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The Commissioner has been successful in overturning a decision of the AAT about whether the assets of the sole director's wife had to be taken into account for the (former) $5M net asset value test. At issue was whether the taxpayer company had correctly applied the retirement exemption under the small business CGT concessions to a capital gain derived on the sale of its interest in a business in the 2007 year of income.
In a very brief judgement, the Federal Court on appeal held that the director's wife was connected with the entity and the matter was remitted to the AAT for it to reconsider on that basis. Although the wife owned no shares in the company, she was connected through her husband’s shareholding in the company, given that he was her ‘small business CGT affiliate’ under the laws as they stood at the relevant time.
This case is straightforward but the important thing to note is that the law has since changed about who an affiliate is for the purposes of the small business CGT concessions. There is a common misconception that the assets of both spouses and all family controlled entities must be taken into account for the $6M net asset value test, but that is not always the case. One of the reasons for this is that, unless a person's spouse carries on a business, then that spouse cannot be an affiliate of the person for these purposes (except in some favourable instances, not presently relevant) (C of T v Altnot Pty Ltd [2014] FCA 362).
The Full Federal Court has dismissed the taxpayer's appeal of its claim to deduct special fees imposed as part of the arrangements for the taxpayer to acquire part of the Victorian Government's electricity transmission business. The fees were fixed in advance for the relevant 3 1/2 year period after the business was acquired, in order to prevent a windfall from increased tariffs applying after privatisation of the Government's electricity distribution network. Although not part of the stated purchase price, the fees were agreed to by the taxpayer as part of the overall package of transactions for its acquisition of the business. Further, the special fees were not dependent in any way on the extent of usage of the transmission network. The Full Court (by majority) held in the circumstances that the special licence fees constituted part of the cost of acquiring the transmission business and consequently were outgoings of capital (SPI PowerNet Pty Ltd v FC of T [2014] FCAFC 36).
In an apparent reaffirmation of the Commissioner's policy, minor changes have been made to Practice Statement PS LA 2003/12. The references to the former Government's proposal to enact the policy in legislation have been removed, given that the current Government has decided not to proceed with that proposal.
Continuation of the Commissioner's policy is very important, since it enables the assets of a deceased to pass through the deceased's estate, then to the trustees of a testamentary trust created under the deceased's will and finally to a beneficiary of that trust (perhaps many years later), without any taxing point. It is arguable that, without the Commissioner's concessionary policy, that outcome might not be achieved. That is arguable because the CGT concessions in Division 128 apply where a deceased's assets passed to a beneficiary through the executor or administrator of the estate. Under the general law, the role of executor or administrator (arrange funeral, collect assets, pay the deceased's debts, etc) is quite distinct from the trusteeship of a testamentary trust that then arises under a person's will, even though the same people often occupy both roles.
This final Tax Determination was released by the Commissioner last Wednesday. It follows from a draft Determination last August referring to SMSF assets generally (rather than just bank accounts), which was subsequently withdrawn in December. That earlier draft had suggested, unless all fund balances were supporting pension payments, that a separate bank account would be required in relation to pensions in order to constitute a segregated current pension asset. The final determination adopts a less restrictive approach.
The Commissioner now accepts, if a bank offers sub-accounts, that a sub account may be maintained for the requisite sole purpose relating to the discharge of pension liabilities (even if other sub-accounts are not). More significantly, the division of a single bank account into notional sub-accounts will also be accepted provided that proper accounting records of those notional sub-accounts are maintained by the SMSF trustees. The prompt division between a bank account for pension liabilities and one that is not for that sole purpose, of receipts or payments requiring apportionment between the accounts, will also be accepted (Taxation Determination TD 2014/7).
A Bill was introduced into Parliament on 19 March to repeal the provision that deems a lease or bailment of serial-numbered goods for more than 90 days to be a ‘PPS lease’. A PPS lease is a security interest, therefore potentially requiring registration to protect the owner. Serial-numbered goods are specified in the regulations – examples are motor vehicles and aircraft.
The biggest beneficiaries of this amendment will be businesses operating in the leasing industry. But it is unlikely to be of much benefit for businesses with leases or bailments of goods to associated entities. In general terms, and although the amendment decreases the scope of a PPS lease, the only category of lease or bailment that will fall outside the definition of a PPS lease after the amendment will be those that are not in substance a means of finance and whose term does not extend beyond 1 year. Further amendments to the PPS regime may result from a substantial review of its operation that is due to be completed by 31 January 2015. (Personal Property Securities Amendment (Deregulatory Measures) Bill 2014).
