commercial loans $0
Distributable surplus $8000
Case Study - Div 7A
bull Although $15000 was loaned to John the amount treated as a dividend will be reduced to A Pty Ltds distributable surplus of $8000 John includes $8000 in his 2016 tax return as an unfranked dividend
bull The remaining $7000 is not treated as a dividend in the income year ended 30 June 2016 and will not be treated as a dividend in a future year even if the company has a distributable surplus in that future year
Step Six - What is the impact on the companys franking account
bull From 1 July 2006 no franking debit arises in a companyrsquos franking account as a result of the operation of Division 7A
Step Seven - Does the loan give rise to an FBT liability
bull Loans that are Division 7A deemed dividends specifically excluded
bull Effective 1 April 2007 a loan that complies with the requirements of Division 7A excluded loan is not a fringe benefit
Commissionerrsquos Discretion under Division 7A
bull One-off opportunity to correct past mistakes - (Practice Statement PS LA 200720) until 30 June 2008
bull However after 300608 Commissioner can still apply discretion in cases of an honest mistake or inadvertent omissions (s 109RB)
bull Formal request for discretion required after 30 June 2008
ATO Backflip - ATO ID 201315 UPE and bad debt deduction
bull This ATO ID considers whether a beneficiary of a trust is entitled to a bad debt deduction for UPE amounts that have been written off as bad debts
bull For bad debt deduction under section 25-35 debt must be actually written off and amount must have been included in assessable income previously
bull ATO view ndash UPE is equity entitlement not a ldquodebtrdquo so cannot be bad debt
bull Even if structured as an equity debt amount not the same as included in taxpayerrsquos assessable income previously
bull No bad debt deduction available to taxpayer
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Address the individual issues and problems in Division 7A by way of specific legislative amendment
2 Statutory Interest Model
Impose requirement that loans to related entities carry a statutory rate of interest but no requirement that principal be repaid prior to termination of the loan
3 Distribution Model
Allow the retention of profits within the private group for permitted purposes and to treat any profits not so used and not distributed as deemed dividends (which would be able to be franked)
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Potential issues to be specifically fixed ndash
UPE classification
distributable surplus quantification
interposed entity identification and treatment
loan and payment definitions
categorisation of exclusions
repayment compliance requirements etc
scope and effect of Commissioners discretionary powers
bull Advantage - could deal with specifically known issues
bull However has potential to be mere piecemeal solution and may fail to significantly simplify the law or its understanding
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
2 Statutory Interest Model
bull Related party loans at legislatively prescribed interest rate
bull Progressive (actual) loan repayments may not be necessary and re-borrowings (of principal) would be permitted
bull Uncomplicated model - interest on the loans assessable to payee (whether paid or not) but not deductible to payer
bull Interest only- principal not be repaid prior to termination of loan
bull Interest rate to be at commercial rate ndash current Division 7A benchmark interest rate too low
bull Allows for retention of loans over prolonged terms
bull Issue ndash ignores that Division 7A also applies to ldquopaymentsrdquo and ldquoforgiven debtsrdquo
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
3 Distribution Model
bull Allow retention of profits within the private group for permitted purposes
bull Any profits not so used and not distributed treated as deemed dividends (but frankable)
bull Retained profits would be taxed at company tax rate
bull Deemed dividends would be taxed at the personal tax rate of relevant shareholders
bull Permitted purposes - use of profits for working capital and other active business purposes of the private company or related entity
bull Use of the profits for passive investment purposes not permitted
bull Acquisition of active assets used in an active business allowed
Board of Taxation ndash Div 7A recommendations - Supplement
bull Set of common principles for loans payments debt forgiveness
bull Simpler system in which asset revaluations will not be required and unrealised profits not taken to be distributed because company assets have been used and company profits tested each year
bull Single 10-year loan with flexibility for repayment of principal
bull A lsquotick the boxrsquo option for trading trusts to retain working capital funds taxed at corporate tax rate - trading trusts that make election denied 50 CGT discount except in relation to goodwill
bull Alternative system that removes uncertainty on the treatment of UPEs by clarifying that all UPEs are loans for Division 7A purposes
bull Self correction mechanism which would enable taxpayers to put in place complying loan agreements reduce compliance and administrative costs
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull No requirement for formal written agreement if evidence of loan
bull Statutory interest rate set at the start of the loan and fixed over the term of the loan and would be RBA indicator lending rate for small business immediately before start of that income year
bull The maximum loan term would be 10 years
bull Prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows
bull ndash 75 per cent of the original loan by the end of year three
bull ndash 55 per cent of the original loan by the end of year five
bull ndash 25 per cent of the original loan by the end of year eight and
bull ndash 0 per cent of original loan (ie fully repaid) by end of year 10
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Transitioning all other pre-existing Division 7A loans to the new 10-year loans from the application date of the new provisions
bull All existing complying seven-year loans would have their terms extended to the new maximum of 10 years
bull All pre-1997 loans would be deemed to be new complying Division 7A loans with a 10-year term starting from the application date of the new provisions
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Introducing a legislative amendment that allows trusts to make a once-and-for-all election for loans from companies (including UPEs owing to companies) to be excluded from the operation of Division 7A
bull ensuring that a trust that makes such an election (an excluded trust) forgoes the CGT discount on capital gains arising from assets other than goodwill and rsquointangible assets inherently connected with the business carried on by the trusteersquo
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Step One ndashHas the private company made a ldquoloanrdquo to an entity during the current year (continued)
Interposed entity loans ndash Section 109UB Subdivision EA
bull Deemed loan arises due to UPE in XYZ Trust and loan to ABC Co shareholder
bull Deemed loan is repaid or converted to armrsquos length loan before tax return due date
bull If not repaid or converted deemed loan becomes Div 7A deemed dividend
bull With effect from 1709 interposing additional trust(s) to separate the UPE holder and lender of loan will not avoid the operation of Subdiv EA
ABC CoBeneficiary of XYZ
Trust
XYZ Trust(UPE)
ABC CoShareholder
UPE exists in favour of ABC Co
Deemed Loan
(Subdivision EA)
Loan of UPE cash
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder
bull Div 7A applies to loans for current or past shareholders if reasonable to assume loan is made because of shareholding relationship
bull Div7A does not apply to loans for future shareholders
bull Loan to associate imposes Div 7A liability on associate not shareholder
ABC Co
ABC CoShareholder
Associate of ABC Co
Shareholder
Loan to Associate of shareholder
(Deemed dividend liability for associate)
Step Two - Is the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
bull An associate of an individual includesbull relative of individualbull partner of individualbull trust where individual or an associate benefits under the trust andbull company in which individual (either alone or together with associates) holds a majority voting
interest
bull An associate of a trust includesbull entity that benefits under the trust andbull entity which is an associate of another entity which benefits under the trust
bull An associate of a company includesbull partner of the company or a partnership in which the company is partnerbull trust where company or an associate of company benefits under the trust andbull entity which holds a majority voting interest in the company (either alone or together with
associates)
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co
shareholder]($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
TR 20103 ndash Section 3 Loans
bull UPE treated as Section 3 loan if inferred as a loan because of treatment of UPE funds by XYZ trust
bull Section 3 loan only Div 7A deemed dividend after 12 months ndash not immediate deemed dividend
bull Section 3 loan provide extra 12 months to repay or make armrsquoslength
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co shareholder]
($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
TR 20103 ndash Section 3 Loans
bull UPE treated as Section 3 loan if inferred as a loan because of treatment of UPE funds by XYZ trust
bull Section 3 loan only Div 7A deemed dividend after 12 months ndash not immediate deemed dividend
bull Section 3 loan provide extra 12 months to repay or make armrsquoslength
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co shareholder]
($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
Quarantine UPE
in Sub-trust
TR 20103 ndash Preservation of UPE status
bull Div 7A treatment can be avoided by preserving UPE status
bull UPE status preserved by transferring and quarantining UPE in Sub-trust
bull Preservation effective if UPE in Sub-trust held only for benefit of ABC Co
bull Return on UPE funds require minimum annual repayment distribution to ABC Co
bull Minimum annual repayment distribution can be based on section 109N benchmark interest rate and section 109NA minimum repayment formula
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co
shareholder]
ABC CoShareholder
[Associate of XYZ Trust] Sub-trust(UPE)
UPE exists in favour of ABC Co
Div 7A amp UPEs
bull TR 20103 states that where a private company has an unpaid present entitlement (UPE) from an associated trust but the trust uses the monies for its own purposes Div 7A can have application Can avoid by
bull fully paying the UPE to the corporate beneficiary before the lodgement day for the trustrsquos income tax return
bull putting a Div 7A loan agreement in place or
bull putting a sub trust in place ndash PS LA 20104
bull TD 201520 states a private company that releases all or part of its unpaid present entitlement is making a payment for Div 7A purposes to the extent that the release represents a financial benefit to an entity
Step Three - Has the loan been fully repaid by the lodgement day
bull A loan is only treated as a dividend if the loan is not fully repaid by the following time
bull loans in 2003-04 or earlier - end of the year loan was made and
bull Loans in 2004-05 year or later - the earlier of date on which company lodges income tax return and due date for such lodgement
bull Repayments must be made by way of actual cash repayment or dividend
bull Repayments made by way of journal entry ie by capitalising the repayment onto the loan balance are not accepted
bull Anti-avoidance provision in s109R - application to same or similar loans
bull Repayment by way of salary and wages or dividend not subject to s109R
Step Four - Is the loan specifically excluded under Subdivision D
The following loans are excluded from being dividends under Div 7A
bull A loan to another company (not acting in its capacity as trustee) - 109K
bull A loan included in the entitys assessable income or made exempt - 109L
bull A loan made in the ordinary course of business on same terms and conditions as loans made to other parties at arms length - 109M
bull An excluded loan that meets interest rate (53) term (725 years) and repayment criteria -109N (issues ndash written agreements converting loans not making minimum repayments Commissionerrsquos discretion)
bull A loan made in the winding up of a company by liquidator - 109NA 109D(1A)
bull A loan to acquire shares under qualifying ESS - 109NB
Step Five - What is the deemed dividend amount
bull Deemed dividend cannot exceed distributable surplus of the company at year end (s 109Y(1))
bull From 1 July 2009 distributable surplus formula is
Net assets + Division 7A amounts minus Non-commercial loans minus Paid-up share value minus Repayments of non-commercial loans
bull Net assets - amount by which companys assets exceed sum ofbull the present legal obligations of the company andbull provisions for depreciation annual leave long service leave and amortisation of
intellectual property and trademarks
bull Div 7A amounts ndash CY payments forgiven debts ndash previously excluded
bull Accounting basis ndash cannot overunder value - Commissioner can re-state
bull Fresta v FCT 2002 ATC 2061 - provision for income tax is a ldquopresent legal obligationrdquo as company is liable for income tax at year end notwithstanding that it is not due and payable until assessed
Case Study - Div 7A
bull On 1 January 2016 A Pty Ltd loaned $15000 to John a shareholder of A Pty Ltd No qualifying written agreement was in place or repayments made before the lodgment day of A Pty Ltds 2016 income tax return
bull Assume no other payments or loans to shareholders or their associates for the income year ended 30 June 2016 Assume no Div 7A amounts and that in prior years there were no loans treated as dividends under Division 7A
Case Study - Div 7A
Case Study - Div 7A
bull On 30 June 2016 A Pty Ltd is taken to pay a dividend to John
Distributable surplus formula
Net assets $20000
Less non-commercial loans (that is loans treated as
dividends in prior years)
$0
Less paid-up share capital $12000
Less repayments of non-commercial loans $0
Distributable surplus $8000
Case Study - Div 7A
bull Although $15000 was loaned to John the amount treated as a dividend will be reduced to A Pty Ltds distributable surplus of $8000 John includes $8000 in his 2016 tax return as an unfranked dividend
bull The remaining $7000 is not treated as a dividend in the income year ended 30 June 2016 and will not be treated as a dividend in a future year even if the company has a distributable surplus in that future year
Step Six - What is the impact on the companys franking account
bull From 1 July 2006 no franking debit arises in a companyrsquos franking account as a result of the operation of Division 7A
Step Seven - Does the loan give rise to an FBT liability
bull Loans that are Division 7A deemed dividends specifically excluded
bull Effective 1 April 2007 a loan that complies with the requirements of Division 7A excluded loan is not a fringe benefit
Commissionerrsquos Discretion under Division 7A
bull One-off opportunity to correct past mistakes - (Practice Statement PS LA 200720) until 30 June 2008
bull However after 300608 Commissioner can still apply discretion in cases of an honest mistake or inadvertent omissions (s 109RB)
bull Formal request for discretion required after 30 June 2008
ATO Backflip - ATO ID 201315 UPE and bad debt deduction
bull This ATO ID considers whether a beneficiary of a trust is entitled to a bad debt deduction for UPE amounts that have been written off as bad debts
bull For bad debt deduction under section 25-35 debt must be actually written off and amount must have been included in assessable income previously
bull ATO view ndash UPE is equity entitlement not a ldquodebtrdquo so cannot be bad debt
bull Even if structured as an equity debt amount not the same as included in taxpayerrsquos assessable income previously
bull No bad debt deduction available to taxpayer
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Address the individual issues and problems in Division 7A by way of specific legislative amendment
2 Statutory Interest Model
Impose requirement that loans to related entities carry a statutory rate of interest but no requirement that principal be repaid prior to termination of the loan
3 Distribution Model
Allow the retention of profits within the private group for permitted purposes and to treat any profits not so used and not distributed as deemed dividends (which would be able to be franked)
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Potential issues to be specifically fixed ndash
UPE classification
distributable surplus quantification
interposed entity identification and treatment
loan and payment definitions
categorisation of exclusions
repayment compliance requirements etc
scope and effect of Commissioners discretionary powers
bull Advantage - could deal with specifically known issues
bull However has potential to be mere piecemeal solution and may fail to significantly simplify the law or its understanding
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
2 Statutory Interest Model
bull Related party loans at legislatively prescribed interest rate
bull Progressive (actual) loan repayments may not be necessary and re-borrowings (of principal) would be permitted
bull Uncomplicated model - interest on the loans assessable to payee (whether paid or not) but not deductible to payer
bull Interest only- principal not be repaid prior to termination of loan
bull Interest rate to be at commercial rate ndash current Division 7A benchmark interest rate too low
bull Allows for retention of loans over prolonged terms
bull Issue ndash ignores that Division 7A also applies to ldquopaymentsrdquo and ldquoforgiven debtsrdquo
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
3 Distribution Model
bull Allow retention of profits within the private group for permitted purposes
bull Any profits not so used and not distributed treated as deemed dividends (but frankable)
bull Retained profits would be taxed at company tax rate
bull Deemed dividends would be taxed at the personal tax rate of relevant shareholders
bull Permitted purposes - use of profits for working capital and other active business purposes of the private company or related entity
bull Use of the profits for passive investment purposes not permitted
bull Acquisition of active assets used in an active business allowed
Board of Taxation ndash Div 7A recommendations - Supplement
bull Set of common principles for loans payments debt forgiveness
bull Simpler system in which asset revaluations will not be required and unrealised profits not taken to be distributed because company assets have been used and company profits tested each year
bull Single 10-year loan with flexibility for repayment of principal
bull A lsquotick the boxrsquo option for trading trusts to retain working capital funds taxed at corporate tax rate - trading trusts that make election denied 50 CGT discount except in relation to goodwill
bull Alternative system that removes uncertainty on the treatment of UPEs by clarifying that all UPEs are loans for Division 7A purposes
bull Self correction mechanism which would enable taxpayers to put in place complying loan agreements reduce compliance and administrative costs
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull No requirement for formal written agreement if evidence of loan
bull Statutory interest rate set at the start of the loan and fixed over the term of the loan and would be RBA indicator lending rate for small business immediately before start of that income year
bull The maximum loan term would be 10 years
bull Prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows
bull ndash 75 per cent of the original loan by the end of year three
bull ndash 55 per cent of the original loan by the end of year five
bull ndash 25 per cent of the original loan by the end of year eight and
bull ndash 0 per cent of original loan (ie fully repaid) by end of year 10
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Transitioning all other pre-existing Division 7A loans to the new 10-year loans from the application date of the new provisions
bull All existing complying seven-year loans would have their terms extended to the new maximum of 10 years
bull All pre-1997 loans would be deemed to be new complying Division 7A loans with a 10-year term starting from the application date of the new provisions
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Introducing a legislative amendment that allows trusts to make a once-and-for-all election for loans from companies (including UPEs owing to companies) to be excluded from the operation of Division 7A
bull ensuring that a trust that makes such an election (an excluded trust) forgoes the CGT discount on capital gains arising from assets other than goodwill and rsquointangible assets inherently connected with the business carried on by the trusteersquo
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder
bull Div 7A applies to loans for current or past shareholders if reasonable to assume loan is made because of shareholding relationship
bull Div7A does not apply to loans for future shareholders
bull Loan to associate imposes Div 7A liability on associate not shareholder
ABC Co
ABC CoShareholder
Associate of ABC Co
Shareholder
Loan to Associate of shareholder
(Deemed dividend liability for associate)
Step Two - Is the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
bull An associate of an individual includesbull relative of individualbull partner of individualbull trust where individual or an associate benefits under the trust andbull company in which individual (either alone or together with associates) holds a majority voting
interest
bull An associate of a trust includesbull entity that benefits under the trust andbull entity which is an associate of another entity which benefits under the trust
bull An associate of a company includesbull partner of the company or a partnership in which the company is partnerbull trust where company or an associate of company benefits under the trust andbull entity which holds a majority voting interest in the company (either alone or together with
associates)
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co
shareholder]($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
TR 20103 ndash Section 3 Loans
bull UPE treated as Section 3 loan if inferred as a loan because of treatment of UPE funds by XYZ trust
bull Section 3 loan only Div 7A deemed dividend after 12 months ndash not immediate deemed dividend
bull Section 3 loan provide extra 12 months to repay or make armrsquoslength
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co shareholder]
($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
TR 20103 ndash Section 3 Loans
bull UPE treated as Section 3 loan if inferred as a loan because of treatment of UPE funds by XYZ trust
bull Section 3 loan only Div 7A deemed dividend after 12 months ndash not immediate deemed dividend
bull Section 3 loan provide extra 12 months to repay or make armrsquoslength
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co shareholder]
($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
Quarantine UPE
in Sub-trust
TR 20103 ndash Preservation of UPE status
bull Div 7A treatment can be avoided by preserving UPE status
bull UPE status preserved by transferring and quarantining UPE in Sub-trust
bull Preservation effective if UPE in Sub-trust held only for benefit of ABC Co
bull Return on UPE funds require minimum annual repayment distribution to ABC Co
bull Minimum annual repayment distribution can be based on section 109N benchmark interest rate and section 109NA minimum repayment formula
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co
shareholder]
ABC CoShareholder
[Associate of XYZ Trust] Sub-trust(UPE)
UPE exists in favour of ABC Co
Div 7A amp UPEs
bull TR 20103 states that where a private company has an unpaid present entitlement (UPE) from an associated trust but the trust uses the monies for its own purposes Div 7A can have application Can avoid by
bull fully paying the UPE to the corporate beneficiary before the lodgement day for the trustrsquos income tax return
bull putting a Div 7A loan agreement in place or
bull putting a sub trust in place ndash PS LA 20104
bull TD 201520 states a private company that releases all or part of its unpaid present entitlement is making a payment for Div 7A purposes to the extent that the release represents a financial benefit to an entity
Step Three - Has the loan been fully repaid by the lodgement day
bull A loan is only treated as a dividend if the loan is not fully repaid by the following time
bull loans in 2003-04 or earlier - end of the year loan was made and
bull Loans in 2004-05 year or later - the earlier of date on which company lodges income tax return and due date for such lodgement
bull Repayments must be made by way of actual cash repayment or dividend
bull Repayments made by way of journal entry ie by capitalising the repayment onto the loan balance are not accepted
bull Anti-avoidance provision in s109R - application to same or similar loans
bull Repayment by way of salary and wages or dividend not subject to s109R
Step Four - Is the loan specifically excluded under Subdivision D
The following loans are excluded from being dividends under Div 7A
bull A loan to another company (not acting in its capacity as trustee) - 109K
bull A loan included in the entitys assessable income or made exempt - 109L
bull A loan made in the ordinary course of business on same terms and conditions as loans made to other parties at arms length - 109M
bull An excluded loan that meets interest rate (53) term (725 years) and repayment criteria -109N (issues ndash written agreements converting loans not making minimum repayments Commissionerrsquos discretion)
bull A loan made in the winding up of a company by liquidator - 109NA 109D(1A)
bull A loan to acquire shares under qualifying ESS - 109NB
Step Five - What is the deemed dividend amount
bull Deemed dividend cannot exceed distributable surplus of the company at year end (s 109Y(1))
bull From 1 July 2009 distributable surplus formula is
Net assets + Division 7A amounts minus Non-commercial loans minus Paid-up share value minus Repayments of non-commercial loans
bull Net assets - amount by which companys assets exceed sum ofbull the present legal obligations of the company andbull provisions for depreciation annual leave long service leave and amortisation of
intellectual property and trademarks
bull Div 7A amounts ndash CY payments forgiven debts ndash previously excluded
bull Accounting basis ndash cannot overunder value - Commissioner can re-state
bull Fresta v FCT 2002 ATC 2061 - provision for income tax is a ldquopresent legal obligationrdquo as company is liable for income tax at year end notwithstanding that it is not due and payable until assessed
Case Study - Div 7A
bull On 1 January 2016 A Pty Ltd loaned $15000 to John a shareholder of A Pty Ltd No qualifying written agreement was in place or repayments made before the lodgment day of A Pty Ltds 2016 income tax return
bull Assume no other payments or loans to shareholders or their associates for the income year ended 30 June 2016 Assume no Div 7A amounts and that in prior years there were no loans treated as dividends under Division 7A
Case Study - Div 7A
Case Study - Div 7A
bull On 30 June 2016 A Pty Ltd is taken to pay a dividend to John
Distributable surplus formula
Net assets $20000
Less non-commercial loans (that is loans treated as
dividends in prior years)
$0
Less paid-up share capital $12000
Less repayments of non-commercial loans $0
Distributable surplus $8000
Case Study - Div 7A
bull Although $15000 was loaned to John the amount treated as a dividend will be reduced to A Pty Ltds distributable surplus of $8000 John includes $8000 in his 2016 tax return as an unfranked dividend
bull The remaining $7000 is not treated as a dividend in the income year ended 30 June 2016 and will not be treated as a dividend in a future year even if the company has a distributable surplus in that future year
Step Six - What is the impact on the companys franking account
bull From 1 July 2006 no franking debit arises in a companyrsquos franking account as a result of the operation of Division 7A
Step Seven - Does the loan give rise to an FBT liability
bull Loans that are Division 7A deemed dividends specifically excluded
bull Effective 1 April 2007 a loan that complies with the requirements of Division 7A excluded loan is not a fringe benefit
Commissionerrsquos Discretion under Division 7A
bull One-off opportunity to correct past mistakes - (Practice Statement PS LA 200720) until 30 June 2008
bull However after 300608 Commissioner can still apply discretion in cases of an honest mistake or inadvertent omissions (s 109RB)
bull Formal request for discretion required after 30 June 2008
ATO Backflip - ATO ID 201315 UPE and bad debt deduction
bull This ATO ID considers whether a beneficiary of a trust is entitled to a bad debt deduction for UPE amounts that have been written off as bad debts
bull For bad debt deduction under section 25-35 debt must be actually written off and amount must have been included in assessable income previously
