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In brief:  A common worry in relation to small businesses has been whether business owners themselves would qualify for the JobKeeper Payment of $1,500 per fortnight if they are not paid salary or wages. Of course, a significant number of small business owners are in that position – they receive income as a partner or by way of trust distributions or dividends, rather than as salary or wages. The eligibility of those business owners for the JobKeeper Payment was clarified over the weekend.

• where the business operates through a sole trader structure – one owner can be nominated to receive the JobKeeper Payment;
• where the business operates through a partnership – one partner can be nominated to receive the JobKeeper Payment;
• where the business operates through a company – one director can be nominated to receive the JobKeeper Payment;
• where the business has shareholders who provide labour to the company and receive dividends in lieu of wages – one such shareholder can be nominated to receive the JobKeeper Payment; and
• where the business operates through a trust – one individual beneficiary (that is, not a corporate beneficiary) can be nominated to receive the JobKeeper Payment.”

It will still be necessary for relevant businesses to satisfy the other necessary criteria to qualify for the JobKeeper Payment, including the requisite fall in turnover of at least 30%. And it seems that the above rules will not apply in relation to the Cash Flow Boost payments – eligibility for those will still depend on payments that are subject to the PAYG Withholding regime, whether payments to business owners or others. Businesses potentially qualifying for the JobKeeper Payment should register on the ATO website.

The Government intends to legislate the JobKeeper Payment this week, but no Bill is publicly available at the time of writing. The updated Fact Sheet from Treasury is available at this website (copy and paste): https://treasury.gov.au/sites/default/files/2020-04/Fact_sheet-Support_for_sole_traders.pdf

In brief:    Treasury this week released a Consultation Paper on the Division 7A amendments proposed to commence on 1 July 2019. There are some significant changes from what has previously been mooted, with some of the main points now proposed including:

•   a single 10 year model for complying loans, with equal annual principal repayments and interest at a Reserve Bank published indicator rate for small business overdrafts (currently 10.3%, compared to the current Division 7A rate of 5.2%)
•   except for the initial year of the advance, loan interest will be calculated for a full year regardless of when any repayment is made during the year
•   25 year loans existing on 30 June 2019 must adopt the new interest rate immediately, but the new 10 year loan rules will not apply until 30 June 2021
•   7 year loans existing on 30 June 2019 will retain their existing outstanding term, but must otherwise comply with the new loan model
•   loans made before 4/12/97 must adopt the 10 year repayment model from 30 June 2021
•   the concept of ‘distributable surplus’ will be removed, so that Division 7A will always apply to the whole value of any loan or other benefit extracted from a private company
•   all outstanding UPEs after 15/12/09 will effectively be subject to the 10 year repayment model from 1 July 2019, although no decision has yet been made to also bring in UPEs from before 16/12/09.

More:    The Consultation Paper also outlines some further amendments that the Government proposes. Perhaps the most significant is the proposal of a 14 year review period during which assessments can be amended in respect of Division 7A matters. In addition, a self-correction mechanism is proposed for taxpayers to rectify inadvertent breaches of Division 7A. Taxpayers will be permitted to self-assess their eligibility for this relief, under which they will be obligated to convert any relevant benefit into a complying loan agreement. Affected taxpayers will also need to make catch-up payments of both principal and interest (on a compound basis) that would have been required, had they properly complied with Division 7A in the first place.

Other proposed amendments include a safe harbour formula that may be adopted in the case of an asset (other than a motor vehicle) provided by a company for use by a shareholder or their associate, confinement of the exclusion for loans made in the ordinary course of an entity’s business to loans made in the ordinary course of a moneylending business, and a ‘but for’ test for the application of s 109T to loans, payments or other benefits provided to a taxpayer indirectly from a private company. (Targeted amendments to the Division 7A integrity rules: Consultation Paper, October 2018)

In brief:    A recent ex parte application in the Federal Court for freezing orders and other interlocutory relief against several taxpayers starkly illustrates the importance that email correspondence may play in disputes. Evidence supporting the application included an affidavit from ‘a computer forensics officer employed in the Forensics and Investigations team of the ATO.’ The evidence of that ATO officer was that documents purportedly made in 2003 had actually been created in 2015, subsequent to the commencement of an ATO audit and associated notice issued to the taxpayers’ accountant to provide information under (former) s 264 ITAA36. Further evidence based on email correspondence involving personnel from the taxpayers’ accountants was alleged to support the fact that the relevant documents ‘were created in February 2015 and backdated to give the appearance that the documents came into existence in May 2003.’