The line of cases dealing with excess superannuation contributions continues. In the latest, the Commissioner has successfully appealed against a previous AAT decision to disregard a contribution on the basis of ‘special circumstances’ (FC of T v Dowling[2014] FCA 252). Obviously, the only real way to avoid all problems is to make sure that no excess contributions occur – whether concessional or non-concessional. Ongoing education of your clients is necessary to stress to them the importance of getting your help to make sure that contributions caps are not exceeded.
The new regime from 1 July 2013 for excess concessional contributions reduces the pain (particularly for taxpayers with lower marginal tax rates), but nothing has changed for excess non-concessional contributions. In general terms, excess concessional contributions will be taxed in total at the marginal rate of the relevant member (15% tax payable by the super fund on the contribution and the balance payable by the member) and excess non-concessional contributions will continue to be taxed at 46.5%. Excess concessional contributions will also result in an ‘interest type’ charge at the same rate as the shortfall interest charge, calculated daily.
An important planning point arises if there is a slip up and excess concessional contributions are made for a member. The member may elect to release all or part of the excess contributions from the super fund, up to a maximum of 85%, ostensibly to pay the additional tax assessed to the member on the excess contributions. Even if not requiring the funds for that purpose, in some cases the member will be much better off to elect to release the maximum amount. The reason is that excess concessional contributions still count towards non-concessional contributions, except to the extent that the excess concessional contributions are elected to be released by the relevant member (in which case there is also a reduction for the 15% tax payable by the super fund). This might be very important where otherwise the member's non-concessional contributions cap will be exceeded or the 3 year ‘bring forward’ rule will be triggered.
Tax planning arrangements can fail for a number of reasons. One of those reasons has little to do with technical tax rules. With a real-life example, this episode of Tax Solutions illustrates how tax planning can go wrong because of a fatal legal flaw in the underlying transactions or circumstances on which the tax plan is based. With the result that the practitioner involved is highly exposed.
The small business CGT concessions provide very substantial benefits in situations where they apply. And given the policy intent to direct the concessions to business assets, one of the central conditions that must normally be satisfied is the ‘active asset test’.
This episode of Tax Solutions emphasises a class of CGT assets that achieve a special status for the purposes of the small business CGT concessions. Those assets continue as active assets indefinitely – retaining that status even long after they have ceased being used in any business controlled by the owners!
Widely drafted beneficiary classes in discretionary trusts can create headaches in dealing with various State taxes. A recent example is Victoria’s new 3% additional duty on foreign buyers of residential property – where a trustee is the buyer and a family beneficiary lives overseas. A starker example that applies in all States and Territories is payroll tax grouping of businesses controlled by family relatives, where at least one of the businesses is operated by a discretionary trust.
Having extraordinarily wide beneficiary classes is an outdated practice that creates problems, rather than serving any useful purpose. There is really no point in including a whole range of relatives who are never intended to benefit. A narrow class of beneficiaries is required, with a simple and practical mechanism to add others to whom it is desired to distribute.
Frustrations with ATO views about UPEs of corporate beneficiaries have led to companies more frequently being used to acquire and operate small and medium sized businesses. But the problem is not discretionary trusts owning businesses, it is Division 7A. And there will usually be ways to deal with Division 7A anyway.
Some advisers believe that a business owner can still access the small business CGT concessions on a future business sale, by selling shares in the company that owns the business. But how realistic is it to hope that that is the way things will turn out. This edition of Tax Solutions emphasises 2 reasons why clients with a business owned by a company may not actually benefit from the CGT concessions.
One of the best things you will ever do for some of your small business clients is to deliberately trigger a CGT event and capture the small business CGT concessions. In the right client circumstances, this strategy can produce several very substantial benefits. That will particularly be so if 100% CGT exemptions can be achieved without duty applying to the transaction.
A restructure for this purpose should always be kept in mind, particularly for clients who may grow to the point where they can no longer satisfy either the $2M turnover test or $6M net asset value test. But it warrants greater consideration at the moment, given the apparent increased political risk of changes to CGT concessions.