bull ATO view ndash UPE is equity entitlement not a ldquodebtrdquo so cannot be bad debt
bull Even if structured as an equity debt amount not the same as included in taxpayerrsquos assessable income previously
bull No bad debt deduction available to taxpayer
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Address the individual issues and problems in Division 7A by way of specific legislative amendment
2 Statutory Interest Model
Impose requirement that loans to related entities carry a statutory rate of interest but no requirement that principal be repaid prior to termination of the loan
3 Distribution Model
Allow the retention of profits within the private group for permitted purposes and to treat any profits not so used and not distributed as deemed dividends (which would be able to be franked)
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Potential issues to be specifically fixed ndash
UPE classification
distributable surplus quantification
interposed entity identification and treatment
loan and payment definitions
categorisation of exclusions
repayment compliance requirements etc
scope and effect of Commissioners discretionary powers
bull Advantage - could deal with specifically known issues
bull However has potential to be mere piecemeal solution and may fail to significantly simplify the law or its understanding
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
2 Statutory Interest Model
bull Related party loans at legislatively prescribed interest rate
bull Progressive (actual) loan repayments may not be necessary and re-borrowings (of principal) would be permitted
bull Uncomplicated model - interest on the loans assessable to payee (whether paid or not) but not deductible to payer
bull Interest only- principal not be repaid prior to termination of loan
bull Interest rate to be at commercial rate ndash current Division 7A benchmark interest rate too low
bull Allows for retention of loans over prolonged terms
bull Issue ndash ignores that Division 7A also applies to ldquopaymentsrdquo and ldquoforgiven debtsrdquo
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
3 Distribution Model
bull Allow retention of profits within the private group for permitted purposes
bull Any profits not so used and not distributed treated as deemed dividends (but frankable)
bull Retained profits would be taxed at company tax rate
bull Deemed dividends would be taxed at the personal tax rate of relevant shareholders
bull Permitted purposes - use of profits for working capital and other active business purposes of the private company or related entity
bull Use of the profits for passive investment purposes not permitted
bull Acquisition of active assets used in an active business allowed
Board of Taxation ndash Div 7A recommendations - Supplement
bull Set of common principles for loans payments debt forgiveness
bull Simpler system in which asset revaluations will not be required and unrealised profits not taken to be distributed because company assets have been used and company profits tested each year
bull Single 10-year loan with flexibility for repayment of principal
bull A lsquotick the boxrsquo option for trading trusts to retain working capital funds taxed at corporate tax rate - trading trusts that make election denied 50 CGT discount except in relation to goodwill
bull Alternative system that removes uncertainty on the treatment of UPEs by clarifying that all UPEs are loans for Division 7A purposes
bull Self correction mechanism which would enable taxpayers to put in place complying loan agreements reduce compliance and administrative costs
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull No requirement for formal written agreement if evidence of loan
bull Statutory interest rate set at the start of the loan and fixed over the term of the loan and would be RBA indicator lending rate for small business immediately before start of that income year
bull The maximum loan term would be 10 years
bull Prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows
bull ndash 75 per cent of the original loan by the end of year three
bull ndash 55 per cent of the original loan by the end of year five
bull ndash 25 per cent of the original loan by the end of year eight and
bull ndash 0 per cent of original loan (ie fully repaid) by end of year 10
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Transitioning all other pre-existing Division 7A loans to the new 10-year loans from the application date of the new provisions
bull All existing complying seven-year loans would have their terms extended to the new maximum of 10 years
bull All pre-1997 loans would be deemed to be new complying Division 7A loans with a 10-year term starting from the application date of the new provisions
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Introducing a legislative amendment that allows trusts to make a once-and-for-all election for loans from companies (including UPEs owing to companies) to be excluded from the operation of Division 7A
bull ensuring that a trust that makes such an election (an excluded trust) forgoes the CGT discount on capital gains arising from assets other than goodwill and rsquointangible assets inherently connected with the business carried on by the trusteersquo
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Step Two - Is the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
bull An associate of an individual includesbull relative of individualbull partner of individualbull trust where individual or an associate benefits under the trust andbull company in which individual (either alone or together with associates) holds a majority voting
interest
bull An associate of a trust includesbull entity that benefits under the trust andbull entity which is an associate of another entity which benefits under the trust
bull An associate of a company includesbull partner of the company or a partnership in which the company is partnerbull trust where company or an associate of company benefits under the trust andbull entity which holds a majority voting interest in the company (either alone or together with
associates)
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co
shareholder]($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
TR 20103 ndash Section 3 Loans
bull UPE treated as Section 3 loan if inferred as a loan because of treatment of UPE funds by XYZ trust
bull Section 3 loan only Div 7A deemed dividend after 12 months ndash not immediate deemed dividend
bull Section 3 loan provide extra 12 months to repay or make armrsquoslength
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co shareholder]
($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
TR 20103 ndash Section 3 Loans
bull UPE treated as Section 3 loan if inferred as a loan because of treatment of UPE funds by XYZ trust
bull Section 3 loan only Div 7A deemed dividend after 12 months ndash not immediate deemed dividend
bull Section 3 loan provide extra 12 months to repay or make armrsquoslength
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co shareholder]
($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
Quarantine UPE
in Sub-trust
TR 20103 ndash Preservation of UPE status
bull Div 7A treatment can be avoided by preserving UPE status
bull UPE status preserved by transferring and quarantining UPE in Sub-trust
bull Preservation effective if UPE in Sub-trust held only for benefit of ABC Co
bull Return on UPE funds require minimum annual repayment distribution to ABC Co
bull Minimum annual repayment distribution can be based on section 109N benchmark interest rate and section 109NA minimum repayment formula
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co
shareholder]
ABC CoShareholder
[Associate of XYZ Trust] Sub-trust(UPE)
UPE exists in favour of ABC Co
Div 7A amp UPEs
bull TR 20103 states that where a private company has an unpaid present entitlement (UPE) from an associated trust but the trust uses the monies for its own purposes Div 7A can have application Can avoid by
bull fully paying the UPE to the corporate beneficiary before the lodgement day for the trustrsquos income tax return
bull putting a Div 7A loan agreement in place or
bull putting a sub trust in place ndash PS LA 20104
bull TD 201520 states a private company that releases all or part of its unpaid present entitlement is making a payment for Div 7A purposes to the extent that the release represents a financial benefit to an entity
Step Three - Has the loan been fully repaid by the lodgement day
bull A loan is only treated as a dividend if the loan is not fully repaid by the following time
bull loans in 2003-04 or earlier - end of the year loan was made and
bull Loans in 2004-05 year or later - the earlier of date on which company lodges income tax return and due date for such lodgement
bull Repayments must be made by way of actual cash repayment or dividend
bull Repayments made by way of journal entry ie by capitalising the repayment onto the loan balance are not accepted
bull Anti-avoidance provision in s109R - application to same or similar loans
bull Repayment by way of salary and wages or dividend not subject to s109R
Step Four - Is the loan specifically excluded under Subdivision D
The following loans are excluded from being dividends under Div 7A
bull A loan to another company (not acting in its capacity as trustee) - 109K
bull A loan included in the entitys assessable income or made exempt - 109L
bull A loan made in the ordinary course of business on same terms and conditions as loans made to other parties at arms length - 109M
bull An excluded loan that meets interest rate (53) term (725 years) and repayment criteria -109N (issues ndash written agreements converting loans not making minimum repayments Commissionerrsquos discretion)
bull A loan made in the winding up of a company by liquidator - 109NA 109D(1A)
bull A loan to acquire shares under qualifying ESS - 109NB
Step Five - What is the deemed dividend amount
bull Deemed dividend cannot exceed distributable surplus of the company at year end (s 109Y(1))
bull From 1 July 2009 distributable surplus formula is
Net assets + Division 7A amounts minus Non-commercial loans minus Paid-up share value minus Repayments of non-commercial loans
bull Net assets - amount by which companys assets exceed sum ofbull the present legal obligations of the company andbull provisions for depreciation annual leave long service leave and amortisation of
intellectual property and trademarks
bull Div 7A amounts ndash CY payments forgiven debts ndash previously excluded
bull Accounting basis ndash cannot overunder value - Commissioner can re-state
bull Fresta v FCT 2002 ATC 2061 - provision for income tax is a ldquopresent legal obligationrdquo as company is liable for income tax at year end notwithstanding that it is not due and payable until assessed
Case Study - Div 7A
bull On 1 January 2016 A Pty Ltd loaned $15000 to John a shareholder of A Pty Ltd No qualifying written agreement was in place or repayments made before the lodgment day of A Pty Ltds 2016 income tax return
bull Assume no other payments or loans to shareholders or their associates for the income year ended 30 June 2016 Assume no Div 7A amounts and that in prior years there were no loans treated as dividends under Division 7A
Case Study - Div 7A
Case Study - Div 7A
bull On 30 June 2016 A Pty Ltd is taken to pay a dividend to John
Distributable surplus formula
Net assets $20000
Less non-commercial loans (that is loans treated as
dividends in prior years)
$0
Less paid-up share capital $12000
Less repayments of non-commercial loans $0
Distributable surplus $8000
Case Study - Div 7A
bull Although $15000 was loaned to John the amount treated as a dividend will be reduced to A Pty Ltds distributable surplus of $8000 John includes $8000 in his 2016 tax return as an unfranked dividend
bull The remaining $7000 is not treated as a dividend in the income year ended 30 June 2016 and will not be treated as a dividend in a future year even if the company has a distributable surplus in that future year
Step Six - What is the impact on the companys franking account
bull From 1 July 2006 no franking debit arises in a companyrsquos franking account as a result of the operation of Division 7A
Step Seven - Does the loan give rise to an FBT liability
bull Loans that are Division 7A deemed dividends specifically excluded
bull Effective 1 April 2007 a loan that complies with the requirements of Division 7A excluded loan is not a fringe benefit
Commissionerrsquos Discretion under Division 7A
bull One-off opportunity to correct past mistakes - (Practice Statement PS LA 200720) until 30 June 2008
bull However after 300608 Commissioner can still apply discretion in cases of an honest mistake or inadvertent omissions (s 109RB)
bull Formal request for discretion required after 30 June 2008
ATO Backflip - ATO ID 201315 UPE and bad debt deduction
bull This ATO ID considers whether a beneficiary of a trust is entitled to a bad debt deduction for UPE amounts that have been written off as bad debts
bull For bad debt deduction under section 25-35 debt must be actually written off and amount must have been included in assessable income previously
bull ATO view ndash UPE is equity entitlement not a ldquodebtrdquo so cannot be bad debt
bull Even if structured as an equity debt amount not the same as included in taxpayerrsquos assessable income previously
bull No bad debt deduction available to taxpayer
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Address the individual issues and problems in Division 7A by way of specific legislative amendment
2 Statutory Interest Model
Impose requirement that loans to related entities carry a statutory rate of interest but no requirement that principal be repaid prior to termination of the loan
3 Distribution Model
Allow the retention of profits within the private group for permitted purposes and to treat any profits not so used and not distributed as deemed dividends (which would be able to be franked)
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Potential issues to be specifically fixed ndash
UPE classification
distributable surplus quantification
interposed entity identification and treatment
loan and payment definitions
categorisation of exclusions
repayment compliance requirements etc
scope and effect of Commissioners discretionary powers
bull Advantage - could deal with specifically known issues
bull However has potential to be mere piecemeal solution and may fail to significantly simplify the law or its understanding
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
2 Statutory Interest Model
bull Related party loans at legislatively prescribed interest rate
bull Progressive (actual) loan repayments may not be necessary and re-borrowings (of principal) would be permitted
bull Uncomplicated model - interest on the loans assessable to payee (whether paid or not) but not deductible to payer
bull Interest only- principal not be repaid prior to termination of loan
bull Interest rate to be at commercial rate ndash current Division 7A benchmark interest rate too low
bull Allows for retention of loans over prolonged terms
bull Issue ndash ignores that Division 7A also applies to ldquopaymentsrdquo and ldquoforgiven debtsrdquo
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
3 Distribution Model
bull Allow retention of profits within the private group for permitted purposes
bull Any profits not so used and not distributed treated as deemed dividends (but frankable)
bull Retained profits would be taxed at company tax rate
bull Deemed dividends would be taxed at the personal tax rate of relevant shareholders
bull Permitted purposes - use of profits for working capital and other active business purposes of the private company or related entity
bull Use of the profits for passive investment purposes not permitted
bull Acquisition of active assets used in an active business allowed
Board of Taxation ndash Div 7A recommendations - Supplement
bull Set of common principles for loans payments debt forgiveness
bull Simpler system in which asset revaluations will not be required and unrealised profits not taken to be distributed because company assets have been used and company profits tested each year
bull Single 10-year loan with flexibility for repayment of principal
bull A lsquotick the boxrsquo option for trading trusts to retain working capital funds taxed at corporate tax rate - trading trusts that make election denied 50 CGT discount except in relation to goodwill
bull Alternative system that removes uncertainty on the treatment of UPEs by clarifying that all UPEs are loans for Division 7A purposes
bull Self correction mechanism which would enable taxpayers to put in place complying loan agreements reduce compliance and administrative costs
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull No requirement for formal written agreement if evidence of loan
bull Statutory interest rate set at the start of the loan and fixed over the term of the loan and would be RBA indicator lending rate for small business immediately before start of that income year
bull The maximum loan term would be 10 years
bull Prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows
bull ndash 75 per cent of the original loan by the end of year three
bull ndash 55 per cent of the original loan by the end of year five
bull ndash 25 per cent of the original loan by the end of year eight and
bull ndash 0 per cent of original loan (ie fully repaid) by end of year 10
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Transitioning all other pre-existing Division 7A loans to the new 10-year loans from the application date of the new provisions
bull All existing complying seven-year loans would have their terms extended to the new maximum of 10 years
bull All pre-1997 loans would be deemed to be new complying Division 7A loans with a 10-year term starting from the application date of the new provisions
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Introducing a legislative amendment that allows trusts to make a once-and-for-all election for loans from companies (including UPEs owing to companies) to be excluded from the operation of Division 7A
bull ensuring that a trust that makes such an election (an excluded trust) forgoes the CGT discount on capital gains arising from assets other than goodwill and rsquointangible assets inherently connected with the business carried on by the trusteersquo
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co
shareholder]($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
TR 20103 ndash Section 3 Loans
bull UPE treated as Section 3 loan if inferred as a loan because of treatment of UPE funds by XYZ trust
bull Section 3 loan only Div 7A deemed dividend after 12 months ndash not immediate deemed dividend
bull Section 3 loan provide extra 12 months to repay or make armrsquoslength
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co shareholder]
($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
TR 20103 ndash Section 3 Loans
bull UPE treated as Section 3 loan if inferred as a loan because of treatment of UPE funds by XYZ trust
bull Section 3 loan only Div 7A deemed dividend after 12 months ndash not immediate deemed dividend
bull Section 3 loan provide extra 12 months to repay or make armrsquoslength
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co shareholder]
($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
Quarantine UPE
in Sub-trust
TR 20103 ndash Preservation of UPE status
bull Div 7A treatment can be avoided by preserving UPE status
bull UPE status preserved by transferring and quarantining UPE in Sub-trust
bull Preservation effective if UPE in Sub-trust held only for benefit of ABC Co
bull Return on UPE funds require minimum annual repayment distribution to ABC Co
bull Minimum annual repayment distribution can be based on section 109N benchmark interest rate and section 109NA minimum repayment formula
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co
shareholder]
ABC CoShareholder
[Associate of XYZ Trust] Sub-trust(UPE)
UPE exists in favour of ABC Co
Div 7A amp UPEs
bull TR 20103 states that where a private company has an unpaid present entitlement (UPE) from an associated trust but the trust uses the monies for its own purposes Div 7A can have application Can avoid by
bull fully paying the UPE to the corporate beneficiary before the lodgement day for the trustrsquos income tax return
bull putting a Div 7A loan agreement in place or
bull putting a sub trust in place ndash PS LA 20104
bull TD 201520 states a private company that releases all or part of its unpaid present entitlement is making a payment for Div 7A purposes to the extent that the release represents a financial benefit to an entity
Step Three - Has the loan been fully repaid by the lodgement day
bull A loan is only treated as a dividend if the loan is not fully repaid by the following time
bull loans in 2003-04 or earlier - end of the year loan was made and
bull Loans in 2004-05 year or later - the earlier of date on which company lodges income tax return and due date for such lodgement
bull Repayments must be made by way of actual cash repayment or dividend
bull Repayments made by way of journal entry ie by capitalising the repayment onto the loan balance are not accepted
bull Anti-avoidance provision in s109R - application to same or similar loans
bull Repayment by way of salary and wages or dividend not subject to s109R
Step Four - Is the loan specifically excluded under Subdivision D
The following loans are excluded from being dividends under Div 7A
bull A loan to another company (not acting in its capacity as trustee) - 109K
bull A loan included in the entitys assessable income or made exempt - 109L
bull A loan made in the ordinary course of business on same terms and conditions as loans made to other parties at arms length - 109M
bull An excluded loan that meets interest rate (53) term (725 years) and repayment criteria -109N (issues ndash written agreements converting loans not making minimum repayments Commissionerrsquos discretion)
bull A loan made in the winding up of a company by liquidator - 109NA 109D(1A)
bull A loan to acquire shares under qualifying ESS - 109NB
Step Five - What is the deemed dividend amount
bull Deemed dividend cannot exceed distributable surplus of the company at year end (s 109Y(1))
bull From 1 July 2009 distributable surplus formula is
Net assets + Division 7A amounts minus Non-commercial loans minus Paid-up share value minus Repayments of non-commercial loans
bull Net assets - amount by which companys assets exceed sum ofbull the present legal obligations of the company andbull provisions for depreciation annual leave long service leave and amortisation of
intellectual property and trademarks
bull Div 7A amounts ndash CY payments forgiven debts ndash previously excluded
bull Accounting basis ndash cannot overunder value - Commissioner can re-state
bull Fresta v FCT 2002 ATC 2061 - provision for income tax is a ldquopresent legal obligationrdquo as company is liable for income tax at year end notwithstanding that it is not due and payable until assessed
Case Study - Div 7A
bull On 1 January 2016 A Pty Ltd loaned $15000 to John a shareholder of A Pty Ltd No qualifying written agreement was in place or repayments made before the lodgment day of A Pty Ltds 2016 income tax return
bull Assume no other payments or loans to shareholders or their associates for the income year ended 30 June 2016 Assume no Div 7A amounts and that in prior years there were no loans treated as dividends under Division 7A
Case Study - Div 7A
Case Study - Div 7A
bull On 30 June 2016 A Pty Ltd is taken to pay a dividend to John
Distributable surplus formula
Net assets $20000
Less non-commercial loans (that is loans treated as
dividends in prior years)
$0
Less paid-up share capital $12000
Less repayments of non-commercial loans $0
Distributable surplus $8000
Case Study - Div 7A
bull Although $15000 was loaned to John the amount treated as a dividend will be reduced to A Pty Ltds distributable surplus of $8000 John includes $8000 in his 2016 tax return as an unfranked dividend
bull The remaining $7000 is not treated as a dividend in the income year ended 30 June 2016 and will not be treated as a dividend in a future year even if the company has a distributable surplus in that future year
Step Six - What is the impact on the companys franking account
bull From 1 July 2006 no franking debit arises in a companyrsquos franking account as a result of the operation of Division 7A
Step Seven - Does the loan give rise to an FBT liability
bull Loans that are Division 7A deemed dividends specifically excluded
bull Effective 1 April 2007 a loan that complies with the requirements of Division 7A excluded loan is not a fringe benefit
Commissionerrsquos Discretion under Division 7A
bull One-off opportunity to correct past mistakes - (Practice Statement PS LA 200720) until 30 June 2008
bull However after 300608 Commissioner can still apply discretion in cases of an honest mistake or inadvertent omissions (s 109RB)
bull Formal request for discretion required after 30 June 2008
ATO Backflip - ATO ID 201315 UPE and bad debt deduction
bull This ATO ID considers whether a beneficiary of a trust is entitled to a bad debt deduction for UPE amounts that have been written off as bad debts
bull For bad debt deduction under section 25-35 debt must be actually written off and amount must have been included in assessable income previously
bull ATO view ndash UPE is equity entitlement not a ldquodebtrdquo so cannot be bad debt
bull Even if structured as an equity debt amount not the same as included in taxpayerrsquos assessable income previously
bull No bad debt deduction available to taxpayer
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Address the individual issues and problems in Division 7A by way of specific legislative amendment
2 Statutory Interest Model
Impose requirement that loans to related entities carry a statutory rate of interest but no requirement that principal be repaid prior to termination of the loan
3 Distribution Model
Allow the retention of profits within the private group for permitted purposes and to treat any profits not so used and not distributed as deemed dividends (which would be able to be franked)
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Potential issues to be specifically fixed ndash
UPE classification
distributable surplus quantification
interposed entity identification and treatment
loan and payment definitions
categorisation of exclusions
repayment compliance requirements etc
scope and effect of Commissioners discretionary powers
bull Advantage - could deal with specifically known issues
bull However has potential to be mere piecemeal solution and may fail to significantly simplify the law or its understanding
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
2 Statutory Interest Model
bull Related party loans at legislatively prescribed interest rate
bull Progressive (actual) loan repayments may not be necessary and re-borrowings (of principal) would be permitted
bull Uncomplicated model - interest on the loans assessable to payee (whether paid or not) but not deductible to payer
bull Interest only- principal not be repaid prior to termination of loan
bull Interest rate to be at commercial rate ndash current Division 7A benchmark interest rate too low
bull Allows for retention of loans over prolonged terms
bull Issue ndash ignores that Division 7A also applies to ldquopaymentsrdquo and ldquoforgiven debtsrdquo
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
3 Distribution Model
bull Allow retention of profits within the private group for permitted purposes
bull Any profits not so used and not distributed treated as deemed dividends (but frankable)
bull Retained profits would be taxed at company tax rate
bull Deemed dividends would be taxed at the personal tax rate of relevant shareholders
bull Permitted purposes - use of profits for working capital and other active business purposes of the private company or related entity
bull Use of the profits for passive investment purposes not permitted
bull Acquisition of active assets used in an active business allowed
Board of Taxation ndash Div 7A recommendations - Supplement
bull Set of common principles for loans payments debt forgiveness
bull Simpler system in which asset revaluations will not be required and unrealised profits not taken to be distributed because company assets have been used and company profits tested each year
bull Single 10-year loan with flexibility for repayment of principal
bull A lsquotick the boxrsquo option for trading trusts to retain working capital funds taxed at corporate tax rate - trading trusts that make election denied 50 CGT discount except in relation to goodwill
bull Alternative system that removes uncertainty on the treatment of UPEs by clarifying that all UPEs are loans for Division 7A purposes
bull Self correction mechanism which would enable taxpayers to put in place complying loan agreements reduce compliance and administrative costs
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull No requirement for formal written agreement if evidence of loan
bull Statutory interest rate set at the start of the loan and fixed over the term of the loan and would be RBA indicator lending rate for small business immediately before start of that income year
bull The maximum loan term would be 10 years
bull Prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows
bull ndash 75 per cent of the original loan by the end of year three
bull ndash 55 per cent of the original loan by the end of year five
bull ndash 25 per cent of the original loan by the end of year eight and
bull ndash 0 per cent of original loan (ie fully repaid) by end of year 10
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Transitioning all other pre-existing Division 7A loans to the new 10-year loans from the application date of the new provisions
bull All existing complying seven-year loans would have their terms extended to the new maximum of 10 years
bull All pre-1997 loans would be deemed to be new complying Division 7A loans with a 10-year term starting from the application date of the new provisions
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Introducing a legislative amendment that allows trusts to make a once-and-for-all election for loans from companies (including UPEs owing to companies) to be excluded from the operation of Division 7A
bull ensuring that a trust that makes such an election (an excluded trust) forgoes the CGT discount on capital gains arising from assets other than goodwill and rsquointangible assets inherently connected with the business carried on by the trusteersquo
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
TR 20103 ndash Section 3 Loans
bull UPE treated as Section 3 loan if inferred as a loan because of treatment of UPE funds by XYZ trust
bull Section 3 loan only Div 7A deemed dividend after 12 months ndash not immediate deemed dividend
bull Section 3 loan provide extra 12 months to repay or make armrsquoslength
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co shareholder]
($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
TR 20103 ndash Section 3 Loans
bull UPE treated as Section 3 loan if inferred as a loan because of treatment of UPE funds by XYZ trust
bull Section 3 loan only Div 7A deemed dividend after 12 months ndash not immediate deemed dividend
bull Section 3 loan provide extra 12 months to repay or make armrsquoslength
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co shareholder]
($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
Quarantine UPE
in Sub-trust
TR 20103 ndash Preservation of UPE status
bull Div 7A treatment can be avoided by preserving UPE status
bull UPE status preserved by transferring and quarantining UPE in Sub-trust
bull Preservation effective if UPE in Sub-trust held only for benefit of ABC Co
bull Return on UPE funds require minimum annual repayment distribution to ABC Co
bull Minimum annual repayment distribution can be based on section 109N benchmark interest rate and section 109NA minimum repayment formula
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co
shareholder]
ABC CoShareholder
[Associate of XYZ Trust] Sub-trust(UPE)
UPE exists in favour of ABC Co
Div 7A amp UPEs
bull TR 20103 states that where a private company has an unpaid present entitlement (UPE) from an associated trust but the trust uses the monies for its own purposes Div 7A can have application Can avoid by
bull fully paying the UPE to the corporate beneficiary before the lodgement day for the trustrsquos income tax return
bull putting a Div 7A loan agreement in place or
bull putting a sub trust in place ndash PS LA 20104
bull TD 201520 states a private company that releases all or part of its unpaid present entitlement is making a payment for Div 7A purposes to the extent that the release represents a financial benefit to an entity
Step Three - Has the loan been fully repaid by the lodgement day
bull A loan is only treated as a dividend if the loan is not fully repaid by the following time
bull loans in 2003-04 or earlier - end of the year loan was made and
bull Loans in 2004-05 year or later - the earlier of date on which company lodges income tax return and due date for such lodgement
bull Repayments must be made by way of actual cash repayment or dividend
bull Repayments made by way of journal entry ie by capitalising the repayment onto the loan balance are not accepted
bull Anti-avoidance provision in s109R - application to same or similar loans
bull Repayment by way of salary and wages or dividend not subject to s109R
Step Four - Is the loan specifically excluded under Subdivision D
The following loans are excluded from being dividends under Div 7A
bull A loan to another company (not acting in its capacity as trustee) - 109K
bull A loan included in the entitys assessable income or made exempt - 109L
bull A loan made in the ordinary course of business on same terms and conditions as loans made to other parties at arms length - 109M
bull An excluded loan that meets interest rate (53) term (725 years) and repayment criteria -109N (issues ndash written agreements converting loans not making minimum repayments Commissionerrsquos discretion)
bull A loan made in the winding up of a company by liquidator - 109NA 109D(1A)
bull A loan to acquire shares under qualifying ESS - 109NB
Step Five - What is the deemed dividend amount
bull Deemed dividend cannot exceed distributable surplus of the company at year end (s 109Y(1))
bull From 1 July 2009 distributable surplus formula is
Net assets + Division 7A amounts minus Non-commercial loans minus Paid-up share value minus Repayments of non-commercial loans
bull Net assets - amount by which companys assets exceed sum ofbull the present legal obligations of the company andbull provisions for depreciation annual leave long service leave and amortisation of
intellectual property and trademarks
bull Div 7A amounts ndash CY payments forgiven debts ndash previously excluded
bull Accounting basis ndash cannot overunder value - Commissioner can re-state
bull Fresta v FCT 2002 ATC 2061 - provision for income tax is a ldquopresent legal obligationrdquo as company is liable for income tax at year end notwithstanding that it is not due and payable until assessed
Case Study - Div 7A
bull On 1 January 2016 A Pty Ltd loaned $15000 to John a shareholder of A Pty Ltd No qualifying written agreement was in place or repayments made before the lodgment day of A Pty Ltds 2016 income tax return
bull Assume no other payments or loans to shareholders or their associates for the income year ended 30 June 2016 Assume no Div 7A amounts and that in prior years there were no loans treated as dividends under Division 7A
Case Study - Div 7A
Case Study - Div 7A
bull On 30 June 2016 A Pty Ltd is taken to pay a dividend to John
Distributable surplus formula
Net assets $20000
Less non-commercial loans (that is loans treated as
dividends in prior years)
$0
Less paid-up share capital $12000
Less repayments of non-commercial loans $0
Distributable surplus $8000
Case Study - Div 7A
bull Although $15000 was loaned to John the amount treated as a dividend will be reduced to A Pty Ltds distributable surplus of $8000 John includes $8000 in his 2016 tax return as an unfranked dividend
bull The remaining $7000 is not treated as a dividend in the income year ended 30 June 2016 and will not be treated as a dividend in a future year even if the company has a distributable surplus in that future year
Step Six - What is the impact on the companys franking account
bull From 1 July 2006 no franking debit arises in a companyrsquos franking account as a result of the operation of Division 7A
Step Seven - Does the loan give rise to an FBT liability
bull Loans that are Division 7A deemed dividends specifically excluded
bull Effective 1 April 2007 a loan that complies with the requirements of Division 7A excluded loan is not a fringe benefit
Commissionerrsquos Discretion under Division 7A
bull One-off opportunity to correct past mistakes - (Practice Statement PS LA 200720) until 30 June 2008
bull However after 300608 Commissioner can still apply discretion in cases of an honest mistake or inadvertent omissions (s 109RB)
bull Formal request for discretion required after 30 June 2008
ATO Backflip - ATO ID 201315 UPE and bad debt deduction
bull This ATO ID considers whether a beneficiary of a trust is entitled to a bad debt deduction for UPE amounts that have been written off as bad debts
bull For bad debt deduction under section 25-35 debt must be actually written off and amount must have been included in assessable income previously
bull ATO view ndash UPE is equity entitlement not a ldquodebtrdquo so cannot be bad debt
bull Even if structured as an equity debt amount not the same as included in taxpayerrsquos assessable income previously
bull No bad debt deduction available to taxpayer
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Address the individual issues and problems in Division 7A by way of specific legislative amendment
2 Statutory Interest Model
Impose requirement that loans to related entities carry a statutory rate of interest but no requirement that principal be repaid prior to termination of the loan
3 Distribution Model
Allow the retention of profits within the private group for permitted purposes and to treat any profits not so used and not distributed as deemed dividends (which would be able to be franked)
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Potential issues to be specifically fixed ndash
UPE classification
distributable surplus quantification
interposed entity identification and treatment
loan and payment definitions
categorisation of exclusions
repayment compliance requirements etc
scope and effect of Commissioners discretionary powers
bull Advantage - could deal with specifically known issues
bull However has potential to be mere piecemeal solution and may fail to significantly simplify the law or its understanding
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
2 Statutory Interest Model
bull Related party loans at legislatively prescribed interest rate
bull Progressive (actual) loan repayments may not be necessary and re-borrowings (of principal) would be permitted
bull Uncomplicated model - interest on the loans assessable to payee (whether paid or not) but not deductible to payer
bull Interest only- principal not be repaid prior to termination of loan
bull Interest rate to be at commercial rate ndash current Division 7A benchmark interest rate too low
bull Allows for retention of loans over prolonged terms
bull Issue ndash ignores that Division 7A also applies to ldquopaymentsrdquo and ldquoforgiven debtsrdquo
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
3 Distribution Model
bull Allow retention of profits within the private group for permitted purposes
bull Any profits not so used and not distributed treated as deemed dividends (but frankable)
bull Retained profits would be taxed at company tax rate
bull Deemed dividends would be taxed at the personal tax rate of relevant shareholders
bull Permitted purposes - use of profits for working capital and other active business purposes of the private company or related entity
bull Use of the profits for passive investment purposes not permitted
bull Acquisition of active assets used in an active business allowed
Board of Taxation ndash Div 7A recommendations - Supplement
bull Set of common principles for loans payments debt forgiveness
bull Simpler system in which asset revaluations will not be required and unrealised profits not taken to be distributed because company assets have been used and company profits tested each year
bull Single 10-year loan with flexibility for repayment of principal
bull A lsquotick the boxrsquo option for trading trusts to retain working capital funds taxed at corporate tax rate - trading trusts that make election denied 50 CGT discount except in relation to goodwill
bull Alternative system that removes uncertainty on the treatment of UPEs by clarifying that all UPEs are loans for Division 7A purposes
bull Self correction mechanism which would enable taxpayers to put in place complying loan agreements reduce compliance and administrative costs
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull No requirement for formal written agreement if evidence of loan
bull Statutory interest rate set at the start of the loan and fixed over the term of the loan and would be RBA indicator lending rate for small business immediately before start of that income year
bull The maximum loan term would be 10 years
bull Prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows
bull ndash 75 per cent of the original loan by the end of year three
bull ndash 55 per cent of the original loan by the end of year five
bull ndash 25 per cent of the original loan by the end of year eight and
bull ndash 0 per cent of original loan (ie fully repaid) by end of year 10
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Transitioning all other pre-existing Division 7A loans to the new 10-year loans from the application date of the new provisions
bull All existing complying seven-year loans would have their terms extended to the new maximum of 10 years
bull All pre-1997 loans would be deemed to be new complying Division 7A loans with a 10-year term starting from the application date of the new provisions
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Introducing a legislative amendment that allows trusts to make a once-and-for-all election for loans from companies (including UPEs owing to companies) to be excluded from the operation of Division 7A
bull ensuring that a trust that makes such an election (an excluded trust) forgoes the CGT discount on capital gains arising from assets other than goodwill and rsquointangible assets inherently connected with the business carried on by the trusteersquo
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
TR 20103 ndash Section 3 Loans
bull UPE treated as Section 3 loan if inferred as a loan because of treatment of UPE funds by XYZ trust
bull Section 3 loan only Div 7A deemed dividend after 12 months ndash not immediate deemed dividend
bull Section 3 loan provide extra 12 months to repay or make armrsquoslength
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co shareholder]
($$UPE$$)
ABC CoShareholder
[Associate of XYZ Trust]
UPE exists in favour of ABC Co
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
Quarantine UPE
in Sub-trust
TR 20103 ndash Preservation of UPE status
bull Div 7A treatment can be avoided by preserving UPE status
bull UPE status preserved by transferring and quarantining UPE in Sub-trust
bull Preservation effective if UPE in Sub-trust held only for benefit of ABC Co
bull Return on UPE funds require minimum annual repayment distribution to ABC Co
bull Minimum annual repayment distribution can be based on section 109N benchmark interest rate and section 109NA minimum repayment formula
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co
shareholder]
ABC CoShareholder
[Associate of XYZ Trust] Sub-trust(UPE)
UPE exists in favour of ABC Co
Div 7A amp UPEs
bull TR 20103 states that where a private company has an unpaid present entitlement (UPE) from an associated trust but the trust uses the monies for its own purposes Div 7A can have application Can avoid by
bull fully paying the UPE to the corporate beneficiary before the lodgement day for the trustrsquos income tax return
bull putting a Div 7A loan agreement in place or
bull putting a sub trust in place ndash PS LA 20104
bull TD 201520 states a private company that releases all or part of its unpaid present entitlement is making a payment for Div 7A purposes to the extent that the release represents a financial benefit to an entity
Step Three - Has the loan been fully repaid by the lodgement day
bull A loan is only treated as a dividend if the loan is not fully repaid by the following time
bull loans in 2003-04 or earlier - end of the year loan was made and
bull Loans in 2004-05 year or later - the earlier of date on which company lodges income tax return and due date for such lodgement
bull Repayments must be made by way of actual cash repayment or dividend
bull Repayments made by way of journal entry ie by capitalising the repayment onto the loan balance are not accepted
bull Anti-avoidance provision in s109R - application to same or similar loans
bull Repayment by way of salary and wages or dividend not subject to s109R
Step Four - Is the loan specifically excluded under Subdivision D
The following loans are excluded from being dividends under Div 7A
bull A loan to another company (not acting in its capacity as trustee) - 109K
bull A loan included in the entitys assessable income or made exempt - 109L
bull A loan made in the ordinary course of business on same terms and conditions as loans made to other parties at arms length - 109M
bull An excluded loan that meets interest rate (53) term (725 years) and repayment criteria -109N (issues ndash written agreements converting loans not making minimum repayments Commissionerrsquos discretion)
bull A loan made in the winding up of a company by liquidator - 109NA 109D(1A)
bull A loan to acquire shares under qualifying ESS - 109NB
Step Five - What is the deemed dividend amount
bull Deemed dividend cannot exceed distributable surplus of the company at year end (s 109Y(1))
bull From 1 July 2009 distributable surplus formula is
Net assets + Division 7A amounts minus Non-commercial loans minus Paid-up share value minus Repayments of non-commercial loans
bull Net assets - amount by which companys assets exceed sum ofbull the present legal obligations of the company andbull provisions for depreciation annual leave long service leave and amortisation of
intellectual property and trademarks
bull Div 7A amounts ndash CY payments forgiven debts ndash previously excluded
bull Accounting basis ndash cannot overunder value - Commissioner can re-state
bull Fresta v FCT 2002 ATC 2061 - provision for income tax is a ldquopresent legal obligationrdquo as company is liable for income tax at year end notwithstanding that it is not due and payable until assessed
Case Study - Div 7A
bull On 1 January 2016 A Pty Ltd loaned $15000 to John a shareholder of A Pty Ltd No qualifying written agreement was in place or repayments made before the lodgment day of A Pty Ltds 2016 income tax return
bull Assume no other payments or loans to shareholders or their associates for the income year ended 30 June 2016 Assume no Div 7A amounts and that in prior years there were no loans treated as dividends under Division 7A
Case Study - Div 7A
Case Study - Div 7A
bull On 30 June 2016 A Pty Ltd is taken to pay a dividend to John
Distributable surplus formula
Net assets $20000
Less non-commercial loans (that is loans treated as
dividends in prior years)
$0
Less paid-up share capital $12000
Less repayments of non-commercial loans $0
Distributable surplus $8000
Case Study - Div 7A
bull Although $15000 was loaned to John the amount treated as a dividend will be reduced to A Pty Ltds distributable surplus of $8000 John includes $8000 in his 2016 tax return as an unfranked dividend
bull The remaining $7000 is not treated as a dividend in the income year ended 30 June 2016 and will not be treated as a dividend in a future year even if the company has a distributable surplus in that future year
Step Six - What is the impact on the companys franking account
bull From 1 July 2006 no franking debit arises in a companyrsquos franking account as a result of the operation of Division 7A
Step Seven - Does the loan give rise to an FBT liability
bull Loans that are Division 7A deemed dividends specifically excluded
bull Effective 1 April 2007 a loan that complies with the requirements of Division 7A excluded loan is not a fringe benefit
Commissionerrsquos Discretion under Division 7A
bull One-off opportunity to correct past mistakes - (Practice Statement PS LA 200720) until 30 June 2008
bull However after 300608 Commissioner can still apply discretion in cases of an honest mistake or inadvertent omissions (s 109RB)
bull Formal request for discretion required after 30 June 2008
ATO Backflip - ATO ID 201315 UPE and bad debt deduction
bull This ATO ID considers whether a beneficiary of a trust is entitled to a bad debt deduction for UPE amounts that have been written off as bad debts
bull For bad debt deduction under section 25-35 debt must be actually written off and amount must have been included in assessable income previously
bull ATO view ndash UPE is equity entitlement not a ldquodebtrdquo so cannot be bad debt
bull Even if structured as an equity debt amount not the same as included in taxpayerrsquos assessable income previously
bull No bad debt deduction available to taxpayer
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Address the individual issues and problems in Division 7A by way of specific legislative amendment
2 Statutory Interest Model
Impose requirement that loans to related entities carry a statutory rate of interest but no requirement that principal be repaid prior to termination of the loan
3 Distribution Model
Allow the retention of profits within the private group for permitted purposes and to treat any profits not so used and not distributed as deemed dividends (which would be able to be franked)
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Potential issues to be specifically fixed ndash
UPE classification
distributable surplus quantification
interposed entity identification and treatment
loan and payment definitions
categorisation of exclusions
repayment compliance requirements etc
scope and effect of Commissioners discretionary powers
bull Advantage - could deal with specifically known issues
bull However has potential to be mere piecemeal solution and may fail to significantly simplify the law or its understanding
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
2 Statutory Interest Model
bull Related party loans at legislatively prescribed interest rate
bull Progressive (actual) loan repayments may not be necessary and re-borrowings (of principal) would be permitted
bull Uncomplicated model - interest on the loans assessable to payee (whether paid or not) but not deductible to payer
bull Interest only- principal not be repaid prior to termination of loan
bull Interest rate to be at commercial rate ndash current Division 7A benchmark interest rate too low
bull Allows for retention of loans over prolonged terms
bull Issue ndash ignores that Division 7A also applies to ldquopaymentsrdquo and ldquoforgiven debtsrdquo
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
3 Distribution Model
bull Allow retention of profits within the private group for permitted purposes
bull Any profits not so used and not distributed treated as deemed dividends (but frankable)
bull Retained profits would be taxed at company tax rate
bull Deemed dividends would be taxed at the personal tax rate of relevant shareholders
bull Permitted purposes - use of profits for working capital and other active business purposes of the private company or related entity
bull Use of the profits for passive investment purposes not permitted
bull Acquisition of active assets used in an active business allowed
Board of Taxation ndash Div 7A recommendations - Supplement
bull Set of common principles for loans payments debt forgiveness
bull Simpler system in which asset revaluations will not be required and unrealised profits not taken to be distributed because company assets have been used and company profits tested each year
bull Single 10-year loan with flexibility for repayment of principal
bull A lsquotick the boxrsquo option for trading trusts to retain working capital funds taxed at corporate tax rate - trading trusts that make election denied 50 CGT discount except in relation to goodwill
bull Alternative system that removes uncertainty on the treatment of UPEs by clarifying that all UPEs are loans for Division 7A purposes
bull Self correction mechanism which would enable taxpayers to put in place complying loan agreements reduce compliance and administrative costs
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull No requirement for formal written agreement if evidence of loan
bull Statutory interest rate set at the start of the loan and fixed over the term of the loan and would be RBA indicator lending rate for small business immediately before start of that income year
bull The maximum loan term would be 10 years
bull Prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows
bull ndash 75 per cent of the original loan by the end of year three
bull ndash 55 per cent of the original loan by the end of year five
bull ndash 25 per cent of the original loan by the end of year eight and
bull ndash 0 per cent of original loan (ie fully repaid) by end of year 10
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Transitioning all other pre-existing Division 7A loans to the new 10-year loans from the application date of the new provisions
bull All existing complying seven-year loans would have their terms extended to the new maximum of 10 years
bull All pre-1997 loans would be deemed to be new complying Division 7A loans with a 10-year term starting from the application date of the new provisions
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Introducing a legislative amendment that allows trusts to make a once-and-for-all election for loans from companies (including UPEs owing to companies) to be excluded from the operation of Division 7A
bull ensuring that a trust that makes such an election (an excluded trust) forgoes the CGT discount on capital gains arising from assets other than goodwill and rsquointangible assets inherently connected with the business carried on by the trusteersquo
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Step Two ndashIs the entity to which the loan has been made a shareholder or associate of a shareholder (continued)
Taxation Ruling TR 20103 amp PSLA 20104 ndash UPE Treatment
Quarantine UPE
in Sub-trust
TR 20103 ndash Preservation of UPE status
bull Div 7A treatment can be avoided by preserving UPE status
bull UPE status preserved by transferring and quarantining UPE in Sub-trust
bull Preservation effective if UPE in Sub-trust held only for benefit of ABC Co
bull Return on UPE funds require minimum annual repayment distribution to ABC Co
bull Minimum annual repayment distribution can be based on section 109N benchmark interest rate and section 109NA minimum repayment formula
ABC Co[Beneficiary of XYZ Trust]
XYZ Trust[Associate of ABC Co
shareholder]
ABC CoShareholder
[Associate of XYZ Trust] Sub-trust(UPE)
UPE exists in favour of ABC Co
Div 7A amp UPEs
bull TR 20103 states that where a private company has an unpaid present entitlement (UPE) from an associated trust but the trust uses the monies for its own purposes Div 7A can have application Can avoid by
bull fully paying the UPE to the corporate beneficiary before the lodgement day for the trustrsquos income tax return
bull putting a Div 7A loan agreement in place or
bull putting a sub trust in place ndash PS LA 20104
bull TD 201520 states a private company that releases all or part of its unpaid present entitlement is making a payment for Div 7A purposes to the extent that the release represents a financial benefit to an entity
Step Three - Has the loan been fully repaid by the lodgement day
bull A loan is only treated as a dividend if the loan is not fully repaid by the following time
bull loans in 2003-04 or earlier - end of the year loan was made and
bull Loans in 2004-05 year or later - the earlier of date on which company lodges income tax return and due date for such lodgement
bull Repayments must be made by way of actual cash repayment or dividend
bull Repayments made by way of journal entry ie by capitalising the repayment onto the loan balance are not accepted
bull Anti-avoidance provision in s109R - application to same or similar loans
bull Repayment by way of salary and wages or dividend not subject to s109R
Step Four - Is the loan specifically excluded under Subdivision D
The following loans are excluded from being dividends under Div 7A
bull A loan to another company (not acting in its capacity as trustee) - 109K
bull A loan included in the entitys assessable income or made exempt - 109L
bull A loan made in the ordinary course of business on same terms and conditions as loans made to other parties at arms length - 109M
bull An excluded loan that meets interest rate (53) term (725 years) and repayment criteria -109N (issues ndash written agreements converting loans not making minimum repayments Commissionerrsquos discretion)
bull A loan made in the winding up of a company by liquidator - 109NA 109D(1A)
bull A loan to acquire shares under qualifying ESS - 109NB
Step Five - What is the deemed dividend amount
bull Deemed dividend cannot exceed distributable surplus of the company at year end (s 109Y(1))
bull From 1 July 2009 distributable surplus formula is
Net assets + Division 7A amounts minus Non-commercial loans minus Paid-up share value minus Repayments of non-commercial loans
bull Net assets - amount by which companys assets exceed sum ofbull the present legal obligations of the company andbull provisions for depreciation annual leave long service leave and amortisation of
intellectual property and trademarks
bull Div 7A amounts ndash CY payments forgiven debts ndash previously excluded
bull Accounting basis ndash cannot overunder value - Commissioner can re-state
bull Fresta v FCT 2002 ATC 2061 - provision for income tax is a ldquopresent legal obligationrdquo as company is liable for income tax at year end notwithstanding that it is not due and payable until assessed
Case Study - Div 7A
bull On 1 January 2016 A Pty Ltd loaned $15000 to John a shareholder of A Pty Ltd No qualifying written agreement was in place or repayments made before the lodgment day of A Pty Ltds 2016 income tax return