More:    This case involved fairly extreme circumstances, where total tax and penalties at issue exceeded $34M and documents had ultimately been seized from premises associated with the relevant accounting firm under search warrants executed by the Federal Police. However, the point is that email correspondence does not have the confidentiality that we intuitively attribute to it. Best practice is to approach the writing of any document or correspondence with the attitude that it may ultimately be viewed by a range of people, including regulatory authorities.

Such incriminating evidence sometimes becomes unveiled from unrelated circumstances. For example, there have been reported cases where a taxpayer has been practically obliged to produce financial evidence, showing much greater business income than what has been reported to the ATO, to defend against an allegation of misrepresentation by a subsequent purchaser of the taxpayer's business. And the discovery process in proceedings for professional negligence against a professional advisor may also throw up incriminating evidence about an understatement of taxable income, perhaps even involving criminal acts. Whether or not the primary matter before the court involves taxation, the Judge will usually make orders for it to be passed on to the ATO. (DC of T v Advanced Holdings Pty Ltd [2018] FCA 1263)

In brief:    Parliament has finally passed the new rules about which companies qualify for the 27.5% tax rate. And these rules operate retrospectively from 1 July 2017, so apply to 2018 company tax returns and franked dividends paid in the 2018 year of income. It is no longer relevant whether or not a company carries on business – the only 2 criteria are that the company’s aggregated turnover is below the threshold ($25M for the 2018 year and $50M for 2019) and that no more than 80% of the company’s assessable income comprises ‘passive income’.

More:    Passive income for this purpose is defined as:

• distributions by corporate tax entities (but not dividends to a company holding voting rights of 10% or more in the company paying the dividend);
• franking credits on those distributions;
• non-share dividends from companies;
• interest income (but not for banks and other specified financial institutions), royalties and rent;
• gains on qualifying securities;
• net capital gains; and
• to the extent referable to any of the above, amounts included in the assessable income of a partner from a partnership or beneficiary from a trust.

The test must be applied for each income year, so the tax rate for a company may change from year to year.

So too for the tax rate used to calculate the maximum franking credits that may be applied to dividends. However, the tax rate for that calculation must be determined on the assumption that the aggregated turnover, passive income and assessable income are all the same as for the previous year of income. And, if the company did not exist in the previous year, then maximum franking credits must be based on the 27.5% rate.

For the ATO’s draft guidance, see Draft Law Companion Ruling LCR 2018/D7 and Draft Practical Compliance Guideline PCG 2018/D5. (Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2018)

In brief:    Presumably because of the deferral of proposed amendments to Division 7A, now aimed to commence from 1 July 2019, the Commissioner has extended the additional concession for maturing sub-trust arrangements to those maturing in the 2019 year of income. So those using the 7 year term under Option 1 in PS LA 2010/4, and which term expires in the 2019 year of income, will be able to effectively extend repayment by putting in place a complying 7 year loan ‘between the sub-trust and the private company beneficiary prior to the private company’s lodgement day’ for the 2019 year.

More:    This extension has been incorporated into Practical Compliance Guideline PCG 2017/13, which now applies to sub-trust arrangements maturing in the 2017, 2018 and 2019 years of income. That is, the amended Guideline applies to Option 1 arrangements entered into prior to 1 July 2012.

The proposed amendments to Division 7A stem from the Board of Taxation’s post-implementation review of Division 7A, provided to the Government in November 2014. They were announced in the 2016-17 Federal Budget, but full details have not yet been released. (Practical Compliance Guideline PCG 2017/13)

In brief:    In a unanimous decision from all 7 Justices of the High Court yesterday, the Commissioner has ultimately succeeded on the main, substantive issues in Thomas’ case. The trustee of a discretionary trust had purported to distribute franking credits to beneficiaries independently from, and in different proportions to, the relevant franked dividends. It is a complex case, but the controversies for the purposes of the appeal were mainly whether the court was bound by directions from the Supreme Court of Queensland to the trustee of the trust under s 96 of the Trusts Act 1973 (Qld) about the effect of the trust distributions and, if the court was not so bound, the proper application of the imputation provisions to the distributions. It was held that the directions from the Supreme Court did not bind the court (nor the Commissioner) in the proper application of tax laws.

More:    The decision makes it plain ‘that the statutory notional allocation of franking credits to beneficiaries follows the proportions which have been established with respect to their notional sharing in franked distributions’ [para 16] – that is, franking credits cannot be distributed separately from the franked dividends to which they are attached.

The High Court appears also to have finally laid to rest the notion that franking credits represent a species of property able to be dealt with as such by a trustee. The trust deed in this case did not have provisions attempting to facilitate separate dealings in franking credits but, in statements apparently intended to be of general principle, the members of the Court said that ‘… franking credits – exist[s] neither in nature nor under the general law’ (Gageler J [97]) and ‘The [assumption that franking credits can be dealt with separately] involves the notion that franking credits are discrete items of income that may be dealt with or disposed of as if they were property under the general law. That notion is contrary to the proper understanding of [the imputation provisions]. Franking credits are a creature of its provisions; their existence and significance depend on those provisions.’ (joint reasons of the other 6 Justices [9])

The Commissioner will no doubt regard those statements as supporting his views in Draft Ruling TR 2012/D1 relating to ‘notional amounts’ of trust income (see, particularly, para 112-115 in relation to franking credits). If franking credits do not constitute property under the general law, then they cannot form part of a trust fund and nor can a trustee be liable to account to beneficiaries for franking credits (although trustees in a sense do have indirect obligations, needing to take into account the impact of distributions on franking credit entitlements under the tax law). This makes income equalisation clauses in trust deeds even more problematic (those clauses will in many cases not work effectively anyway). And practitioners who include franking credits in the financial statements of trusts need to think carefully about the risks that doing so potentially create for getting the numbers wrong in the proper recording of the distributable income of the trust, beneficiaries’ entitlements to that income and consequent proportional franking credit implications. (FC of T v Thomas [2018] HCA 31)

In brief:    A tax practitioner has failed to overturn the assessment of funds received over several years from companies of which he was the sole director or otherwise controlling mind. His contention was that the Administrative Appeals Tribunal had found that he genuinely believed that the receipts constituted loans from the companies, and that that belief should be imputed to those companies, given his control of them. The taxpayer submitted that such common belief was sufficient to establish the character of the receipts as loans. The Federal Court, however, dismissed his appeal, finding no error of law by the Administrative Appeals Tribunal in upholding the Commissioner’s assessments.

More:    The law has long recognised that a director (including a sole director) may contract with their company, although necessarily doing so as agent for their company. However, this case is a salutary lesson – perhaps counterintuitively to what some practitioners would regard as the effect – that the subjective intentions of the director may not be sufficient to stamp any transaction between them with the character desired. The taxpayer failed because he had not proved that the receipts were the proceeds under loan contracts, thus failing to discharge his onus of showing that the Commissioner’s assessments were excessive. Rather than evidence merely of the taxpayer’s state of mind, it was an objective assessment of all the circumstances surrounding the receipts that was determinative. No interest was paid on the purported loans or recorded in any books or tax returns and there was a lack of other documentary evidence, apart from loan agreements entered into well after the receipts. (Rowntree v C of T [2018] FCA 182)

In brief:    Much has been said about the Aussiegolfa decision (now on appeal to the Full Court), in which the Federal Court determined that an SMSF had breached the sole purpose test and also exceeded the 5% threshold for in-house assets. The relevant investment was in a unit of student accommodation, acquired under the DomaCom Fund, and a daughter of the SMSF’s sole member was one of 3 students who leased the unit. The member is a state manager for DomaCom and it was admitted that the arrangements were intended to test the use of residential property under the DomaCom system for related parties of SMSFs.