bull Assume no other payments or loans to shareholders or their associates for the income year ended 30 June 2016 Assume no Div 7A amounts and that in prior years there were no loans treated as dividends under Division 7A
Case Study - Div 7A
Case Study - Div 7A
bull On 30 June 2016 A Pty Ltd is taken to pay a dividend to John
Distributable surplus formula
Net assets $20000
Less non-commercial loans (that is loans treated as
dividends in prior years)
$0
Less paid-up share capital $12000
Less repayments of non-commercial loans $0
Distributable surplus $8000
Case Study - Div 7A
bull Although $15000 was loaned to John the amount treated as a dividend will be reduced to A Pty Ltds distributable surplus of $8000 John includes $8000 in his 2016 tax return as an unfranked dividend
bull The remaining $7000 is not treated as a dividend in the income year ended 30 June 2016 and will not be treated as a dividend in a future year even if the company has a distributable surplus in that future year
Step Six - What is the impact on the companys franking account
bull From 1 July 2006 no franking debit arises in a companyrsquos franking account as a result of the operation of Division 7A
Step Seven - Does the loan give rise to an FBT liability
bull Loans that are Division 7A deemed dividends specifically excluded
bull Effective 1 April 2007 a loan that complies with the requirements of Division 7A excluded loan is not a fringe benefit
Commissionerrsquos Discretion under Division 7A
bull One-off opportunity to correct past mistakes - (Practice Statement PS LA 200720) until 30 June 2008
bull However after 300608 Commissioner can still apply discretion in cases of an honest mistake or inadvertent omissions (s 109RB)
bull Formal request for discretion required after 30 June 2008
ATO Backflip - ATO ID 201315 UPE and bad debt deduction
bull This ATO ID considers whether a beneficiary of a trust is entitled to a bad debt deduction for UPE amounts that have been written off as bad debts
bull For bad debt deduction under section 25-35 debt must be actually written off and amount must have been included in assessable income previously
bull ATO view ndash UPE is equity entitlement not a ldquodebtrdquo so cannot be bad debt
bull Even if structured as an equity debt amount not the same as included in taxpayerrsquos assessable income previously
bull No bad debt deduction available to taxpayer
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Address the individual issues and problems in Division 7A by way of specific legislative amendment
2 Statutory Interest Model
Impose requirement that loans to related entities carry a statutory rate of interest but no requirement that principal be repaid prior to termination of the loan
3 Distribution Model
Allow the retention of profits within the private group for permitted purposes and to treat any profits not so used and not distributed as deemed dividends (which would be able to be franked)
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Potential issues to be specifically fixed ndash
UPE classification
distributable surplus quantification
interposed entity identification and treatment
loan and payment definitions
categorisation of exclusions
repayment compliance requirements etc
scope and effect of Commissioners discretionary powers
bull Advantage - could deal with specifically known issues
bull However has potential to be mere piecemeal solution and may fail to significantly simplify the law or its understanding
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
2 Statutory Interest Model
bull Related party loans at legislatively prescribed interest rate
bull Progressive (actual) loan repayments may not be necessary and re-borrowings (of principal) would be permitted
bull Uncomplicated model - interest on the loans assessable to payee (whether paid or not) but not deductible to payer
bull Interest only- principal not be repaid prior to termination of loan
bull Interest rate to be at commercial rate ndash current Division 7A benchmark interest rate too low
bull Allows for retention of loans over prolonged terms
bull Issue ndash ignores that Division 7A also applies to ldquopaymentsrdquo and ldquoforgiven debtsrdquo
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
3 Distribution Model
bull Allow retention of profits within the private group for permitted purposes
bull Any profits not so used and not distributed treated as deemed dividends (but frankable)
bull Retained profits would be taxed at company tax rate
bull Deemed dividends would be taxed at the personal tax rate of relevant shareholders
bull Permitted purposes - use of profits for working capital and other active business purposes of the private company or related entity
bull Use of the profits for passive investment purposes not permitted
bull Acquisition of active assets used in an active business allowed
Board of Taxation ndash Div 7A recommendations - Supplement
bull Set of common principles for loans payments debt forgiveness
bull Simpler system in which asset revaluations will not be required and unrealised profits not taken to be distributed because company assets have been used and company profits tested each year
bull Single 10-year loan with flexibility for repayment of principal
bull A lsquotick the boxrsquo option for trading trusts to retain working capital funds taxed at corporate tax rate - trading trusts that make election denied 50 CGT discount except in relation to goodwill
bull Alternative system that removes uncertainty on the treatment of UPEs by clarifying that all UPEs are loans for Division 7A purposes
bull Self correction mechanism which would enable taxpayers to put in place complying loan agreements reduce compliance and administrative costs
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull No requirement for formal written agreement if evidence of loan
bull Statutory interest rate set at the start of the loan and fixed over the term of the loan and would be RBA indicator lending rate for small business immediately before start of that income year
bull The maximum loan term would be 10 years
bull Prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows
bull ndash 75 per cent of the original loan by the end of year three
bull ndash 55 per cent of the original loan by the end of year five
bull ndash 25 per cent of the original loan by the end of year eight and
bull ndash 0 per cent of original loan (ie fully repaid) by end of year 10
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Transitioning all other pre-existing Division 7A loans to the new 10-year loans from the application date of the new provisions
bull All existing complying seven-year loans would have their terms extended to the new maximum of 10 years
bull All pre-1997 loans would be deemed to be new complying Division 7A loans with a 10-year term starting from the application date of the new provisions
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Introducing a legislative amendment that allows trusts to make a once-and-for-all election for loans from companies (including UPEs owing to companies) to be excluded from the operation of Division 7A
bull ensuring that a trust that makes such an election (an excluded trust) forgoes the CGT discount on capital gains arising from assets other than goodwill and rsquointangible assets inherently connected with the business carried on by the trusteersquo
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Div 7A amp UPEs
bull TR 20103 states that where a private company has an unpaid present entitlement (UPE) from an associated trust but the trust uses the monies for its own purposes Div 7A can have application Can avoid by
bull fully paying the UPE to the corporate beneficiary before the lodgement day for the trustrsquos income tax return
bull putting a Div 7A loan agreement in place or
bull putting a sub trust in place ndash PS LA 20104
bull TD 201520 states a private company that releases all or part of its unpaid present entitlement is making a payment for Div 7A purposes to the extent that the release represents a financial benefit to an entity
Step Three - Has the loan been fully repaid by the lodgement day
bull A loan is only treated as a dividend if the loan is not fully repaid by the following time
bull loans in 2003-04 or earlier - end of the year loan was made and
bull Loans in 2004-05 year or later - the earlier of date on which company lodges income tax return and due date for such lodgement
bull Repayments must be made by way of actual cash repayment or dividend
bull Repayments made by way of journal entry ie by capitalising the repayment onto the loan balance are not accepted
bull Anti-avoidance provision in s109R - application to same or similar loans
bull Repayment by way of salary and wages or dividend not subject to s109R
Step Four - Is the loan specifically excluded under Subdivision D
The following loans are excluded from being dividends under Div 7A
bull A loan to another company (not acting in its capacity as trustee) - 109K
bull A loan included in the entitys assessable income or made exempt - 109L
bull A loan made in the ordinary course of business on same terms and conditions as loans made to other parties at arms length - 109M
bull An excluded loan that meets interest rate (53) term (725 years) and repayment criteria -109N (issues ndash written agreements converting loans not making minimum repayments Commissionerrsquos discretion)
bull A loan made in the winding up of a company by liquidator - 109NA 109D(1A)
bull A loan to acquire shares under qualifying ESS - 109NB
Step Five - What is the deemed dividend amount
bull Deemed dividend cannot exceed distributable surplus of the company at year end (s 109Y(1))
bull From 1 July 2009 distributable surplus formula is
Net assets + Division 7A amounts minus Non-commercial loans minus Paid-up share value minus Repayments of non-commercial loans
bull Net assets - amount by which companys assets exceed sum ofbull the present legal obligations of the company andbull provisions for depreciation annual leave long service leave and amortisation of
intellectual property and trademarks
bull Div 7A amounts ndash CY payments forgiven debts ndash previously excluded
bull Accounting basis ndash cannot overunder value - Commissioner can re-state
bull Fresta v FCT 2002 ATC 2061 - provision for income tax is a ldquopresent legal obligationrdquo as company is liable for income tax at year end notwithstanding that it is not due and payable until assessed
Case Study - Div 7A
bull On 1 January 2016 A Pty Ltd loaned $15000 to John a shareholder of A Pty Ltd No qualifying written agreement was in place or repayments made before the lodgment day of A Pty Ltds 2016 income tax return
bull Assume no other payments or loans to shareholders or their associates for the income year ended 30 June 2016 Assume no Div 7A amounts and that in prior years there were no loans treated as dividends under Division 7A
Case Study - Div 7A
Case Study - Div 7A
bull On 30 June 2016 A Pty Ltd is taken to pay a dividend to John
Distributable surplus formula
Net assets $20000
Less non-commercial loans (that is loans treated as
dividends in prior years)
$0
Less paid-up share capital $12000
Less repayments of non-commercial loans $0
Distributable surplus $8000
Case Study - Div 7A
bull Although $15000 was loaned to John the amount treated as a dividend will be reduced to A Pty Ltds distributable surplus of $8000 John includes $8000 in his 2016 tax return as an unfranked dividend
bull The remaining $7000 is not treated as a dividend in the income year ended 30 June 2016 and will not be treated as a dividend in a future year even if the company has a distributable surplus in that future year
Step Six - What is the impact on the companys franking account
bull From 1 July 2006 no franking debit arises in a companyrsquos franking account as a result of the operation of Division 7A
Step Seven - Does the loan give rise to an FBT liability
bull Loans that are Division 7A deemed dividends specifically excluded
bull Effective 1 April 2007 a loan that complies with the requirements of Division 7A excluded loan is not a fringe benefit
Commissionerrsquos Discretion under Division 7A
bull One-off opportunity to correct past mistakes - (Practice Statement PS LA 200720) until 30 June 2008
bull However after 300608 Commissioner can still apply discretion in cases of an honest mistake or inadvertent omissions (s 109RB)
bull Formal request for discretion required after 30 June 2008
ATO Backflip - ATO ID 201315 UPE and bad debt deduction
bull This ATO ID considers whether a beneficiary of a trust is entitled to a bad debt deduction for UPE amounts that have been written off as bad debts
bull For bad debt deduction under section 25-35 debt must be actually written off and amount must have been included in assessable income previously
bull ATO view ndash UPE is equity entitlement not a ldquodebtrdquo so cannot be bad debt
bull Even if structured as an equity debt amount not the same as included in taxpayerrsquos assessable income previously
bull No bad debt deduction available to taxpayer
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Address the individual issues and problems in Division 7A by way of specific legislative amendment
2 Statutory Interest Model
Impose requirement that loans to related entities carry a statutory rate of interest but no requirement that principal be repaid prior to termination of the loan
3 Distribution Model
Allow the retention of profits within the private group for permitted purposes and to treat any profits not so used and not distributed as deemed dividends (which would be able to be franked)
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Potential issues to be specifically fixed ndash
UPE classification
distributable surplus quantification
interposed entity identification and treatment
loan and payment definitions
categorisation of exclusions
repayment compliance requirements etc
scope and effect of Commissioners discretionary powers
bull Advantage - could deal with specifically known issues
bull However has potential to be mere piecemeal solution and may fail to significantly simplify the law or its understanding
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
2 Statutory Interest Model
bull Related party loans at legislatively prescribed interest rate
bull Progressive (actual) loan repayments may not be necessary and re-borrowings (of principal) would be permitted
bull Uncomplicated model - interest on the loans assessable to payee (whether paid or not) but not deductible to payer
bull Interest only- principal not be repaid prior to termination of loan
bull Interest rate to be at commercial rate ndash current Division 7A benchmark interest rate too low
bull Allows for retention of loans over prolonged terms
bull Issue ndash ignores that Division 7A also applies to ldquopaymentsrdquo and ldquoforgiven debtsrdquo
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
3 Distribution Model
bull Allow retention of profits within the private group for permitted purposes
bull Any profits not so used and not distributed treated as deemed dividends (but frankable)
bull Retained profits would be taxed at company tax rate
bull Deemed dividends would be taxed at the personal tax rate of relevant shareholders
bull Permitted purposes - use of profits for working capital and other active business purposes of the private company or related entity
bull Use of the profits for passive investment purposes not permitted
bull Acquisition of active assets used in an active business allowed
Board of Taxation ndash Div 7A recommendations - Supplement
bull Set of common principles for loans payments debt forgiveness
bull Simpler system in which asset revaluations will not be required and unrealised profits not taken to be distributed because company assets have been used and company profits tested each year
bull Single 10-year loan with flexibility for repayment of principal
bull A lsquotick the boxrsquo option for trading trusts to retain working capital funds taxed at corporate tax rate - trading trusts that make election denied 50 CGT discount except in relation to goodwill
bull Alternative system that removes uncertainty on the treatment of UPEs by clarifying that all UPEs are loans for Division 7A purposes
bull Self correction mechanism which would enable taxpayers to put in place complying loan agreements reduce compliance and administrative costs
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull No requirement for formal written agreement if evidence of loan
bull Statutory interest rate set at the start of the loan and fixed over the term of the loan and would be RBA indicator lending rate for small business immediately before start of that income year
bull The maximum loan term would be 10 years
bull Prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows
bull ndash 75 per cent of the original loan by the end of year three
bull ndash 55 per cent of the original loan by the end of year five
bull ndash 25 per cent of the original loan by the end of year eight and
bull ndash 0 per cent of original loan (ie fully repaid) by end of year 10
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Transitioning all other pre-existing Division 7A loans to the new 10-year loans from the application date of the new provisions
bull All existing complying seven-year loans would have their terms extended to the new maximum of 10 years
bull All pre-1997 loans would be deemed to be new complying Division 7A loans with a 10-year term starting from the application date of the new provisions
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Introducing a legislative amendment that allows trusts to make a once-and-for-all election for loans from companies (including UPEs owing to companies) to be excluded from the operation of Division 7A
bull ensuring that a trust that makes such an election (an excluded trust) forgoes the CGT discount on capital gains arising from assets other than goodwill and rsquointangible assets inherently connected with the business carried on by the trusteersquo
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Step Three - Has the loan been fully repaid by the lodgement day
bull A loan is only treated as a dividend if the loan is not fully repaid by the following time
bull loans in 2003-04 or earlier - end of the year loan was made and
bull Loans in 2004-05 year or later - the earlier of date on which company lodges income tax return and due date for such lodgement
bull Repayments must be made by way of actual cash repayment or dividend
bull Repayments made by way of journal entry ie by capitalising the repayment onto the loan balance are not accepted
bull Anti-avoidance provision in s109R - application to same or similar loans
bull Repayment by way of salary and wages or dividend not subject to s109R
Step Four - Is the loan specifically excluded under Subdivision D
The following loans are excluded from being dividends under Div 7A
bull A loan to another company (not acting in its capacity as trustee) - 109K
bull A loan included in the entitys assessable income or made exempt - 109L
bull A loan made in the ordinary course of business on same terms and conditions as loans made to other parties at arms length - 109M
bull An excluded loan that meets interest rate (53) term (725 years) and repayment criteria -109N (issues ndash written agreements converting loans not making minimum repayments Commissionerrsquos discretion)
bull A loan made in the winding up of a company by liquidator - 109NA 109D(1A)
bull A loan to acquire shares under qualifying ESS - 109NB
Step Five - What is the deemed dividend amount
bull Deemed dividend cannot exceed distributable surplus of the company at year end (s 109Y(1))
bull From 1 July 2009 distributable surplus formula is
Net assets + Division 7A amounts minus Non-commercial loans minus Paid-up share value minus Repayments of non-commercial loans
bull Net assets - amount by which companys assets exceed sum ofbull the present legal obligations of the company andbull provisions for depreciation annual leave long service leave and amortisation of
intellectual property and trademarks
bull Div 7A amounts ndash CY payments forgiven debts ndash previously excluded
bull Accounting basis ndash cannot overunder value - Commissioner can re-state
bull Fresta v FCT 2002 ATC 2061 - provision for income tax is a ldquopresent legal obligationrdquo as company is liable for income tax at year end notwithstanding that it is not due and payable until assessed
Case Study - Div 7A
bull On 1 January 2016 A Pty Ltd loaned $15000 to John a shareholder of A Pty Ltd No qualifying written agreement was in place or repayments made before the lodgment day of A Pty Ltds 2016 income tax return
bull Assume no other payments or loans to shareholders or their associates for the income year ended 30 June 2016 Assume no Div 7A amounts and that in prior years there were no loans treated as dividends under Division 7A
Case Study - Div 7A
Case Study - Div 7A
bull On 30 June 2016 A Pty Ltd is taken to pay a dividend to John
Distributable surplus formula
Net assets $20000
Less non-commercial loans (that is loans treated as
dividends in prior years)
$0
Less paid-up share capital $12000
Less repayments of non-commercial loans $0
Distributable surplus $8000
Case Study - Div 7A
bull Although $15000 was loaned to John the amount treated as a dividend will be reduced to A Pty Ltds distributable surplus of $8000 John includes $8000 in his 2016 tax return as an unfranked dividend
bull The remaining $7000 is not treated as a dividend in the income year ended 30 June 2016 and will not be treated as a dividend in a future year even if the company has a distributable surplus in that future year
Step Six - What is the impact on the companys franking account
bull From 1 July 2006 no franking debit arises in a companyrsquos franking account as a result of the operation of Division 7A
Step Seven - Does the loan give rise to an FBT liability
bull Loans that are Division 7A deemed dividends specifically excluded
bull Effective 1 April 2007 a loan that complies with the requirements of Division 7A excluded loan is not a fringe benefit
Commissionerrsquos Discretion under Division 7A
bull One-off opportunity to correct past mistakes - (Practice Statement PS LA 200720) until 30 June 2008
bull However after 300608 Commissioner can still apply discretion in cases of an honest mistake or inadvertent omissions (s 109RB)
bull Formal request for discretion required after 30 June 2008
ATO Backflip - ATO ID 201315 UPE and bad debt deduction
bull This ATO ID considers whether a beneficiary of a trust is entitled to a bad debt deduction for UPE amounts that have been written off as bad debts
bull For bad debt deduction under section 25-35 debt must be actually written off and amount must have been included in assessable income previously
bull ATO view ndash UPE is equity entitlement not a ldquodebtrdquo so cannot be bad debt
bull Even if structured as an equity debt amount not the same as included in taxpayerrsquos assessable income previously
bull No bad debt deduction available to taxpayer
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Address the individual issues and problems in Division 7A by way of specific legislative amendment
2 Statutory Interest Model
Impose requirement that loans to related entities carry a statutory rate of interest but no requirement that principal be repaid prior to termination of the loan
3 Distribution Model
Allow the retention of profits within the private group for permitted purposes and to treat any profits not so used and not distributed as deemed dividends (which would be able to be franked)
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Potential issues to be specifically fixed ndash
UPE classification
distributable surplus quantification
interposed entity identification and treatment
loan and payment definitions
categorisation of exclusions
repayment compliance requirements etc
scope and effect of Commissioners discretionary powers
bull Advantage - could deal with specifically known issues
bull However has potential to be mere piecemeal solution and may fail to significantly simplify the law or its understanding
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
2 Statutory Interest Model
bull Related party loans at legislatively prescribed interest rate
bull Progressive (actual) loan repayments may not be necessary and re-borrowings (of principal) would be permitted
bull Uncomplicated model - interest on the loans assessable to payee (whether paid or not) but not deductible to payer
bull Interest only- principal not be repaid prior to termination of loan
bull Interest rate to be at commercial rate ndash current Division 7A benchmark interest rate too low
bull Allows for retention of loans over prolonged terms
bull Issue ndash ignores that Division 7A also applies to ldquopaymentsrdquo and ldquoforgiven debtsrdquo
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
3 Distribution Model
bull Allow retention of profits within the private group for permitted purposes
bull Any profits not so used and not distributed treated as deemed dividends (but frankable)
bull Retained profits would be taxed at company tax rate
bull Deemed dividends would be taxed at the personal tax rate of relevant shareholders
bull Permitted purposes - use of profits for working capital and other active business purposes of the private company or related entity
bull Use of the profits for passive investment purposes not permitted
bull Acquisition of active assets used in an active business allowed
Board of Taxation ndash Div 7A recommendations - Supplement
bull Set of common principles for loans payments debt forgiveness
bull Simpler system in which asset revaluations will not be required and unrealised profits not taken to be distributed because company assets have been used and company profits tested each year
bull Single 10-year loan with flexibility for repayment of principal
bull A lsquotick the boxrsquo option for trading trusts to retain working capital funds taxed at corporate tax rate - trading trusts that make election denied 50 CGT discount except in relation to goodwill
bull Alternative system that removes uncertainty on the treatment of UPEs by clarifying that all UPEs are loans for Division 7A purposes
bull Self correction mechanism which would enable taxpayers to put in place complying loan agreements reduce compliance and administrative costs
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull No requirement for formal written agreement if evidence of loan
bull Statutory interest rate set at the start of the loan and fixed over the term of the loan and would be RBA indicator lending rate for small business immediately before start of that income year
bull The maximum loan term would be 10 years
bull Prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows
bull ndash 75 per cent of the original loan by the end of year three
bull ndash 55 per cent of the original loan by the end of year five
bull ndash 25 per cent of the original loan by the end of year eight and
bull ndash 0 per cent of original loan (ie fully repaid) by end of year 10
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Transitioning all other pre-existing Division 7A loans to the new 10-year loans from the application date of the new provisions
bull All existing complying seven-year loans would have their terms extended to the new maximum of 10 years
bull All pre-1997 loans would be deemed to be new complying Division 7A loans with a 10-year term starting from the application date of the new provisions
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Introducing a legislative amendment that allows trusts to make a once-and-for-all election for loans from companies (including UPEs owing to companies) to be excluded from the operation of Division 7A
bull ensuring that a trust that makes such an election (an excluded trust) forgoes the CGT discount on capital gains arising from assets other than goodwill and rsquointangible assets inherently connected with the business carried on by the trusteersquo
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Step Four - Is the loan specifically excluded under Subdivision D
The following loans are excluded from being dividends under Div 7A
bull A loan to another company (not acting in its capacity as trustee) - 109K
bull A loan included in the entitys assessable income or made exempt - 109L
bull A loan made in the ordinary course of business on same terms and conditions as loans made to other parties at arms length - 109M
bull An excluded loan that meets interest rate (53) term (725 years) and repayment criteria -109N (issues ndash written agreements converting loans not making minimum repayments Commissionerrsquos discretion)
bull A loan made in the winding up of a company by liquidator - 109NA 109D(1A)
bull A loan to acquire shares under qualifying ESS - 109NB
Step Five - What is the deemed dividend amount
bull Deemed dividend cannot exceed distributable surplus of the company at year end (s 109Y(1))
bull From 1 July 2009 distributable surplus formula is
Net assets + Division 7A amounts minus Non-commercial loans minus Paid-up share value minus Repayments of non-commercial loans
bull Net assets - amount by which companys assets exceed sum ofbull the present legal obligations of the company andbull provisions for depreciation annual leave long service leave and amortisation of
intellectual property and trademarks