More:    The sole purpose test was breached because a purpose of the SMSF in acquiring units in the DomaCom Fund was to provide accommodation for the sole member’s daughter. But, in relation to the in-house assets breach, it was a critical finding that the sub-fund established for the property acquisition under the DomaCom Fund constituted a separate trust. The members of the sub-fund were wholly entitled to all the income and capital of the sub-fund, to the exclusion of all other members of DomaCom. Further, it was held that the DomaCom responsible entity owed no fiduciary duties to those other members in respect of the sub-fund. So the sub-fund, even though constituted under a single managed investment scheme and governed by the constitution of the scheme, was held to be a separate trust. This decision serves as a good reminder of the versatility of trusts law. Even though we are accustomed in practice to specific types of trusts (e.g. discretionary trust, child maintenance trust, etc), each typically constituted under a single document, these are not precise species recognised in trusts law. Trusts can be created in many ways and there is enormous flexibility in the terms that can be encompassed. This is part of the reason for the special place of trusts in common law countries and their particular attraction to tax practitioners. (Aussiegolfa Pty Ltd v C of T [2017] FCA 1525)

In brief:    In an important win for the Commissioner, the Federal Court has held that there was error by the AAT in valuing a 1/3rd holding of shares in a private company by discounting the sale price for a ‘lack of control’. The taxpayer was one of 3 equal shareholders in the company who together contracted to sell all the shares for a total price of $17.7M, with each shareholder receiving $5.9M. The market value of the taxpayer’s shares was critical in determining whether he satisfied the $6M net asset value test and was entitled to the small business CGT concessions.

More:    This case involves 2 issues. The first is the precise identification of the relevant CGT asset or assets involved and the second is the determination of the market values of those assets for the purposes of s152-20. So that latter question necessarily involves principles of valuation law, in the context of the Income Tax Assessment Act 1997. And the case is very important, given the significance of market values in many areas of tax law.

Although commencing with the price actually received by the taxpayer, the AAT had discounted that price in recognition of the relative lack of control of a minority shareholder. It had done so on the basis that the contemporaneous sale of all shares owned by the other shareholders were ‘special circumstances’ that should be recognised in the valuation process. The Court disagreed and held in any case that the AAT had erred by not having regard to market realities and the recognition in valuation principles of a buyer willing to pay more for an asset than others ‘because they are in a better position to exploit the particular attributes or potentialities of the asset’. (FC of T v Miley [2017] FCA 1396)

In brief:    The reduced 27.5% corporate tax rate has applied since 1 July 2016 to companies that carry on business and have an aggregated turnover of less than $10M ($25M for the 2018 year of income). Exposure draft legislation has now been released to reduce the confusion about which companies would be taken to be carrying on business. However, rather than address that question, the draft legislation will apply the lower tax rate to companies that have aggregated turnover less than the specified threshold for the year and whose total assessable income comprises less than 80% of ‘passive income’.

More:    Passive income for this purpose is to be defined as:

•     dividends (but not those from holdings with voting rights of 10% or more); 
•     non-share dividends by companies; 
•     interest income, royalties and rent; 
•     gains on qualifying securities; 
•     capital gains; and 
•     to the extent attributable to any of the above, amounts included in assessable income from a partnership or trust.