bull Div 7A amounts ndash CY payments forgiven debts ndash previously excluded
bull Accounting basis ndash cannot overunder value - Commissioner can re-state
bull Fresta v FCT 2002 ATC 2061 - provision for income tax is a ldquopresent legal obligationrdquo as company is liable for income tax at year end notwithstanding that it is not due and payable until assessed
Case Study - Div 7A
bull On 1 January 2016 A Pty Ltd loaned $15000 to John a shareholder of A Pty Ltd No qualifying written agreement was in place or repayments made before the lodgment day of A Pty Ltds 2016 income tax return
bull Assume no other payments or loans to shareholders or their associates for the income year ended 30 June 2016 Assume no Div 7A amounts and that in prior years there were no loans treated as dividends under Division 7A
Case Study - Div 7A
Case Study - Div 7A
bull On 30 June 2016 A Pty Ltd is taken to pay a dividend to John
Distributable surplus formula
Net assets $20000
Less non-commercial loans (that is loans treated as
dividends in prior years)
$0
Less paid-up share capital $12000
Less repayments of non-commercial loans $0
Distributable surplus $8000
Case Study - Div 7A
bull Although $15000 was loaned to John the amount treated as a dividend will be reduced to A Pty Ltds distributable surplus of $8000 John includes $8000 in his 2016 tax return as an unfranked dividend
bull The remaining $7000 is not treated as a dividend in the income year ended 30 June 2016 and will not be treated as a dividend in a future year even if the company has a distributable surplus in that future year
Step Six - What is the impact on the companys franking account
bull From 1 July 2006 no franking debit arises in a companyrsquos franking account as a result of the operation of Division 7A
Step Seven - Does the loan give rise to an FBT liability
bull Loans that are Division 7A deemed dividends specifically excluded
bull Effective 1 April 2007 a loan that complies with the requirements of Division 7A excluded loan is not a fringe benefit
Commissionerrsquos Discretion under Division 7A
bull One-off opportunity to correct past mistakes - (Practice Statement PS LA 200720) until 30 June 2008
bull However after 300608 Commissioner can still apply discretion in cases of an honest mistake or inadvertent omissions (s 109RB)
bull Formal request for discretion required after 30 June 2008
ATO Backflip - ATO ID 201315 UPE and bad debt deduction
bull This ATO ID considers whether a beneficiary of a trust is entitled to a bad debt deduction for UPE amounts that have been written off as bad debts
bull For bad debt deduction under section 25-35 debt must be actually written off and amount must have been included in assessable income previously
bull ATO view ndash UPE is equity entitlement not a ldquodebtrdquo so cannot be bad debt
bull Even if structured as an equity debt amount not the same as included in taxpayerrsquos assessable income previously
bull No bad debt deduction available to taxpayer
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Address the individual issues and problems in Division 7A by way of specific legislative amendment
2 Statutory Interest Model
Impose requirement that loans to related entities carry a statutory rate of interest but no requirement that principal be repaid prior to termination of the loan
3 Distribution Model
Allow the retention of profits within the private group for permitted purposes and to treat any profits not so used and not distributed as deemed dividends (which would be able to be franked)
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Potential issues to be specifically fixed ndash
UPE classification
distributable surplus quantification
interposed entity identification and treatment
loan and payment definitions
categorisation of exclusions
repayment compliance requirements etc
scope and effect of Commissioners discretionary powers
bull Advantage - could deal with specifically known issues
bull However has potential to be mere piecemeal solution and may fail to significantly simplify the law or its understanding
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
2 Statutory Interest Model
bull Related party loans at legislatively prescribed interest rate
bull Progressive (actual) loan repayments may not be necessary and re-borrowings (of principal) would be permitted
bull Uncomplicated model - interest on the loans assessable to payee (whether paid or not) but not deductible to payer
bull Interest only- principal not be repaid prior to termination of loan
bull Interest rate to be at commercial rate ndash current Division 7A benchmark interest rate too low
bull Allows for retention of loans over prolonged terms
bull Issue ndash ignores that Division 7A also applies to ldquopaymentsrdquo and ldquoforgiven debtsrdquo
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
3 Distribution Model
bull Allow retention of profits within the private group for permitted purposes
bull Any profits not so used and not distributed treated as deemed dividends (but frankable)
bull Retained profits would be taxed at company tax rate
bull Deemed dividends would be taxed at the personal tax rate of relevant shareholders
bull Permitted purposes - use of profits for working capital and other active business purposes of the private company or related entity
bull Use of the profits for passive investment purposes not permitted
bull Acquisition of active assets used in an active business allowed
Board of Taxation ndash Div 7A recommendations - Supplement
bull Set of common principles for loans payments debt forgiveness
bull Simpler system in which asset revaluations will not be required and unrealised profits not taken to be distributed because company assets have been used and company profits tested each year
bull Single 10-year loan with flexibility for repayment of principal
bull A lsquotick the boxrsquo option for trading trusts to retain working capital funds taxed at corporate tax rate - trading trusts that make election denied 50 CGT discount except in relation to goodwill
bull Alternative system that removes uncertainty on the treatment of UPEs by clarifying that all UPEs are loans for Division 7A purposes
bull Self correction mechanism which would enable taxpayers to put in place complying loan agreements reduce compliance and administrative costs
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull No requirement for formal written agreement if evidence of loan
bull Statutory interest rate set at the start of the loan and fixed over the term of the loan and would be RBA indicator lending rate for small business immediately before start of that income year
bull The maximum loan term would be 10 years
bull Prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows
bull ndash 75 per cent of the original loan by the end of year three
bull ndash 55 per cent of the original loan by the end of year five
bull ndash 25 per cent of the original loan by the end of year eight and
bull ndash 0 per cent of original loan (ie fully repaid) by end of year 10
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Transitioning all other pre-existing Division 7A loans to the new 10-year loans from the application date of the new provisions
bull All existing complying seven-year loans would have their terms extended to the new maximum of 10 years
bull All pre-1997 loans would be deemed to be new complying Division 7A loans with a 10-year term starting from the application date of the new provisions
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Introducing a legislative amendment that allows trusts to make a once-and-for-all election for loans from companies (including UPEs owing to companies) to be excluded from the operation of Division 7A
bull ensuring that a trust that makes such an election (an excluded trust) forgoes the CGT discount on capital gains arising from assets other than goodwill and rsquointangible assets inherently connected with the business carried on by the trusteersquo
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Step Five - What is the deemed dividend amount
bull Deemed dividend cannot exceed distributable surplus of the company at year end (s 109Y(1))
bull From 1 July 2009 distributable surplus formula is
Net assets + Division 7A amounts minus Non-commercial loans minus Paid-up share value minus Repayments of non-commercial loans
bull Net assets - amount by which companys assets exceed sum ofbull the present legal obligations of the company andbull provisions for depreciation annual leave long service leave and amortisation of
intellectual property and trademarks
bull Div 7A amounts ndash CY payments forgiven debts ndash previously excluded
bull Accounting basis ndash cannot overunder value - Commissioner can re-state
bull Fresta v FCT 2002 ATC 2061 - provision for income tax is a ldquopresent legal obligationrdquo as company is liable for income tax at year end notwithstanding that it is not due and payable until assessed
Case Study - Div 7A
bull On 1 January 2016 A Pty Ltd loaned $15000 to John a shareholder of A Pty Ltd No qualifying written agreement was in place or repayments made before the lodgment day of A Pty Ltds 2016 income tax return
bull Assume no other payments or loans to shareholders or their associates for the income year ended 30 June 2016 Assume no Div 7A amounts and that in prior years there were no loans treated as dividends under Division 7A
Case Study - Div 7A
Case Study - Div 7A
bull On 30 June 2016 A Pty Ltd is taken to pay a dividend to John
Distributable surplus formula
Net assets $20000
Less non-commercial loans (that is loans treated as
dividends in prior years)
$0
Less paid-up share capital $12000
Less repayments of non-commercial loans $0
Distributable surplus $8000
Case Study - Div 7A
bull Although $15000 was loaned to John the amount treated as a dividend will be reduced to A Pty Ltds distributable surplus of $8000 John includes $8000 in his 2016 tax return as an unfranked dividend
bull The remaining $7000 is not treated as a dividend in the income year ended 30 June 2016 and will not be treated as a dividend in a future year even if the company has a distributable surplus in that future year
Step Six - What is the impact on the companys franking account
bull From 1 July 2006 no franking debit arises in a companyrsquos franking account as a result of the operation of Division 7A
Step Seven - Does the loan give rise to an FBT liability
bull Loans that are Division 7A deemed dividends specifically excluded
bull Effective 1 April 2007 a loan that complies with the requirements of Division 7A excluded loan is not a fringe benefit
Commissionerrsquos Discretion under Division 7A
bull One-off opportunity to correct past mistakes - (Practice Statement PS LA 200720) until 30 June 2008
bull However after 300608 Commissioner can still apply discretion in cases of an honest mistake or inadvertent omissions (s 109RB)
bull Formal request for discretion required after 30 June 2008
ATO Backflip - ATO ID 201315 UPE and bad debt deduction
bull This ATO ID considers whether a beneficiary of a trust is entitled to a bad debt deduction for UPE amounts that have been written off as bad debts
bull For bad debt deduction under section 25-35 debt must be actually written off and amount must have been included in assessable income previously
bull ATO view ndash UPE is equity entitlement not a ldquodebtrdquo so cannot be bad debt
bull Even if structured as an equity debt amount not the same as included in taxpayerrsquos assessable income previously
bull No bad debt deduction available to taxpayer
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Address the individual issues and problems in Division 7A by way of specific legislative amendment
2 Statutory Interest Model
Impose requirement that loans to related entities carry a statutory rate of interest but no requirement that principal be repaid prior to termination of the loan
3 Distribution Model
Allow the retention of profits within the private group for permitted purposes and to treat any profits not so used and not distributed as deemed dividends (which would be able to be franked)
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Potential issues to be specifically fixed ndash
UPE classification
distributable surplus quantification
interposed entity identification and treatment
loan and payment definitions
categorisation of exclusions
repayment compliance requirements etc
scope and effect of Commissioners discretionary powers
bull Advantage - could deal with specifically known issues
bull However has potential to be mere piecemeal solution and may fail to significantly simplify the law or its understanding
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
2 Statutory Interest Model
bull Related party loans at legislatively prescribed interest rate
bull Progressive (actual) loan repayments may not be necessary and re-borrowings (of principal) would be permitted
bull Uncomplicated model - interest on the loans assessable to payee (whether paid or not) but not deductible to payer
bull Interest only- principal not be repaid prior to termination of loan
bull Interest rate to be at commercial rate ndash current Division 7A benchmark interest rate too low
bull Allows for retention of loans over prolonged terms
bull Issue ndash ignores that Division 7A also applies to ldquopaymentsrdquo and ldquoforgiven debtsrdquo
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
3 Distribution Model
bull Allow retention of profits within the private group for permitted purposes
bull Any profits not so used and not distributed treated as deemed dividends (but frankable)
bull Retained profits would be taxed at company tax rate
bull Deemed dividends would be taxed at the personal tax rate of relevant shareholders
bull Permitted purposes - use of profits for working capital and other active business purposes of the private company or related entity
bull Use of the profits for passive investment purposes not permitted
bull Acquisition of active assets used in an active business allowed
Board of Taxation ndash Div 7A recommendations - Supplement
bull Set of common principles for loans payments debt forgiveness
bull Simpler system in which asset revaluations will not be required and unrealised profits not taken to be distributed because company assets have been used and company profits tested each year
bull Single 10-year loan with flexibility for repayment of principal
bull A lsquotick the boxrsquo option for trading trusts to retain working capital funds taxed at corporate tax rate - trading trusts that make election denied 50 CGT discount except in relation to goodwill
bull Alternative system that removes uncertainty on the treatment of UPEs by clarifying that all UPEs are loans for Division 7A purposes
bull Self correction mechanism which would enable taxpayers to put in place complying loan agreements reduce compliance and administrative costs
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull No requirement for formal written agreement if evidence of loan
bull Statutory interest rate set at the start of the loan and fixed over the term of the loan and would be RBA indicator lending rate for small business immediately before start of that income year
bull The maximum loan term would be 10 years
bull Prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows
bull ndash 75 per cent of the original loan by the end of year three
bull ndash 55 per cent of the original loan by the end of year five
bull ndash 25 per cent of the original loan by the end of year eight and
bull ndash 0 per cent of original loan (ie fully repaid) by end of year 10
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Transitioning all other pre-existing Division 7A loans to the new 10-year loans from the application date of the new provisions
bull All existing complying seven-year loans would have their terms extended to the new maximum of 10 years
bull All pre-1997 loans would be deemed to be new complying Division 7A loans with a 10-year term starting from the application date of the new provisions
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Introducing a legislative amendment that allows trusts to make a once-and-for-all election for loans from companies (including UPEs owing to companies) to be excluded from the operation of Division 7A
bull ensuring that a trust that makes such an election (an excluded trust) forgoes the CGT discount on capital gains arising from assets other than goodwill and rsquointangible assets inherently connected with the business carried on by the trusteersquo
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Case Study - Div 7A
bull On 1 January 2016 A Pty Ltd loaned $15000 to John a shareholder of A Pty Ltd No qualifying written agreement was in place or repayments made before the lodgment day of A Pty Ltds 2016 income tax return
bull Assume no other payments or loans to shareholders or their associates for the income year ended 30 June 2016 Assume no Div 7A amounts and that in prior years there were no loans treated as dividends under Division 7A
Case Study - Div 7A
Case Study - Div 7A
bull On 30 June 2016 A Pty Ltd is taken to pay a dividend to John
Distributable surplus formula
Net assets $20000
Less non-commercial loans (that is loans treated as
dividends in prior years)
$0
Less paid-up share capital $12000
Less repayments of non-commercial loans $0
Distributable surplus $8000
Case Study - Div 7A
bull Although $15000 was loaned to John the amount treated as a dividend will be reduced to A Pty Ltds distributable surplus of $8000 John includes $8000 in his 2016 tax return as an unfranked dividend
bull The remaining $7000 is not treated as a dividend in the income year ended 30 June 2016 and will not be treated as a dividend in a future year even if the company has a distributable surplus in that future year
Step Six - What is the impact on the companys franking account
bull From 1 July 2006 no franking debit arises in a companyrsquos franking account as a result of the operation of Division 7A
Step Seven - Does the loan give rise to an FBT liability
bull Loans that are Division 7A deemed dividends specifically excluded
bull Effective 1 April 2007 a loan that complies with the requirements of Division 7A excluded loan is not a fringe benefit
Commissionerrsquos Discretion under Division 7A
bull One-off opportunity to correct past mistakes - (Practice Statement PS LA 200720) until 30 June 2008
bull However after 300608 Commissioner can still apply discretion in cases of an honest mistake or inadvertent omissions (s 109RB)
bull Formal request for discretion required after 30 June 2008
ATO Backflip - ATO ID 201315 UPE and bad debt deduction
bull This ATO ID considers whether a beneficiary of a trust is entitled to a bad debt deduction for UPE amounts that have been written off as bad debts
bull For bad debt deduction under section 25-35 debt must be actually written off and amount must have been included in assessable income previously
bull ATO view ndash UPE is equity entitlement not a ldquodebtrdquo so cannot be bad debt
bull Even if structured as an equity debt amount not the same as included in taxpayerrsquos assessable income previously
bull No bad debt deduction available to taxpayer
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Address the individual issues and problems in Division 7A by way of specific legislative amendment
2 Statutory Interest Model
Impose requirement that loans to related entities carry a statutory rate of interest but no requirement that principal be repaid prior to termination of the loan
3 Distribution Model
Allow the retention of profits within the private group for permitted purposes and to treat any profits not so used and not distributed as deemed dividends (which would be able to be franked)
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Potential issues to be specifically fixed ndash
UPE classification
distributable surplus quantification
interposed entity identification and treatment
loan and payment definitions
categorisation of exclusions
repayment compliance requirements etc
scope and effect of Commissioners discretionary powers
bull Advantage - could deal with specifically known issues
bull However has potential to be mere piecemeal solution and may fail to significantly simplify the law or its understanding
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
2 Statutory Interest Model
bull Related party loans at legislatively prescribed interest rate
bull Progressive (actual) loan repayments may not be necessary and re-borrowings (of principal) would be permitted
bull Uncomplicated model - interest on the loans assessable to payee (whether paid or not) but not deductible to payer
bull Interest only- principal not be repaid prior to termination of loan
bull Interest rate to be at commercial rate ndash current Division 7A benchmark interest rate too low
bull Allows for retention of loans over prolonged terms
bull Issue ndash ignores that Division 7A also applies to ldquopaymentsrdquo and ldquoforgiven debtsrdquo
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
3 Distribution Model
bull Allow retention of profits within the private group for permitted purposes
bull Any profits not so used and not distributed treated as deemed dividends (but frankable)
bull Retained profits would be taxed at company tax rate
bull Deemed dividends would be taxed at the personal tax rate of relevant shareholders
bull Permitted purposes - use of profits for working capital and other active business purposes of the private company or related entity
bull Use of the profits for passive investment purposes not permitted
bull Acquisition of active assets used in an active business allowed
Board of Taxation ndash Div 7A recommendations - Supplement
bull Set of common principles for loans payments debt forgiveness
bull Simpler system in which asset revaluations will not be required and unrealised profits not taken to be distributed because company assets have been used and company profits tested each year
bull Single 10-year loan with flexibility for repayment of principal
bull A lsquotick the boxrsquo option for trading trusts to retain working capital funds taxed at corporate tax rate - trading trusts that make election denied 50 CGT discount except in relation to goodwill
bull Alternative system that removes uncertainty on the treatment of UPEs by clarifying that all UPEs are loans for Division 7A purposes
bull Self correction mechanism which would enable taxpayers to put in place complying loan agreements reduce compliance and administrative costs
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull No requirement for formal written agreement if evidence of loan
bull Statutory interest rate set at the start of the loan and fixed over the term of the loan and would be RBA indicator lending rate for small business immediately before start of that income year
bull The maximum loan term would be 10 years
bull Prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows
bull ndash 75 per cent of the original loan by the end of year three
bull ndash 55 per cent of the original loan by the end of year five
bull ndash 25 per cent of the original loan by the end of year eight and
bull ndash 0 per cent of original loan (ie fully repaid) by end of year 10
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Transitioning all other pre-existing Division 7A loans to the new 10-year loans from the application date of the new provisions
bull All existing complying seven-year loans would have their terms extended to the new maximum of 10 years
bull All pre-1997 loans would be deemed to be new complying Division 7A loans with a 10-year term starting from the application date of the new provisions
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Introducing a legislative amendment that allows trusts to make a once-and-for-all election for loans from companies (including UPEs owing to companies) to be excluded from the operation of Division 7A
bull ensuring that a trust that makes such an election (an excluded trust) forgoes the CGT discount on capital gains arising from assets other than goodwill and rsquointangible assets inherently connected with the business carried on by the trusteersquo
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Case Study - Div 7A
Case Study - Div 7A
bull On 30 June 2016 A Pty Ltd is taken to pay a dividend to John
Distributable surplus formula
Net assets $20000
Less non-commercial loans (that is loans treated as
dividends in prior years)
$0
Less paid-up share capital $12000
Less repayments of non-commercial loans $0
Distributable surplus $8000
Case Study - Div 7A
bull Although $15000 was loaned to John the amount treated as a dividend will be reduced to A Pty Ltds distributable surplus of $8000 John includes $8000 in his 2016 tax return as an unfranked dividend
bull The remaining $7000 is not treated as a dividend in the income year ended 30 June 2016 and will not be treated as a dividend in a future year even if the company has a distributable surplus in that future year
Step Six - What is the impact on the companys franking account
bull From 1 July 2006 no franking debit arises in a companyrsquos franking account as a result of the operation of Division 7A
Step Seven - Does the loan give rise to an FBT liability
bull Loans that are Division 7A deemed dividends specifically excluded
bull Effective 1 April 2007 a loan that complies with the requirements of Division 7A excluded loan is not a fringe benefit
Commissionerrsquos Discretion under Division 7A
bull One-off opportunity to correct past mistakes - (Practice Statement PS LA 200720) until 30 June 2008
bull However after 300608 Commissioner can still apply discretion in cases of an honest mistake or inadvertent omissions (s 109RB)
bull Formal request for discretion required after 30 June 2008
ATO Backflip - ATO ID 201315 UPE and bad debt deduction
bull This ATO ID considers whether a beneficiary of a trust is entitled to a bad debt deduction for UPE amounts that have been written off as bad debts
bull For bad debt deduction under section 25-35 debt must be actually written off and amount must have been included in assessable income previously
bull ATO view ndash UPE is equity entitlement not a ldquodebtrdquo so cannot be bad debt
bull Even if structured as an equity debt amount not the same as included in taxpayerrsquos assessable income previously
bull No bad debt deduction available to taxpayer
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Address the individual issues and problems in Division 7A by way of specific legislative amendment
2 Statutory Interest Model
Impose requirement that loans to related entities carry a statutory rate of interest but no requirement that principal be repaid prior to termination of the loan
3 Distribution Model
Allow the retention of profits within the private group for permitted purposes and to treat any profits not so used and not distributed as deemed dividends (which would be able to be franked)
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Potential issues to be specifically fixed ndash
UPE classification
distributable surplus quantification
interposed entity identification and treatment
loan and payment definitions
categorisation of exclusions
repayment compliance requirements etc
scope and effect of Commissioners discretionary powers
bull Advantage - could deal with specifically known issues
bull However has potential to be mere piecemeal solution and may fail to significantly simplify the law or its understanding
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
2 Statutory Interest Model
bull Related party loans at legislatively prescribed interest rate
bull Progressive (actual) loan repayments may not be necessary and re-borrowings (of principal) would be permitted
bull Uncomplicated model - interest on the loans assessable to payee (whether paid or not) but not deductible to payer
bull Interest only- principal not be repaid prior to termination of loan
bull Interest rate to be at commercial rate ndash current Division 7A benchmark interest rate too low
bull Allows for retention of loans over prolonged terms
bull Issue ndash ignores that Division 7A also applies to ldquopaymentsrdquo and ldquoforgiven debtsrdquo
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
3 Distribution Model
bull Allow retention of profits within the private group for permitted purposes
bull Any profits not so used and not distributed treated as deemed dividends (but frankable)
bull Retained profits would be taxed at company tax rate
bull Deemed dividends would be taxed at the personal tax rate of relevant shareholders
bull Permitted purposes - use of profits for working capital and other active business purposes of the private company or related entity
bull Use of the profits for passive investment purposes not permitted
bull Acquisition of active assets used in an active business allowed
Board of Taxation ndash Div 7A recommendations - Supplement
bull Set of common principles for loans payments debt forgiveness
bull Simpler system in which asset revaluations will not be required and unrealised profits not taken to be distributed because company assets have been used and company profits tested each year
bull Single 10-year loan with flexibility for repayment of principal
bull A lsquotick the boxrsquo option for trading trusts to retain working capital funds taxed at corporate tax rate - trading trusts that make election denied 50 CGT discount except in relation to goodwill