The 80% passive income test is an annual one so must be determined each year. The threshold is arbitrary so some odd results are possible. For example, a corporate beneficiary may be eligible for the reduced rate on trust distributions attributable mainly to business income in the trust, provided that it carries on business itself and satisfies the 80% test overall. But a company carrying on business managing the rental of its commercial or residential properties would not. What constitutes carrying on business is still not defined. (Exposure Draft: Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017)

In brief:    In addition to distribution resolutions by 2 trusts in this case, variation resolutions for each provided for additional distributions ‘should the Commissioner of Taxation disallow any amount as a deduction or include any amount in the assessable income of the trust …’ Assuming each variation provision was authorised by the relevant trust deed, the Full Federal Court held that it made the trust distribution contingent (on whether the Commissioner disallowed a trust deduction or included an additional amount in assessable income). Consequently, the beneficiary taxpayer who had been assessed on adjustments to the net (taxable) trust income was not presently entitled to a share of trust income by the end of the relevant income year and was not liable for tax on amended assessments following audit by the ATO.

More:    There were a number of issues in this complex case, which arose from ATO amendments made a number of years after the relevant income years. But the big takeaway is the impact of variation clauses relating to trust distributions. They typically serve no real purpose but create very significant potential problems. It was beneficial in this case that the beneficiary assessed had no present entitlement to the trust income, but ordinarily the result of that is a liability on the trustee for tax at the maximum individual rate. Variation clauses should consequently be avoided. (Lewski v Commissioner of Taxation [2017] FCAFC 145)

In brief:    A recent NSW payroll tax case shows again the potential problems of widely drawn beneficiary classes in discretionary trusts. A company owned and controlled by Michael Gerace had been issued with payroll tax assessments of nearly $2M and was put into liquidation. The Chief Commissioner of State Revenue (NSW) was successful in an appeal to group that insolvent company with a trust controlled by Michael’s brother and one established originally for their parents, despite an apparent lack of commercial connections. Grouping was achieved because Michael was a discretionary beneficiary of both those other trusts, so he was effectively taken to have a controlling interest in each of those trusts (as well as the insolvent company that he owned). And members of a payroll tax group are jointly and severally liable for the tax payable by every group member.

More:    Having wide trust beneficiary classes is an outdated practice that potentially creates substantial tax disadvantages, yet serves no real purpose – Tax Strategies’ trusts have for several years been created on a different basis without wide beneficiary classes, substantially minimising the risk of such tax disadvantages. There was no doubt about the grouping in this case, but Michael disclaimed his interests under his brother’s and parents’ trusts in an attempt to retrospectively sever his connection with them. However, the Court held that that did not affect payroll tax liabilities that had already arisen, irrespective of its impact as between Michael and the respective trustees. It is traditional drafting practice to have wide beneficiary classes in a discretionary trust, including many family members who are not intended and will never benefit under the trust. But that can give the payroll tax Commissioners a very easy grouping mechanism. It has also caused significant problems in relation to the recently introduced duty and land tax surcharges for foreign purchasers of residential real estate in a number of States. (Chief Commissioner of State Revenue (NSW) v Smeaton Grange Holdings Pty Ltd [2017] NSWCA 184)

In brief:    The ATO has released a Position Paper on its views for the application of the event-based reporting regime to SMSFs from 1 July 2018. This follows a recent draft legislative instrument to lay down the timing framework for the reporting regime. The basic rule proposed is that reporting must be done within 10 business days after the end of the month in which the reporting event occurred, although that will be subject to further concessions (at least for a transitional period).

More:    The purpose of the event-base reporting regime is to enable the ATO to track and administer the application of super fund members’ $1.6M (initially) transfer balance account cap. The ATO is seeking feedback about the options outlined in its Position Paper. The first option is the basic rule of 10 business days after the end of the month, but 28 days after the end of the quarter in which the reporting event occurs for reporting of the commencement of a retirement phase income stream and relevant repayment events relating to limited recourse borrowing arrangements. Also, extensions will generally not apply in relation to commutations of income streams. The second option proposed by the ATO is 28 days after the end of the relevant quarter in which the reporting event occurs for an initial 2 year period, reverting to the basic rule of 10 business days after the end of the month for all relevant events (again, except in relation to commutations). (ATO Position Paper; Transfer Balance Cap & SMSF ‘Event-Based’ Reporting Framework, 18 August 2017)