bull Alternative system that removes uncertainty on the treatment of UPEs by clarifying that all UPEs are loans for Division 7A purposes
bull Self correction mechanism which would enable taxpayers to put in place complying loan agreements reduce compliance and administrative costs
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull No requirement for formal written agreement if evidence of loan
bull Statutory interest rate set at the start of the loan and fixed over the term of the loan and would be RBA indicator lending rate for small business immediately before start of that income year
bull The maximum loan term would be 10 years
bull Prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows
bull ndash 75 per cent of the original loan by the end of year three
bull ndash 55 per cent of the original loan by the end of year five
bull ndash 25 per cent of the original loan by the end of year eight and
bull ndash 0 per cent of original loan (ie fully repaid) by end of year 10
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Transitioning all other pre-existing Division 7A loans to the new 10-year loans from the application date of the new provisions
bull All existing complying seven-year loans would have their terms extended to the new maximum of 10 years
bull All pre-1997 loans would be deemed to be new complying Division 7A loans with a 10-year term starting from the application date of the new provisions
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Introducing a legislative amendment that allows trusts to make a once-and-for-all election for loans from companies (including UPEs owing to companies) to be excluded from the operation of Division 7A
bull ensuring that a trust that makes such an election (an excluded trust) forgoes the CGT discount on capital gains arising from assets other than goodwill and rsquointangible assets inherently connected with the business carried on by the trusteersquo
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Case Study - Div 7A
bull On 30 June 2016 A Pty Ltd is taken to pay a dividend to John
Distributable surplus formula
Net assets $20000
Less non-commercial loans (that is loans treated as
dividends in prior years)
$0
Less paid-up share capital $12000
Less repayments of non-commercial loans $0
Distributable surplus $8000
Case Study - Div 7A
bull Although $15000 was loaned to John the amount treated as a dividend will be reduced to A Pty Ltds distributable surplus of $8000 John includes $8000 in his 2016 tax return as an unfranked dividend
bull The remaining $7000 is not treated as a dividend in the income year ended 30 June 2016 and will not be treated as a dividend in a future year even if the company has a distributable surplus in that future year
Step Six - What is the impact on the companys franking account
bull From 1 July 2006 no franking debit arises in a companyrsquos franking account as a result of the operation of Division 7A
Step Seven - Does the loan give rise to an FBT liability
bull Loans that are Division 7A deemed dividends specifically excluded
bull Effective 1 April 2007 a loan that complies with the requirements of Division 7A excluded loan is not a fringe benefit
Commissionerrsquos Discretion under Division 7A
bull One-off opportunity to correct past mistakes - (Practice Statement PS LA 200720) until 30 June 2008
bull However after 300608 Commissioner can still apply discretion in cases of an honest mistake or inadvertent omissions (s 109RB)
bull Formal request for discretion required after 30 June 2008
ATO Backflip - ATO ID 201315 UPE and bad debt deduction
bull This ATO ID considers whether a beneficiary of a trust is entitled to a bad debt deduction for UPE amounts that have been written off as bad debts
bull For bad debt deduction under section 25-35 debt must be actually written off and amount must have been included in assessable income previously
bull ATO view ndash UPE is equity entitlement not a ldquodebtrdquo so cannot be bad debt
bull Even if structured as an equity debt amount not the same as included in taxpayerrsquos assessable income previously
bull No bad debt deduction available to taxpayer
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Address the individual issues and problems in Division 7A by way of specific legislative amendment
2 Statutory Interest Model
Impose requirement that loans to related entities carry a statutory rate of interest but no requirement that principal be repaid prior to termination of the loan
3 Distribution Model
Allow the retention of profits within the private group for permitted purposes and to treat any profits not so used and not distributed as deemed dividends (which would be able to be franked)
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Potential issues to be specifically fixed ndash
UPE classification
distributable surplus quantification
interposed entity identification and treatment
loan and payment definitions
categorisation of exclusions
repayment compliance requirements etc
scope and effect of Commissioners discretionary powers
bull Advantage - could deal with specifically known issues
bull However has potential to be mere piecemeal solution and may fail to significantly simplify the law or its understanding
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
2 Statutory Interest Model
bull Related party loans at legislatively prescribed interest rate
bull Progressive (actual) loan repayments may not be necessary and re-borrowings (of principal) would be permitted
bull Uncomplicated model - interest on the loans assessable to payee (whether paid or not) but not deductible to payer
bull Interest only- principal not be repaid prior to termination of loan
bull Interest rate to be at commercial rate ndash current Division 7A benchmark interest rate too low
bull Allows for retention of loans over prolonged terms
bull Issue ndash ignores that Division 7A also applies to ldquopaymentsrdquo and ldquoforgiven debtsrdquo
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
3 Distribution Model
bull Allow retention of profits within the private group for permitted purposes
bull Any profits not so used and not distributed treated as deemed dividends (but frankable)
bull Retained profits would be taxed at company tax rate
bull Deemed dividends would be taxed at the personal tax rate of relevant shareholders
bull Permitted purposes - use of profits for working capital and other active business purposes of the private company or related entity
bull Use of the profits for passive investment purposes not permitted
bull Acquisition of active assets used in an active business allowed
Board of Taxation ndash Div 7A recommendations - Supplement
bull Set of common principles for loans payments debt forgiveness
bull Simpler system in which asset revaluations will not be required and unrealised profits not taken to be distributed because company assets have been used and company profits tested each year
bull Single 10-year loan with flexibility for repayment of principal
bull A lsquotick the boxrsquo option for trading trusts to retain working capital funds taxed at corporate tax rate - trading trusts that make election denied 50 CGT discount except in relation to goodwill
bull Alternative system that removes uncertainty on the treatment of UPEs by clarifying that all UPEs are loans for Division 7A purposes
bull Self correction mechanism which would enable taxpayers to put in place complying loan agreements reduce compliance and administrative costs
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull No requirement for formal written agreement if evidence of loan
bull Statutory interest rate set at the start of the loan and fixed over the term of the loan and would be RBA indicator lending rate for small business immediately before start of that income year
bull The maximum loan term would be 10 years
bull Prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows
bull ndash 75 per cent of the original loan by the end of year three
bull ndash 55 per cent of the original loan by the end of year five
bull ndash 25 per cent of the original loan by the end of year eight and
bull ndash 0 per cent of original loan (ie fully repaid) by end of year 10
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Transitioning all other pre-existing Division 7A loans to the new 10-year loans from the application date of the new provisions
bull All existing complying seven-year loans would have their terms extended to the new maximum of 10 years
bull All pre-1997 loans would be deemed to be new complying Division 7A loans with a 10-year term starting from the application date of the new provisions
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Introducing a legislative amendment that allows trusts to make a once-and-for-all election for loans from companies (including UPEs owing to companies) to be excluded from the operation of Division 7A
bull ensuring that a trust that makes such an election (an excluded trust) forgoes the CGT discount on capital gains arising from assets other than goodwill and rsquointangible assets inherently connected with the business carried on by the trusteersquo
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Case Study - Div 7A
bull Although $15000 was loaned to John the amount treated as a dividend will be reduced to A Pty Ltds distributable surplus of $8000 John includes $8000 in his 2016 tax return as an unfranked dividend
bull The remaining $7000 is not treated as a dividend in the income year ended 30 June 2016 and will not be treated as a dividend in a future year even if the company has a distributable surplus in that future year
Step Six - What is the impact on the companys franking account
bull From 1 July 2006 no franking debit arises in a companyrsquos franking account as a result of the operation of Division 7A
Step Seven - Does the loan give rise to an FBT liability
bull Loans that are Division 7A deemed dividends specifically excluded
bull Effective 1 April 2007 a loan that complies with the requirements of Division 7A excluded loan is not a fringe benefit
Commissionerrsquos Discretion under Division 7A
bull One-off opportunity to correct past mistakes - (Practice Statement PS LA 200720) until 30 June 2008
bull However after 300608 Commissioner can still apply discretion in cases of an honest mistake or inadvertent omissions (s 109RB)
bull Formal request for discretion required after 30 June 2008
ATO Backflip - ATO ID 201315 UPE and bad debt deduction
bull This ATO ID considers whether a beneficiary of a trust is entitled to a bad debt deduction for UPE amounts that have been written off as bad debts
bull For bad debt deduction under section 25-35 debt must be actually written off and amount must have been included in assessable income previously
bull ATO view ndash UPE is equity entitlement not a ldquodebtrdquo so cannot be bad debt
bull Even if structured as an equity debt amount not the same as included in taxpayerrsquos assessable income previously
bull No bad debt deduction available to taxpayer
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Address the individual issues and problems in Division 7A by way of specific legislative amendment
2 Statutory Interest Model
Impose requirement that loans to related entities carry a statutory rate of interest but no requirement that principal be repaid prior to termination of the loan
3 Distribution Model
Allow the retention of profits within the private group for permitted purposes and to treat any profits not so used and not distributed as deemed dividends (which would be able to be franked)
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Potential issues to be specifically fixed ndash
UPE classification
distributable surplus quantification
interposed entity identification and treatment
loan and payment definitions
categorisation of exclusions
repayment compliance requirements etc
scope and effect of Commissioners discretionary powers
bull Advantage - could deal with specifically known issues
bull However has potential to be mere piecemeal solution and may fail to significantly simplify the law or its understanding
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
2 Statutory Interest Model
bull Related party loans at legislatively prescribed interest rate
bull Progressive (actual) loan repayments may not be necessary and re-borrowings (of principal) would be permitted
bull Uncomplicated model - interest on the loans assessable to payee (whether paid or not) but not deductible to payer
bull Interest only- principal not be repaid prior to termination of loan
bull Interest rate to be at commercial rate ndash current Division 7A benchmark interest rate too low
bull Allows for retention of loans over prolonged terms
bull Issue ndash ignores that Division 7A also applies to ldquopaymentsrdquo and ldquoforgiven debtsrdquo
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
3 Distribution Model
bull Allow retention of profits within the private group for permitted purposes
bull Any profits not so used and not distributed treated as deemed dividends (but frankable)
bull Retained profits would be taxed at company tax rate
bull Deemed dividends would be taxed at the personal tax rate of relevant shareholders
bull Permitted purposes - use of profits for working capital and other active business purposes of the private company or related entity
bull Use of the profits for passive investment purposes not permitted
bull Acquisition of active assets used in an active business allowed
Board of Taxation ndash Div 7A recommendations - Supplement
bull Set of common principles for loans payments debt forgiveness
bull Simpler system in which asset revaluations will not be required and unrealised profits not taken to be distributed because company assets have been used and company profits tested each year
bull Single 10-year loan with flexibility for repayment of principal
bull A lsquotick the boxrsquo option for trading trusts to retain working capital funds taxed at corporate tax rate - trading trusts that make election denied 50 CGT discount except in relation to goodwill
bull Alternative system that removes uncertainty on the treatment of UPEs by clarifying that all UPEs are loans for Division 7A purposes
bull Self correction mechanism which would enable taxpayers to put in place complying loan agreements reduce compliance and administrative costs
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull No requirement for formal written agreement if evidence of loan
bull Statutory interest rate set at the start of the loan and fixed over the term of the loan and would be RBA indicator lending rate for small business immediately before start of that income year
bull The maximum loan term would be 10 years
bull Prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows
bull ndash 75 per cent of the original loan by the end of year three
bull ndash 55 per cent of the original loan by the end of year five
bull ndash 25 per cent of the original loan by the end of year eight and
bull ndash 0 per cent of original loan (ie fully repaid) by end of year 10
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Transitioning all other pre-existing Division 7A loans to the new 10-year loans from the application date of the new provisions
bull All existing complying seven-year loans would have their terms extended to the new maximum of 10 years
bull All pre-1997 loans would be deemed to be new complying Division 7A loans with a 10-year term starting from the application date of the new provisions
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Introducing a legislative amendment that allows trusts to make a once-and-for-all election for loans from companies (including UPEs owing to companies) to be excluded from the operation of Division 7A
bull ensuring that a trust that makes such an election (an excluded trust) forgoes the CGT discount on capital gains arising from assets other than goodwill and rsquointangible assets inherently connected with the business carried on by the trusteersquo
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Step Six - What is the impact on the companys franking account
bull From 1 July 2006 no franking debit arises in a companyrsquos franking account as a result of the operation of Division 7A
Step Seven - Does the loan give rise to an FBT liability
bull Loans that are Division 7A deemed dividends specifically excluded
bull Effective 1 April 2007 a loan that complies with the requirements of Division 7A excluded loan is not a fringe benefit
Commissionerrsquos Discretion under Division 7A
bull One-off opportunity to correct past mistakes - (Practice Statement PS LA 200720) until 30 June 2008
bull However after 300608 Commissioner can still apply discretion in cases of an honest mistake or inadvertent omissions (s 109RB)
bull Formal request for discretion required after 30 June 2008
ATO Backflip - ATO ID 201315 UPE and bad debt deduction
bull This ATO ID considers whether a beneficiary of a trust is entitled to a bad debt deduction for UPE amounts that have been written off as bad debts
bull For bad debt deduction under section 25-35 debt must be actually written off and amount must have been included in assessable income previously
bull ATO view ndash UPE is equity entitlement not a ldquodebtrdquo so cannot be bad debt
bull Even if structured as an equity debt amount not the same as included in taxpayerrsquos assessable income previously
bull No bad debt deduction available to taxpayer
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Address the individual issues and problems in Division 7A by way of specific legislative amendment
2 Statutory Interest Model
Impose requirement that loans to related entities carry a statutory rate of interest but no requirement that principal be repaid prior to termination of the loan
3 Distribution Model
Allow the retention of profits within the private group for permitted purposes and to treat any profits not so used and not distributed as deemed dividends (which would be able to be franked)
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Potential issues to be specifically fixed ndash
UPE classification
distributable surplus quantification
interposed entity identification and treatment
loan and payment definitions
categorisation of exclusions
repayment compliance requirements etc
scope and effect of Commissioners discretionary powers
bull Advantage - could deal with specifically known issues
bull However has potential to be mere piecemeal solution and may fail to significantly simplify the law or its understanding
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
2 Statutory Interest Model
bull Related party loans at legislatively prescribed interest rate
bull Progressive (actual) loan repayments may not be necessary and re-borrowings (of principal) would be permitted
bull Uncomplicated model - interest on the loans assessable to payee (whether paid or not) but not deductible to payer
bull Interest only- principal not be repaid prior to termination of loan
bull Interest rate to be at commercial rate ndash current Division 7A benchmark interest rate too low
bull Allows for retention of loans over prolonged terms
bull Issue ndash ignores that Division 7A also applies to ldquopaymentsrdquo and ldquoforgiven debtsrdquo
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
3 Distribution Model
bull Allow retention of profits within the private group for permitted purposes
bull Any profits not so used and not distributed treated as deemed dividends (but frankable)
bull Retained profits would be taxed at company tax rate
bull Deemed dividends would be taxed at the personal tax rate of relevant shareholders
bull Permitted purposes - use of profits for working capital and other active business purposes of the private company or related entity
bull Use of the profits for passive investment purposes not permitted
bull Acquisition of active assets used in an active business allowed
Board of Taxation ndash Div 7A recommendations - Supplement
bull Set of common principles for loans payments debt forgiveness
bull Simpler system in which asset revaluations will not be required and unrealised profits not taken to be distributed because company assets have been used and company profits tested each year
bull Single 10-year loan with flexibility for repayment of principal
bull A lsquotick the boxrsquo option for trading trusts to retain working capital funds taxed at corporate tax rate - trading trusts that make election denied 50 CGT discount except in relation to goodwill
bull Alternative system that removes uncertainty on the treatment of UPEs by clarifying that all UPEs are loans for Division 7A purposes
bull Self correction mechanism which would enable taxpayers to put in place complying loan agreements reduce compliance and administrative costs
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull No requirement for formal written agreement if evidence of loan
bull Statutory interest rate set at the start of the loan and fixed over the term of the loan and would be RBA indicator lending rate for small business immediately before start of that income year
bull The maximum loan term would be 10 years
bull Prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows
bull ndash 75 per cent of the original loan by the end of year three
bull ndash 55 per cent of the original loan by the end of year five
bull ndash 25 per cent of the original loan by the end of year eight and
bull ndash 0 per cent of original loan (ie fully repaid) by end of year 10
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Transitioning all other pre-existing Division 7A loans to the new 10-year loans from the application date of the new provisions
bull All existing complying seven-year loans would have their terms extended to the new maximum of 10 years
bull All pre-1997 loans would be deemed to be new complying Division 7A loans with a 10-year term starting from the application date of the new provisions
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Introducing a legislative amendment that allows trusts to make a once-and-for-all election for loans from companies (including UPEs owing to companies) to be excluded from the operation of Division 7A
bull ensuring that a trust that makes such an election (an excluded trust) forgoes the CGT discount on capital gains arising from assets other than goodwill and rsquointangible assets inherently connected with the business carried on by the trusteersquo
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Step Seven - Does the loan give rise to an FBT liability
bull Loans that are Division 7A deemed dividends specifically excluded
bull Effective 1 April 2007 a loan that complies with the requirements of Division 7A excluded loan is not a fringe benefit
Commissionerrsquos Discretion under Division 7A
bull One-off opportunity to correct past mistakes - (Practice Statement PS LA 200720) until 30 June 2008
bull However after 300608 Commissioner can still apply discretion in cases of an honest mistake or inadvertent omissions (s 109RB)
bull Formal request for discretion required after 30 June 2008
ATO Backflip - ATO ID 201315 UPE and bad debt deduction
bull This ATO ID considers whether a beneficiary of a trust is entitled to a bad debt deduction for UPE amounts that have been written off as bad debts
bull For bad debt deduction under section 25-35 debt must be actually written off and amount must have been included in assessable income previously
bull ATO view ndash UPE is equity entitlement not a ldquodebtrdquo so cannot be bad debt
bull Even if structured as an equity debt amount not the same as included in taxpayerrsquos assessable income previously
bull No bad debt deduction available to taxpayer
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Address the individual issues and problems in Division 7A by way of specific legislative amendment
2 Statutory Interest Model
Impose requirement that loans to related entities carry a statutory rate of interest but no requirement that principal be repaid prior to termination of the loan
3 Distribution Model
Allow the retention of profits within the private group for permitted purposes and to treat any profits not so used and not distributed as deemed dividends (which would be able to be franked)
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Potential issues to be specifically fixed ndash
UPE classification
distributable surplus quantification
interposed entity identification and treatment
loan and payment definitions
categorisation of exclusions
repayment compliance requirements etc
scope and effect of Commissioners discretionary powers
bull Advantage - could deal with specifically known issues
bull However has potential to be mere piecemeal solution and may fail to significantly simplify the law or its understanding
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
2 Statutory Interest Model
bull Related party loans at legislatively prescribed interest rate
bull Progressive (actual) loan repayments may not be necessary and re-borrowings (of principal) would be permitted
bull Uncomplicated model - interest on the loans assessable to payee (whether paid or not) but not deductible to payer
bull Interest only- principal not be repaid prior to termination of loan
bull Interest rate to be at commercial rate ndash current Division 7A benchmark interest rate too low
bull Allows for retention of loans over prolonged terms
bull Issue ndash ignores that Division 7A also applies to ldquopaymentsrdquo and ldquoforgiven debtsrdquo
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
3 Distribution Model
bull Allow retention of profits within the private group for permitted purposes
bull Any profits not so used and not distributed treated as deemed dividends (but frankable)
bull Retained profits would be taxed at company tax rate
bull Deemed dividends would be taxed at the personal tax rate of relevant shareholders
bull Permitted purposes - use of profits for working capital and other active business purposes of the private company or related entity
bull Use of the profits for passive investment purposes not permitted
bull Acquisition of active assets used in an active business allowed
Board of Taxation ndash Div 7A recommendations - Supplement
bull Set of common principles for loans payments debt forgiveness
bull Simpler system in which asset revaluations will not be required and unrealised profits not taken to be distributed because company assets have been used and company profits tested each year
bull Single 10-year loan with flexibility for repayment of principal
bull A lsquotick the boxrsquo option for trading trusts to retain working capital funds taxed at corporate tax rate - trading trusts that make election denied 50 CGT discount except in relation to goodwill
bull Alternative system that removes uncertainty on the treatment of UPEs by clarifying that all UPEs are loans for Division 7A purposes
bull Self correction mechanism which would enable taxpayers to put in place complying loan agreements reduce compliance and administrative costs
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull No requirement for formal written agreement if evidence of loan
bull Statutory interest rate set at the start of the loan and fixed over the term of the loan and would be RBA indicator lending rate for small business immediately before start of that income year
bull The maximum loan term would be 10 years
bull Prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows
bull ndash 75 per cent of the original loan by the end of year three
bull ndash 55 per cent of the original loan by the end of year five
bull ndash 25 per cent of the original loan by the end of year eight and
bull ndash 0 per cent of original loan (ie fully repaid) by end of year 10
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Transitioning all other pre-existing Division 7A loans to the new 10-year loans from the application date of the new provisions
bull All existing complying seven-year loans would have their terms extended to the new maximum of 10 years
bull All pre-1997 loans would be deemed to be new complying Division 7A loans with a 10-year term starting from the application date of the new provisions
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Introducing a legislative amendment that allows trusts to make a once-and-for-all election for loans from companies (including UPEs owing to companies) to be excluded from the operation of Division 7A
bull ensuring that a trust that makes such an election (an excluded trust) forgoes the CGT discount on capital gains arising from assets other than goodwill and rsquointangible assets inherently connected with the business carried on by the trusteersquo
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Commissionerrsquos Discretion under Division 7A
bull One-off opportunity to correct past mistakes - (Practice Statement PS LA 200720) until 30 June 2008
bull However after 300608 Commissioner can still apply discretion in cases of an honest mistake or inadvertent omissions (s 109RB)
bull Formal request for discretion required after 30 June 2008
ATO Backflip - ATO ID 201315 UPE and bad debt deduction
bull This ATO ID considers whether a beneficiary of a trust is entitled to a bad debt deduction for UPE amounts that have been written off as bad debts
bull For bad debt deduction under section 25-35 debt must be actually written off and amount must have been included in assessable income previously
bull ATO view ndash UPE is equity entitlement not a ldquodebtrdquo so cannot be bad debt