In brief:    The Government has announced significant changes amongst amendments to the super reforms commencing on 1 July 2017. In relation to limited recourse borrowing arrangements (LRBAs), it is proposed that the outstanding LRBA balance at the end of each year will count towards a member’s Total Superannuation Balance cap of $1.6M. And also that repayments of a LRBA (both principal and interest) will need to be credited to a member’s Transfer Balance Cap. For Transition to Retirement pension (TRIS) accounts, fund earnings are to automatically become exempt when a member turns 65 or satisfies any other nil condition of release. It is intended to enact the amendments before 1 July 2017.

More:    The proposed changes in relation to LRBAs are to counter perceived distortions to the operation of the reforms. There is a concern, for instance, that the payment of pension liabilities may effectively be made from accumulation phase income using a LRBA, giving an effective transfer of accumulation growth to the retirement phase. And that a member’s Total Superannuation Balance may be artificially kept below the $1.6M cap by lump sum withdrawals that are then lent back to the SMSF under a LRBA. These measures will add further complexity, including the need for apportionments where there is more than one member of a fund. The automatic exemption for TRIS pensions is a welcome one, designed to avoid a compliance need to commute a TRIS on satisfaction of a nil condition of release and recommence an account based pension.

In brief:    In a complex case, contested both by the Commissioner of Taxation and the wife of the taxpayer who controlled the transferor trust, the taxpayer has successfully obtained a declaration in the Federal Court that CGT rollover relief under Subdivision 126-A applied. The Family Court order was for the transfer of shares in a listed public company to the wife, although they were actually transferred to the trustee of a trust at the wife’s direction. It was held that rollover relief applied to the change in beneficial ownership in favour of the wife at the time the Court orders were made. In any case, the Court would have held that a rollover under s 126-15 applied for a trust to trust transfer given that the wife was sufficiently ‘involved’.

More:    The Court’s comments about CGT rollover on divorce applying on a trust to trust transfer is controversial – it has been commonly understood that the rollover only applied for spouse to spouse transfers or those from companies and trusts to a spouse. Also, the Court was prepared to hold that a change of beneficial ownership (without transfer of the legal title) constituted a CGT event A1. In any case, an appeal by the Commissioner (and presumably the wife) seems likely. The company shares which were the subject of the Family Court’s order appear to have had a value of approximately $20M so presumably a substantial tax liability is at stake. This case (which also included complex trusts law and other legal points) illustrates the need for deep analysis and consideration of the tax issues involved in divorce and other relationship breakdowns – whatever the ultimate outcome of an appeal, one or other of the husband and wife in this case will no doubt be bitterly disappointed. (Sandini Pty Ltd v FC of T [2017] FCA 287)

In brief:    The New South Wales Supreme Court has held that a disclaimer of his interest as a discretionary trust object was valid to retrospectively end a person’s rights to benefit from the time those rights were created. This was sufficient to break the payroll tax grouping between several entities controlled by 2 brothers, the group determined by the Chief Commissioner having included a company in liquidation with substantial outstanding payroll tax assessments.

More:    This case is another that confirms the enthusiasm by State payroll tax authorities for the grouping of entities. Grouping is a very useful mechanism for those authorities since each member of a group is jointly and severally liable for the payroll tax liabilities of all group members. And discretionary trust objects are typically deemed to have more than a 50% interest, readily enabling grouping through broad beneficiary classes in discretionary trusts. That is the real issue – having extraordinarily wide beneficiary classes is an outdated practice that creates problems, rather than serving any useful purpose. And that is why Tax Strategies’ trusts are created quite differently and will not facilitate payroll tax grouping through such tenuous connections. (Smeaton Grange Holdings Pty Ltd v Chief Commissioner of State Revenue (NSW) [2016] NSWSC 1594)

In brief:    The Full Federal Court has held that there was no error by the AAT in concluding that the $2M turnover test had not been satisfied and that, consequently, no small business CGT concessions applied on the sale of mining tenements. The case turned on whether disbursements totalling $55,106 for fuel costs under 2 contracts constituted ‘*ordinary income that the entity *derives in the income year in the ordinary course of carrying on a *business.’ (s 328-120(1)). The AAT had held that receipts from fuel disbursements were ordinary income, despite the normal practice that customers of the drilling contractor provided fuel and the initial contracts for the 2 relevant drilling jobs required the customers to provide fuel.