bull Even if structured as an equity debt amount not the same as included in taxpayerrsquos assessable income previously
bull No bad debt deduction available to taxpayer
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Address the individual issues and problems in Division 7A by way of specific legislative amendment
2 Statutory Interest Model
Impose requirement that loans to related entities carry a statutory rate of interest but no requirement that principal be repaid prior to termination of the loan
3 Distribution Model
Allow the retention of profits within the private group for permitted purposes and to treat any profits not so used and not distributed as deemed dividends (which would be able to be franked)
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Potential issues to be specifically fixed ndash
UPE classification
distributable surplus quantification
interposed entity identification and treatment
loan and payment definitions
categorisation of exclusions
repayment compliance requirements etc
scope and effect of Commissioners discretionary powers
bull Advantage - could deal with specifically known issues
bull However has potential to be mere piecemeal solution and may fail to significantly simplify the law or its understanding
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
2 Statutory Interest Model
bull Related party loans at legislatively prescribed interest rate
bull Progressive (actual) loan repayments may not be necessary and re-borrowings (of principal) would be permitted
bull Uncomplicated model - interest on the loans assessable to payee (whether paid or not) but not deductible to payer
bull Interest only- principal not be repaid prior to termination of loan
bull Interest rate to be at commercial rate ndash current Division 7A benchmark interest rate too low
bull Allows for retention of loans over prolonged terms
bull Issue ndash ignores that Division 7A also applies to ldquopaymentsrdquo and ldquoforgiven debtsrdquo
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
3 Distribution Model
bull Allow retention of profits within the private group for permitted purposes
bull Any profits not so used and not distributed treated as deemed dividends (but frankable)
bull Retained profits would be taxed at company tax rate
bull Deemed dividends would be taxed at the personal tax rate of relevant shareholders
bull Permitted purposes - use of profits for working capital and other active business purposes of the private company or related entity
bull Use of the profits for passive investment purposes not permitted
bull Acquisition of active assets used in an active business allowed
Board of Taxation ndash Div 7A recommendations - Supplement
bull Set of common principles for loans payments debt forgiveness
bull Simpler system in which asset revaluations will not be required and unrealised profits not taken to be distributed because company assets have been used and company profits tested each year
bull Single 10-year loan with flexibility for repayment of principal
bull A lsquotick the boxrsquo option for trading trusts to retain working capital funds taxed at corporate tax rate - trading trusts that make election denied 50 CGT discount except in relation to goodwill
bull Alternative system that removes uncertainty on the treatment of UPEs by clarifying that all UPEs are loans for Division 7A purposes
bull Self correction mechanism which would enable taxpayers to put in place complying loan agreements reduce compliance and administrative costs
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull No requirement for formal written agreement if evidence of loan
bull Statutory interest rate set at the start of the loan and fixed over the term of the loan and would be RBA indicator lending rate for small business immediately before start of that income year
bull The maximum loan term would be 10 years
bull Prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows
bull ndash 75 per cent of the original loan by the end of year three
bull ndash 55 per cent of the original loan by the end of year five
bull ndash 25 per cent of the original loan by the end of year eight and
bull ndash 0 per cent of original loan (ie fully repaid) by end of year 10
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Transitioning all other pre-existing Division 7A loans to the new 10-year loans from the application date of the new provisions
bull All existing complying seven-year loans would have their terms extended to the new maximum of 10 years
bull All pre-1997 loans would be deemed to be new complying Division 7A loans with a 10-year term starting from the application date of the new provisions
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Introducing a legislative amendment that allows trusts to make a once-and-for-all election for loans from companies (including UPEs owing to companies) to be excluded from the operation of Division 7A
bull ensuring that a trust that makes such an election (an excluded trust) forgoes the CGT discount on capital gains arising from assets other than goodwill and rsquointangible assets inherently connected with the business carried on by the trusteersquo
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
ATO Backflip - ATO ID 201315 UPE and bad debt deduction
bull This ATO ID considers whether a beneficiary of a trust is entitled to a bad debt deduction for UPE amounts that have been written off as bad debts
bull For bad debt deduction under section 25-35 debt must be actually written off and amount must have been included in assessable income previously
bull ATO view ndash UPE is equity entitlement not a ldquodebtrdquo so cannot be bad debt
bull Even if structured as an equity debt amount not the same as included in taxpayerrsquos assessable income previously
bull No bad debt deduction available to taxpayer
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Address the individual issues and problems in Division 7A by way of specific legislative amendment
2 Statutory Interest Model
Impose requirement that loans to related entities carry a statutory rate of interest but no requirement that principal be repaid prior to termination of the loan
3 Distribution Model
Allow the retention of profits within the private group for permitted purposes and to treat any profits not so used and not distributed as deemed dividends (which would be able to be franked)
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Potential issues to be specifically fixed ndash
UPE classification
distributable surplus quantification
interposed entity identification and treatment
loan and payment definitions
categorisation of exclusions
repayment compliance requirements etc
scope and effect of Commissioners discretionary powers
bull Advantage - could deal with specifically known issues
bull However has potential to be mere piecemeal solution and may fail to significantly simplify the law or its understanding
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
2 Statutory Interest Model
bull Related party loans at legislatively prescribed interest rate
bull Progressive (actual) loan repayments may not be necessary and re-borrowings (of principal) would be permitted
bull Uncomplicated model - interest on the loans assessable to payee (whether paid or not) but not deductible to payer
bull Interest only- principal not be repaid prior to termination of loan
bull Interest rate to be at commercial rate ndash current Division 7A benchmark interest rate too low
bull Allows for retention of loans over prolonged terms
bull Issue ndash ignores that Division 7A also applies to ldquopaymentsrdquo and ldquoforgiven debtsrdquo
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
3 Distribution Model
bull Allow retention of profits within the private group for permitted purposes
bull Any profits not so used and not distributed treated as deemed dividends (but frankable)
bull Retained profits would be taxed at company tax rate
bull Deemed dividends would be taxed at the personal tax rate of relevant shareholders
bull Permitted purposes - use of profits for working capital and other active business purposes of the private company or related entity
bull Use of the profits for passive investment purposes not permitted
bull Acquisition of active assets used in an active business allowed
Board of Taxation ndash Div 7A recommendations - Supplement
bull Set of common principles for loans payments debt forgiveness
bull Simpler system in which asset revaluations will not be required and unrealised profits not taken to be distributed because company assets have been used and company profits tested each year
bull Single 10-year loan with flexibility for repayment of principal
bull A lsquotick the boxrsquo option for trading trusts to retain working capital funds taxed at corporate tax rate - trading trusts that make election denied 50 CGT discount except in relation to goodwill
bull Alternative system that removes uncertainty on the treatment of UPEs by clarifying that all UPEs are loans for Division 7A purposes
bull Self correction mechanism which would enable taxpayers to put in place complying loan agreements reduce compliance and administrative costs
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull No requirement for formal written agreement if evidence of loan
bull Statutory interest rate set at the start of the loan and fixed over the term of the loan and would be RBA indicator lending rate for small business immediately before start of that income year
bull The maximum loan term would be 10 years
bull Prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows
bull ndash 75 per cent of the original loan by the end of year three
bull ndash 55 per cent of the original loan by the end of year five
bull ndash 25 per cent of the original loan by the end of year eight and
bull ndash 0 per cent of original loan (ie fully repaid) by end of year 10
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Transitioning all other pre-existing Division 7A loans to the new 10-year loans from the application date of the new provisions
bull All existing complying seven-year loans would have their terms extended to the new maximum of 10 years
bull All pre-1997 loans would be deemed to be new complying Division 7A loans with a 10-year term starting from the application date of the new provisions
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Introducing a legislative amendment that allows trusts to make a once-and-for-all election for loans from companies (including UPEs owing to companies) to be excluded from the operation of Division 7A
bull ensuring that a trust that makes such an election (an excluded trust) forgoes the CGT discount on capital gains arising from assets other than goodwill and rsquointangible assets inherently connected with the business carried on by the trusteersquo
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Address the individual issues and problems in Division 7A by way of specific legislative amendment
2 Statutory Interest Model
Impose requirement that loans to related entities carry a statutory rate of interest but no requirement that principal be repaid prior to termination of the loan
3 Distribution Model
Allow the retention of profits within the private group for permitted purposes and to treat any profits not so used and not distributed as deemed dividends (which would be able to be franked)
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Potential issues to be specifically fixed ndash
UPE classification
distributable surplus quantification
interposed entity identification and treatment
loan and payment definitions
categorisation of exclusions
repayment compliance requirements etc
scope and effect of Commissioners discretionary powers
bull Advantage - could deal with specifically known issues
bull However has potential to be mere piecemeal solution and may fail to significantly simplify the law or its understanding
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
2 Statutory Interest Model
bull Related party loans at legislatively prescribed interest rate
bull Progressive (actual) loan repayments may not be necessary and re-borrowings (of principal) would be permitted
bull Uncomplicated model - interest on the loans assessable to payee (whether paid or not) but not deductible to payer
bull Interest only- principal not be repaid prior to termination of loan
bull Interest rate to be at commercial rate ndash current Division 7A benchmark interest rate too low
bull Allows for retention of loans over prolonged terms
bull Issue ndash ignores that Division 7A also applies to ldquopaymentsrdquo and ldquoforgiven debtsrdquo
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
3 Distribution Model
bull Allow retention of profits within the private group for permitted purposes
bull Any profits not so used and not distributed treated as deemed dividends (but frankable)
bull Retained profits would be taxed at company tax rate
bull Deemed dividends would be taxed at the personal tax rate of relevant shareholders
bull Permitted purposes - use of profits for working capital and other active business purposes of the private company or related entity
bull Use of the profits for passive investment purposes not permitted
bull Acquisition of active assets used in an active business allowed
Board of Taxation ndash Div 7A recommendations - Supplement
bull Set of common principles for loans payments debt forgiveness
bull Simpler system in which asset revaluations will not be required and unrealised profits not taken to be distributed because company assets have been used and company profits tested each year
bull Single 10-year loan with flexibility for repayment of principal
bull A lsquotick the boxrsquo option for trading trusts to retain working capital funds taxed at corporate tax rate - trading trusts that make election denied 50 CGT discount except in relation to goodwill
bull Alternative system that removes uncertainty on the treatment of UPEs by clarifying that all UPEs are loans for Division 7A purposes
bull Self correction mechanism which would enable taxpayers to put in place complying loan agreements reduce compliance and administrative costs
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull No requirement for formal written agreement if evidence of loan
bull Statutory interest rate set at the start of the loan and fixed over the term of the loan and would be RBA indicator lending rate for small business immediately before start of that income year
bull The maximum loan term would be 10 years
bull Prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows
bull ndash 75 per cent of the original loan by the end of year three
bull ndash 55 per cent of the original loan by the end of year five
bull ndash 25 per cent of the original loan by the end of year eight and
bull ndash 0 per cent of original loan (ie fully repaid) by end of year 10
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Transitioning all other pre-existing Division 7A loans to the new 10-year loans from the application date of the new provisions
bull All existing complying seven-year loans would have their terms extended to the new maximum of 10 years
bull All pre-1997 loans would be deemed to be new complying Division 7A loans with a 10-year term starting from the application date of the new provisions
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Introducing a legislative amendment that allows trusts to make a once-and-for-all election for loans from companies (including UPEs owing to companies) to be excluded from the operation of Division 7A
bull ensuring that a trust that makes such an election (an excluded trust) forgoes the CGT discount on capital gains arising from assets other than goodwill and rsquointangible assets inherently connected with the business carried on by the trusteersquo
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
1 Division 7A Adjustment Model
Potential issues to be specifically fixed ndash
UPE classification
distributable surplus quantification
interposed entity identification and treatment
loan and payment definitions
categorisation of exclusions
repayment compliance requirements etc
scope and effect of Commissioners discretionary powers
bull Advantage - could deal with specifically known issues
bull However has potential to be mere piecemeal solution and may fail to significantly simplify the law or its understanding
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
2 Statutory Interest Model
bull Related party loans at legislatively prescribed interest rate
bull Progressive (actual) loan repayments may not be necessary and re-borrowings (of principal) would be permitted
bull Uncomplicated model - interest on the loans assessable to payee (whether paid or not) but not deductible to payer
bull Interest only- principal not be repaid prior to termination of loan
bull Interest rate to be at commercial rate ndash current Division 7A benchmark interest rate too low
bull Allows for retention of loans over prolonged terms
bull Issue ndash ignores that Division 7A also applies to ldquopaymentsrdquo and ldquoforgiven debtsrdquo
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
3 Distribution Model
bull Allow retention of profits within the private group for permitted purposes
bull Any profits not so used and not distributed treated as deemed dividends (but frankable)
bull Retained profits would be taxed at company tax rate
bull Deemed dividends would be taxed at the personal tax rate of relevant shareholders
bull Permitted purposes - use of profits for working capital and other active business purposes of the private company or related entity
bull Use of the profits for passive investment purposes not permitted
bull Acquisition of active assets used in an active business allowed
Board of Taxation ndash Div 7A recommendations - Supplement
bull Set of common principles for loans payments debt forgiveness
bull Simpler system in which asset revaluations will not be required and unrealised profits not taken to be distributed because company assets have been used and company profits tested each year
bull Single 10-year loan with flexibility for repayment of principal
bull A lsquotick the boxrsquo option for trading trusts to retain working capital funds taxed at corporate tax rate - trading trusts that make election denied 50 CGT discount except in relation to goodwill
bull Alternative system that removes uncertainty on the treatment of UPEs by clarifying that all UPEs are loans for Division 7A purposes
bull Self correction mechanism which would enable taxpayers to put in place complying loan agreements reduce compliance and administrative costs
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull No requirement for formal written agreement if evidence of loan
bull Statutory interest rate set at the start of the loan and fixed over the term of the loan and would be RBA indicator lending rate for small business immediately before start of that income year
bull The maximum loan term would be 10 years
bull Prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows
bull ndash 75 per cent of the original loan by the end of year three
bull ndash 55 per cent of the original loan by the end of year five
bull ndash 25 per cent of the original loan by the end of year eight and
bull ndash 0 per cent of original loan (ie fully repaid) by end of year 10
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Transitioning all other pre-existing Division 7A loans to the new 10-year loans from the application date of the new provisions
bull All existing complying seven-year loans would have their terms extended to the new maximum of 10 years
bull All pre-1997 loans would be deemed to be new complying Division 7A loans with a 10-year term starting from the application date of the new provisions
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Introducing a legislative amendment that allows trusts to make a once-and-for-all election for loans from companies (including UPEs owing to companies) to be excluded from the operation of Division 7A
bull ensuring that a trust that makes such an election (an excluded trust) forgoes the CGT discount on capital gains arising from assets other than goodwill and rsquointangible assets inherently connected with the business carried on by the trusteersquo
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
2 Statutory Interest Model
bull Related party loans at legislatively prescribed interest rate
bull Progressive (actual) loan repayments may not be necessary and re-borrowings (of principal) would be permitted
bull Uncomplicated model - interest on the loans assessable to payee (whether paid or not) but not deductible to payer
bull Interest only- principal not be repaid prior to termination of loan
bull Interest rate to be at commercial rate ndash current Division 7A benchmark interest rate too low
bull Allows for retention of loans over prolonged terms
bull Issue ndash ignores that Division 7A also applies to ldquopaymentsrdquo and ldquoforgiven debtsrdquo
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
3 Distribution Model
bull Allow retention of profits within the private group for permitted purposes
bull Any profits not so used and not distributed treated as deemed dividends (but frankable)
bull Retained profits would be taxed at company tax rate
bull Deemed dividends would be taxed at the personal tax rate of relevant shareholders
bull Permitted purposes - use of profits for working capital and other active business purposes of the private company or related entity
bull Use of the profits for passive investment purposes not permitted
bull Acquisition of active assets used in an active business allowed
Board of Taxation ndash Div 7A recommendations - Supplement
bull Set of common principles for loans payments debt forgiveness
bull Simpler system in which asset revaluations will not be required and unrealised profits not taken to be distributed because company assets have been used and company profits tested each year
bull Single 10-year loan with flexibility for repayment of principal
bull A lsquotick the boxrsquo option for trading trusts to retain working capital funds taxed at corporate tax rate - trading trusts that make election denied 50 CGT discount except in relation to goodwill
bull Alternative system that removes uncertainty on the treatment of UPEs by clarifying that all UPEs are loans for Division 7A purposes
bull Self correction mechanism which would enable taxpayers to put in place complying loan agreements reduce compliance and administrative costs
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull No requirement for formal written agreement if evidence of loan
bull Statutory interest rate set at the start of the loan and fixed over the term of the loan and would be RBA indicator lending rate for small business immediately before start of that income year
bull The maximum loan term would be 10 years
bull Prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows
bull ndash 75 per cent of the original loan by the end of year three
bull ndash 55 per cent of the original loan by the end of year five
bull ndash 25 per cent of the original loan by the end of year eight and
bull ndash 0 per cent of original loan (ie fully repaid) by end of year 10
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Transitioning all other pre-existing Division 7A loans to the new 10-year loans from the application date of the new provisions
bull All existing complying seven-year loans would have their terms extended to the new maximum of 10 years
bull All pre-1997 loans would be deemed to be new complying Division 7A loans with a 10-year term starting from the application date of the new provisions
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Introducing a legislative amendment that allows trusts to make a once-and-for-all election for loans from companies (including UPEs owing to companies) to be excluded from the operation of Division 7A
bull ensuring that a trust that makes such an election (an excluded trust) forgoes the CGT discount on capital gains arising from assets other than goodwill and rsquointangible assets inherently connected with the business carried on by the trusteersquo
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Board of Taxation Recommendations -Consultation Paper (Dec 2012)
3 Distribution Model
bull Allow retention of profits within the private group for permitted purposes
bull Any profits not so used and not distributed treated as deemed dividends (but frankable)
bull Retained profits would be taxed at company tax rate
bull Deemed dividends would be taxed at the personal tax rate of relevant shareholders
bull Permitted purposes - use of profits for working capital and other active business purposes of the private company or related entity
bull Use of the profits for passive investment purposes not permitted
bull Acquisition of active assets used in an active business allowed
Board of Taxation ndash Div 7A recommendations - Supplement
bull Set of common principles for loans payments debt forgiveness
bull Simpler system in which asset revaluations will not be required and unrealised profits not taken to be distributed because company assets have been used and company profits tested each year
bull Single 10-year loan with flexibility for repayment of principal
bull A lsquotick the boxrsquo option for trading trusts to retain working capital funds taxed at corporate tax rate - trading trusts that make election denied 50 CGT discount except in relation to goodwill
bull Alternative system that removes uncertainty on the treatment of UPEs by clarifying that all UPEs are loans for Division 7A purposes
bull Self correction mechanism which would enable taxpayers to put in place complying loan agreements reduce compliance and administrative costs
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull No requirement for formal written agreement if evidence of loan
bull Statutory interest rate set at the start of the loan and fixed over the term of the loan and would be RBA indicator lending rate for small business immediately before start of that income year
bull The maximum loan term would be 10 years
bull Prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows
bull ndash 75 per cent of the original loan by the end of year three
bull ndash 55 per cent of the original loan by the end of year five
bull ndash 25 per cent of the original loan by the end of year eight and
bull ndash 0 per cent of original loan (ie fully repaid) by end of year 10
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Transitioning all other pre-existing Division 7A loans to the new 10-year loans from the application date of the new provisions
bull All existing complying seven-year loans would have their terms extended to the new maximum of 10 years
bull All pre-1997 loans would be deemed to be new complying Division 7A loans with a 10-year term starting from the application date of the new provisions
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Introducing a legislative amendment that allows trusts to make a once-and-for-all election for loans from companies (including UPEs owing to companies) to be excluded from the operation of Division 7A
bull ensuring that a trust that makes such an election (an excluded trust) forgoes the CGT discount on capital gains arising from assets other than goodwill and rsquointangible assets inherently connected with the business carried on by the trusteersquo
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Board of Taxation ndash Div 7A recommendations - Supplement
bull Set of common principles for loans payments debt forgiveness
bull Simpler system in which asset revaluations will not be required and unrealised profits not taken to be distributed because company assets have been used and company profits tested each year
bull Single 10-year loan with flexibility for repayment of principal
bull A lsquotick the boxrsquo option for trading trusts to retain working capital funds taxed at corporate tax rate - trading trusts that make election denied 50 CGT discount except in relation to goodwill
bull Alternative system that removes uncertainty on the treatment of UPEs by clarifying that all UPEs are loans for Division 7A purposes
bull Self correction mechanism which would enable taxpayers to put in place complying loan agreements reduce compliance and administrative costs
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull No requirement for formal written agreement if evidence of loan
bull Statutory interest rate set at the start of the loan and fixed over the term of the loan and would be RBA indicator lending rate for small business immediately before start of that income year
bull The maximum loan term would be 10 years
bull Prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows
bull ndash 75 per cent of the original loan by the end of year three
bull ndash 55 per cent of the original loan by the end of year five
bull ndash 25 per cent of the original loan by the end of year eight and
bull ndash 0 per cent of original loan (ie fully repaid) by end of year 10
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Transitioning all other pre-existing Division 7A loans to the new 10-year loans from the application date of the new provisions
bull All existing complying seven-year loans would have their terms extended to the new maximum of 10 years
bull All pre-1997 loans would be deemed to be new complying Division 7A loans with a 10-year term starting from the application date of the new provisions
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Introducing a legislative amendment that allows trusts to make a once-and-for-all election for loans from companies (including UPEs owing to companies) to be excluded from the operation of Division 7A
bull ensuring that a trust that makes such an election (an excluded trust) forgoes the CGT discount on capital gains arising from assets other than goodwill and rsquointangible assets inherently connected with the business carried on by the trusteersquo
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull No requirement for formal written agreement if evidence of loan
bull Statutory interest rate set at the start of the loan and fixed over the term of the loan and would be RBA indicator lending rate for small business immediately before start of that income year
bull The maximum loan term would be 10 years
bull Prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows
bull ndash 75 per cent of the original loan by the end of year three
bull ndash 55 per cent of the original loan by the end of year five
bull ndash 25 per cent of the original loan by the end of year eight and
bull ndash 0 per cent of original loan (ie fully repaid) by end of year 10
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Transitioning all other pre-existing Division 7A loans to the new 10-year loans from the application date of the new provisions
bull All existing complying seven-year loans would have their terms extended to the new maximum of 10 years
bull All pre-1997 loans would be deemed to be new complying Division 7A loans with a 10-year term starting from the application date of the new provisions
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Introducing a legislative amendment that allows trusts to make a once-and-for-all election for loans from companies (including UPEs owing to companies) to be excluded from the operation of Division 7A
bull ensuring that a trust that makes such an election (an excluded trust) forgoes the CGT discount on capital gains arising from assets other than goodwill and rsquointangible assets inherently connected with the business carried on by the trusteersquo
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Transitioning all other pre-existing Division 7A loans to the new 10-year loans from the application date of the new provisions
bull All existing complying seven-year loans would have their terms extended to the new maximum of 10 years
bull All pre-1997 loans would be deemed to be new complying Division 7A loans with a 10-year term starting from the application date of the new provisions
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Introducing a legislative amendment that allows trusts to make a once-and-for-all election for loans from companies (including UPEs owing to companies) to be excluded from the operation of Division 7A
bull ensuring that a trust that makes such an election (an excluded trust) forgoes the CGT discount on capital gains arising from assets other than goodwill and rsquointangible assets inherently connected with the business carried on by the trusteersquo
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Introducing a legislative amendment that allows trusts to make a once-and-for-all election for loans from companies (including UPEs owing to companies) to be excluded from the operation of Division 7A
bull ensuring that a trust that makes such an election (an excluded trust) forgoes the CGT discount on capital gains arising from assets other than goodwill and rsquointangible assets inherently connected with the business carried on by the trusteersquo
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Board of Taxation Report ndashDivision 7A Recommendations
Key Recommendations
bull Qualifying taxpayers can self-assess their eligibility for an exception to Division 7A that will operate to reverse the effect of a prior deemed dividend
bull Eligibility for the exception will be based on satisfying two criteria
bull It is reasonable to infer on the basis of objective factors that the conduct that caused the deemed dividend was unintentional and
bull Appropriate steps have been taken to ensure that affected parties are placed in the position they would have been in had the dividend not arisen
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Federal Budget AnnouncementChanges recommended to Div 7A
bull In the May 2016 Budget the Government announced it is proposing to amend Division 7A with effect 1 July 2018 to include
bull Adoption of Board of Taxation recommendations
bull a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty
bull new safe harbour rules such as for use of assets to provide certainty and simplify compliance for taxpayers and
bull amended rules with appropriate transitional arrangements regarding complying Div 7A loans including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Board of Taxation Recommendations -Consultation Paper
bull Board of Taxation (Final) Report to Government
bull Treasury - Exposure Draft (consultation) - December 2017
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
TRUST TAXATION ISSUES
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
TRUST COMPONENTS
Settlor Person who makes the original property settlement to create the trust
Settled sum Nominal sum bestowed by the person to create the trust
Trust property Assets held by the trustee
Trustee A trustee is not a separate legal identity The trustee is the person (including a
company) who operates the trust estate as legal owner of the trust property
Beneficiary
object
Person who will benefit from the distribution of trust incomeproperty
Trust deed Memorandum that governs the operation of the trust
Vesting period Trust deeds generally allow the trustee to appoint and move the vesting date at
their absolute discretion
Legislation determines the final vesting date eg 80 years in Victoria
Guardian Person from whom consent must be gained before a change can be made to
the trust deed
Appointor Person with the power to appoint and remove the trustee
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
TYPES OF TRUSTS
bull Trust created by a person during their lifetime (inter-vivos trust)ndash There are three types of inter-vivos trusts
o Fixed
o Discretionary
o Hybrid
ndash To create an inter-vivos trust there must beo evidence of an intention to create a trust
o a transfer of property from the settlor to the trustee for a nominal sum
o a record by way of a minute the acceptance of the office of the trustee
o trust deed submitted to relevant state authority for acceptance and payment of duty
o property transferred to the trust either by gift or sale
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
TYPES OF INTER-VIVOS TRUST
Type of trust Features
Fixed trust Each beneficiary has a fixed interest in the proportion of income or capital of
the trust Trustee must make distributions in accordance with the interests held
Two types ndash unit and non-unit
Unit ndash Beneficial ownership is divided into units and the number of units
held determines the proportion of ownership
Non-unit ndash No units are issued Instead the trust deed states the fixed
entitlement of each beneficiary
Discretionary trust Trust deeds give discretion to the trustee to decide the proportion of income
and capital distributed to beneficiaries
Most common trust used in family tax planning ndash family trusts discussed later
Hybrid trusts Components of both fixed and discretionary trusts
Interests of the beneficiaries in the trust property will be fixed
Remainder of the trust structure is discretionary (eg income capital etc)
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
TYPES OF TRUST (contrsquodhellip)
bull Trusts created by will or on the intestacy of any personndash A trust is automatically created on the death of a person The
assets of the deceased form the trust property which is held in trust for the beneficiaries named in the will
bull Trusts created by the operation of the rules of law (or equity)ndash Arises when it would be inequitable for the holder of property to
be permitted to hold that property for their own benefit Also known as a constructive trust
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
PART B TAXATION OF TRUST INCOMEbull Division 6 of ITAA36 governs the taxation of trust incomebull Because a trust is not a separate legal entity Division 6
apportions liability to tax between the trustee and beneficiary dependant on whether or not the beneficiary is presently entitled to trust income
bull Where the beneficiary is presently entitled to trust income and not under a legal disability they are assessed on their share of the net income Where the beneficiary is presently entitled but under a legal disability or is not presently entitled then the trustee is assessed on the net income
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Role of the Settlor
bull Best to have an unrelated party in the role of settlor to minimise the potential application of s 102 ITAA 36
bull Section 102 will not be triggered where the settler is a mere contingent beneficiary
bull For s 102 to apply the settlor must have power to revoke or alter the trust so as to acquire a beneficial interest in the trust income or trust property or their children who are under 18 must acquire an interest in the trust income
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Trustees
bull Corporate or Individual Trusteesbull The use of an individual as trustee is generally a less costly
bull The trustee is personally liable for the debts incurred in their capacity as trustee and are indemnified from trust assets
bull Use of a Corporate Trusteebull Provides more protection ndash but do not overuse a corporate trustee
bull See DFC of T (Superannuation) v Fitzgeralds amp Anor 2007 ATC 5105
bull The assets of the trustee acting in its own right will be subject to claims against the trustee for liabilities incurred in relation to the trust (but the reverse will not apply provided that necessary documentation and procedures are in place)
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Change Beneficiaries Trustee -Resettlements
bull The identity of beneficiaries is an essential element of the trust
bull A change of beneficiaries may result in a re-settlement of a trust
bull A change in the membership of a continuing class of members will not constitute a change in the beneficial ownership
bull The change of trustee does not trigger immediate tax consequences -CGT event A1 does not occur
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Change Beneficiaries Trustee -Resettlements
bull Whether changes to a trust create a new trust (a resettlement) will depend on the particular circumstances
bull In FCT v Clark (2011) 79 ATR 550 Court considered that the indicia of continuity identified in Commercial Nominees apply equally for the purposes of the income tax laws governing trusts
bull Court held that changes which ATO argued had brought about a break in the continuity of the trust estate were insufficient to have had that effect
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Change Beneficiaries Trustee -Resettlements
bull Following Clarke decision ATO withdrew the document -Creation of a new trust ndash Statement of Principles August 2001 ndash which set out its views on this issue
bull In TD 201221 ATO acknowledged that as a result of decision in FCT v Clark approach set out in the Statement of Principles was not sustainable
bull ATO now accepts that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Vesting of Trust
bull Most trust deeds have a standard vesting date of 80 years from the commencement date of the trust
bull More unusual vesting periods include ldquo21 years after death of last living descendant of King George V alive at the time the trust was establishedrdquo
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Vesting of Trust
bull Trust deeds generally have default distribution mechanism to distribute trust fund on vesting date where trustee has not exercised discretion to distribute
bull Where the vesting date has been overlooked the trust fund will usually be held on trust by the trustee for a defined class of beneficiaries (referred to for present purposes as lsquoprimary beneficiariesrsquo)
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Vesting of Trust
bull From a tax perspective the vesting of the trust results in the primary beneficiaries becoming absolutely entitled to the trust fund and CGT events E5 or E7 would likely occur (depending on the nature of the trust property)
bull The effect of CGT event E5 or E7 is that the trustee will make a taxable capital gain on post-CGT assets if the market value of the assets exceeds their cost base The beneficiaries would acquire the trust property at the vesting date with a cost base equal to its market value
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Vesting of Trust
bull From a revenue perspective stamp duty is usually chargeable on transfers and certain other transactions relating to land including transactions resulting in a change in beneficial ownership of land
bull Depending on default distribution provisions in trust deed vesting of a trust that results in a change in interests in land could be a dutiable transaction
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Vesting of Trust
Can vesting be avoided
bull Generally trust property vests within 80 years
bull South Australia has abolished the perpetuity period
bull If a trust deed has a shorter vesting date such as 40 years the vesting date can potentially be extended to avoid unwanted consequences
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Vesting of Trust
Extending the vesting date ndash power under the trust deed
bull Some trust deeds give the trustee power to extend the vesting date
bull If the trustee exercises this power properly and does not exceed the perpetuity period the extension will be valid and the trust can continue
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Vesting of Trust
Extending vesting date ndash no power under the trust deed
bull Some trust deeds do not contain a power to extend the vesting date
bull Supreme Court in most States has the power to vary trusts under their respective trust legislation where it is for the benefit of the beneficiaries of the trust
bull Recent case of Re Plator Nominees [2012] VSC 284 ndash court agreed to extend vesting date ndash court consideredbull benefits and disadvantages of proposed variation bull purpose of trust and settlorrsquos intention in establishing trust
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Vesting of Trust
bull Resettlement of the trust should also be considered when extending the vesting date
bull With withdrawal of Statement of Principles August and issuing TD 201221 where trustee exercises a valid power to extend vesting date there should not be a resettlement
bull If no power consideration should be given to trust structure and settlorrsquos intention at time trust established
bull If there is a clear reason why shorter vesting period was nominated caution should be exercised before any attempt is made to extend the vesting period
bull
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Trustees that are beneficiaries
bull A trustee can be a beneficiary in a trust but it cannot be the only beneficiary
bull The fact that the trustee is a beneficiary in a trust may impact on the ability of third parties to make a claim against the assets of the trust ndash see the case of Richstar Enterprises case
bull the extensive control that the person had over the appointment of the trustees and distributions made by the trust created (at least) a contingent interest in the trust properties sufficient to bring them within the s 9 definition
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
Taxation of trusts - Division 6
Present Entitlement ndashReimbursement Agreement
REIMBURSEMENT AGREEMENT ndash SECTION 100A
bull The term ldquoreimbursement agreementrdquo is defined as any agreement arrangement or understanding providing for
bull the payment of money (including a payment by way of loan) to
bull the transfer of property to or
bull the provision of services or any other benefits for
bull any person other than the beneficiary being an agreement entered into for a purpose (not necessarily the sole or principal purpose) of reducing the tax liability of a person
bull Raftland case and others ndash presence of reimbursement agreement triggers application of section 1ooA
bull Effect is that ldquodistributionrdquo and transactions relevant to reimbursement agreement are disregarded
Present Entitlement ndashReimbursement Agreements
bull Anti-avoidance provisions operate to strike down present entitlement in the presence of a reimbursement agreement
bull Raftland Pty Ltd Case ndash distribution created an indebtedness but it was not a ldquoreal debtrdquo that was intended to be paidbull It was held that the entitlement under the Raftland Trust deed was not intended to
have substantive legal effect Accordingly s 100A(1) applied
bull Trustee was taxed on the income to which no beneficiary was presently entitled
Update ndash ATO Guide on reimbursement agreementsbull Section 100A ITAA 1936 can apply where a beneficiary is made
presently entitled to trust income that is intended to be directed to another person The effect of the application of section 100A is that the trustee is made taxable on the distribution at the top marginal rate currently 49 with the Medicare levy
bull It appears from the ATO Guide that the ATO is interpreting section 100A more broadly than it has in the past
Effective Disclaimers
bull Where there is a distribution to a person it vests in the person even before knowledge of the transfer subject to his right when informed of it to say if he pleases I will not accept it
bull Effect of making a Disclaimer - TD 200126 bull A renunciation by a beneficiary of an actual interest in a discretionary trust
(the interest being a CGT asset) would give rise to CGT event C2
bull A disclaimer by a mere beneficiary of a discretionary trust has no tax effect
bull A disclaimer by a default beneficiary may require further consideration
Net income v Trust law income
bull Net income of a trust estate ndash Taxable income as per s 95(1)
bull In order to decide on which amounts the beneficiary or trustee will be assessable under s 97 98 99 or 99A it is necessary first to determine the net income of the trust estate
bull The net income is defined in s 95(1) to mean the total assessable income of the trust estate calculated as if the trustee were a resident less all allowable deductions
bull The net income should be calculated on the basis that the trustee is a resident
Net income exceeds Trust law income (1)
bull Net income gt trust law income (both amounts gt 0 and the excess results from an income amount)
bull Net income gt trust law income (both amounts gt 0 and the excess results from a capital amount)
bull Net income gt trust law income (trust law income lt 0)
bull Net income consists only of a capital gain and trust law income lt 0
Net income exceeds trust law income (2)
bull Where the trust law income lt 0 no beneficiary will be presently entitled - the trustee will be assessed on the income under s 99A
bull Example ndash Net income gt trust law income
bull Quantum View ndash excess is assessable to the trustee under s 99A
bull Proportionate View ndash no amount assessable to the trustee under s 99A
Proportionate v Quantum Approach
bull The proportionate approach has received greater support from decided cases where the excess of net income results from an income amount
bull The proportionate approach does not deliver the fairest result where the income beneficiaries are not entitled to a share of the capital of the trust ndash See Richardsonrsquos Case
bull The Zeta Force Case supports the proportionate approach where the difference is of an income nature
The Importance of Trust Income
bull Section 97(1) relies on the presence of trust law income (income in accordance with the trust deed or generally accepted accounting principles) - in the absence of trust law income the proportionate or quantum approach cannot be applied satisfactorily
bull Cajkusicrsquos Case demonstrates the difficulties in applying either view where there is no trust law income and so the net income is assessed to the trustee under s 99A
bull In Bamford V FCT High Court sanctioned proportionate approach as appropriate methodology
Update ndash Practice Statement PS LA 20152
bull The ATO states in the Practice Statement that it will not issue an original trustee assessment more than 4 years after the relevant trust tax return was lodged or for the 30 June 2014 and later income years more than 2 years after lodgment if the trust was a small business entity (and none of the qualifications in item 3 of the table in s 170(1) of the ITAA 1936 apply)
bull According to the Practice Statement the time limits listed above do not apply in the following circumstances
bull if the trustee has not lodged a trust return for the year in question
bull if the Commissioner is of the opinion that there has been fraud or evasion
bull where an extended or unlimited amendment period would apply or
bull where the time limit is extended ndash in cases where the ATO has started to examine the affairs of a trust (or related entity) and the examination will not be completed within the time limits the ATO may seek the trustees agreement to extend the period
Taxation of Trusts - Recent Government Initiatives
bull On 24 October 2012 the Government released a policy options paper for reforms to the taxation of trusts
bull The options paper articulates the design of 2 alternative models
bull Economic Benefits Model (EBM) and
bull Proportionate Assessment Model (PAM)
bull Adoption of either EBM or PAM means that trusts will not be taxed as companies ndash legal and tax status remain in current framework
Overview of nature and scope of Government options proposed
General observations
bull Both approaches endorse an unencumbered ability to stream income classes to different beneficiaries - expense allocation rules ensure that various classes of income are appropriately calculated
bull Also proposal to extend distribution date from 30 June to 31 August (ie the provision of a 2-month extension) - will overcome the type of compliance problems faced at 30 June 2012
bull However many trust deeds would need to be updated to accommodate this proposal
Overview of nature and scope of Government options proposed
Path Ahead
bull Submissions have closed
bull Govt will issue Exposure Draft Bill in 2017 (further consultation will be sought)
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
What this Guideline is about
bull This guideline was originally released in draft form on 26 October 2016 and was finalised on 13 September 2017
bull The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement
bull This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of ldquofixed entitlementrdquo
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Savings Rule
The mere fact that a trustee has power to redeem units in a unit trust or issue further units for an appropriate value being
bull where the units are listed for quotation in the official list of an approved stock exchange ndash the same price as other units are offered for sale on that exchange at the time of the redemption or issue or cent where the units are not so listed ndash a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles
bull for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer
bull for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer but which nevertheless is accurate
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)
bull for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs) including where accrued distributions are excluded from the net asset value based on a unit dayrsquos pricing model
bull for a price based on the volume weighted average price (VWAP) of the units or
bull in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015847 ASIC Class Order [CO 13655] and ASIC Class Order [CO 13657] (if relevant) or any other ASIC guidance or relief on the same subject
Tax Update ndash October 2017
Commissionerrsquos discretion to treat an interest in the income or capital of a trust as a fixed entitlement
PCG 201616
Safe harbour
To qualify for access to a safe harbour a trust must at all relevant times the particular conditions pertaining to the particular type of trust For an unlisted ordinary trust the conditions are
bull the trust must have a trust instrument
bull all beneficial interests in the income and capital of the trust are vested
bull all beneficial interests have the same rights to receive the income and capital of the trust
bull all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capitalof the trust
bull the trust is not a discretionary trust or a trust with default income or capital beneficiaries ndash that is no beneficial interest in the income or capital of the trust is capable of being defeated partly or wholly by the exercise of a power of appointment of income or capital by the trustee or other done
bull a trustee or manager has never exercised a power capable of defeating a beneficiaryrsaquos interest to defeat a beneficiaryrsaquos interest in the income or capital of the trust and
bull an arrangement has not been entered into which would result in
bull (a) section 272-35 having application
bull (b) the trafficking of the tax benefit of a tax loss bad debt deduction or debtequity swap deduction or
bull (c) fraud or evasion
COMPANY TAXATION ISSUES
Tax Update
Corporate tax rate cut for companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull This bill has been introduced into the House of Representatives
bull It amends the Income Tax Rates Act 1986 to progressively extend the lower 275 corporate tax rate to all corporate tax entities by the 2023-24 financial year and further reduce the corporate tax rate in stages so that by the 2026-27 financial year the corporate tax rate for all entities will be 25
bull This follows the legislated reduction in corporate tax rates for entities with annual aggregated turnover of under $50 million
bull This bill is the Governmentrsquos second attempt to legislate those tax cuts for larger companies
Proposed New Company Tax Rates
Financial year Aggregated turnover less
than
Company tax rate
2016-17 $10m 275
2017-18 $25m 275
2018-19 $50m 275
2019-20 to 2023-24 $50m 275
2024-25 $50m 27
2025-26 $50m 26
2026-27+ $50m 25
Tax Update
Corporate tax rate cut for companies
PCG 20177 - Franking for small business
bull The maximum franking credit that can be allocated to a distribution must be based on the entitys applicable corporate tax rate
bull For a small business company this is 275 for their 2016ndash17 income year
bull If you are a small business that has issued 2016ndash17 distributions based on 30 you should notify shareholders of the correct dividend and franking credit amounts
bull You can do this by sending a letter or an email to your shareholders or a revised distribution statement
bull Small businesses should also ensure the correct amounts are reported to us in their annual distribution reporting process
bull Small businesses should also take care to ensure the correct amounts are reflected in their franking account
Tax Update
Corporate tax rate cut for larger companies
Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017
bull Definitional framework of small business entity (SBE) company
bull New 8020 rule ndash application and effect
TAX ADMINISTRATION ISSUES
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
The Commissioner can only exercise the Remedial Power (to modify law) where
bull the modification is not inconsistent with the intended purpose or object of the provision
bull the Commissioner considers the modification to be reasonable having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object and
bull the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull Before exercising the power the Commissioner must be satisfied that any appropriate and reasonably practicable consultation has been undertaken
bull This allows an opportunity to identify and consider all implications from the exercise of the power and to ensure that the exercise of the power is appropriate in the circumstances
bull This is consistent with the approach to amendments of primary legislation which are subject to public consultation
bull In addition the Commissioner will consult with a technical advisory group (which will include private sector experts the Treasury and the ATO) and the Board of Taxation prior to any exercise of the power According to the EM Parliament expects
Tax Update
Commissionerrsquos new ldquoRemedial Powerrdquo
Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016
bull A modification does not apply to a taxpayer if it would produce a less favourable result for them or for any other taxpayer
bull According to the EM lsquofavourablersquo could mean either thatbull a tax liability is reduced orbull the costs of complying with the taxation law are reduced orbull overall taking into account changes in liabilities and compliances costs the modification is
favourable
bull A taxpayer needs to self-assess whether a modification is less favourable to it and whether it must therefore treat the modification as not applying to itself and to any other entity