More:    The taxpayer’s drilling company was a ‘connected entity’ and had undertaken drilling exploration on the mining tenements from which the taxpayer derived the capital gain. And the Commissioner had accepted that the basic conditions for the small business CGT concessions would have been satisfied if the drilling company’s annual turnover had been less than $2M for the previous year of income. This case continues the steady stream relating to the small business CGT concessions and illustrates how important it is to step through each of the relevant tests for the concessions in fine detail. (Doutch v Commissioner of Taxation [2016] FCAFC 166)

In brief:    Company liquidators have successfully argued that the participation by directors (including a de facto director) in a tax evasion scheme breached various directors’ duties. The scheme involved back-to-back loans into Australia with untaxed offshore funds accumulated by the brothers who built the Nudie juice business. Tax debts owing by the companies were held to be part of the losses caused by such breaches and were consequently recoverable from the directors by the liquidators.

More:    This case is the latest in a number involving the Binetter family, arising from Project Wickenby. It illustrates a relatively novel approach to the collection of tax debts owing by presumably insolvent companies, establishing a pathway for liquidators direct to the directors. The case is also a good reminder that it is a mistake to focus solely on tax laws, including in relation to legitimate tax planning arrangements – many arrangements are undone not by failings necessarily related to tax, but instead related to aspects of the general law. (BCI Finances Pty Ltd (in liq) v Binetter (No 4) [2016] FCA 1351)

In brief:    The Commissioner has issued several draft Law Companion Guidelines in relation to the super reforms commencing on 1 July 2017. Two relate to defined benefit interests but the other 2 are particularly relevant to SMSFs. LCG 2016/D8 covers the transitional CGT relief for assets supporting exempt income streams and which are affected by the $1.6M transfer balance cap or loss of exemption relating to TRIS pensions. LCG 2016/D9 provides guidance about how the $1.6M transfer balance cap operates for account based income streams.

More:    These LCGs will be useful in helping practitioners digest the new reforms and their implications for clients in various circumstances. That will include potential impacts on estate planning, particularly where reversionary pensions will cause the $1.6M cap to be exceeded after the death of a primary pensioner (although there will be a 12 month window to adjust benefits for the reversionary pensioner in that case). In addition to decisions about potential rearrangements relating to existing income streams and adopting the transitional CGT relief, planning prior to 1 July 2017 should also include maximising both concessional and non-concessional contributions where appropriate.

In brief:    A Bill has been introduced to increase the small business entity turnover threshold from $2M to $10M for most purposes (but not for the small business income tax offset, for which the turnover threshold is proposed to be $5M). The change is intended to apply from 1 July 2016 and will have a number of implications for small businesses, including imputation changes for companies that qualify as small business entities.

More:    The proposed $10M turnover threshold is not to apply for accessing the small business CGT concessions – the existing $2M threshold will continue for that purpose. However, it is the new $10M threshold that will apply for the new small business restructure roll-over. In relation to the associated proposed reduction of the corporate tax rate to 27.5% for small business companies from 1 July 2016, it will no longer be possible to attach franking credits based on the 30% corporate rate. Instead, maximum franking is to be based on the particular company’s tax rate for the income year in which the distribution is paid, assuming that its turnover is the same as for the previous year.

As set out in the Explanatory Memorandum to the Bill, the $10M small business entity threshold is intended to apply for a number of other small business concessions, including immediate deductibility for start-up expenses, simpler depreciation rules, simplified trading stock rules, immediate deductions for certain prepaid business expenses, accounting for GST on a cash basis, etc. [Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016]