Tax Facts contains news and alerts relating to tax practice, for the benefit of accountants and other professionals in public practice. Please click on the links below for recent issues. You may also like to peruse Tax Facts by topic category - topics are listed below to the right.
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In brief: Exposure draft legislation has been released for the proposed restructure rollover for small businesses to apply from 1 July 2016. The proposed rollover will be optional and is to extend to trading stock, depreciating assets and revenue assets, as well as other CGT assets generally. It is to apply to small business entities that also satisfy the $6M net asset test, and affiliates or entities connected with such small business entities.
The rollover will only apply if no consideration is provided in relation to the asset transfers. And there must be no change in the proportionate interests of individuals who have the ‘ultimate economic ownership’ (a term not defined) of the assets. However, there will be no change in the ultimate economic ownership interests if a discretionary trust that has made a family trust election is a party and the other parties to the transfer are members of the same family group.
More: There will plainly need to be some complimentary provisions so that a rollover from a private company will not constitute a Division 7A ‘payment’ and trigger an unfranked dividend accordingly. But, if enacted along the lines of what is presently proposed, the rollover should enable some previous structuring errors to be fixed and facilitate some other useful planning strategies. Genuine gifts of a business to children of a proprietor will also be possible in some situations, although it will often be preferable to capture the small business CGT concessions rather than opt for the rollover in those cases.
In brief: A recent case involving an objection against a private ruling from the ATO emphasises the limitations of the private ruling system in relation to questions of fact on which the Commissioner makes a ruling. The Federal Court upheld the taxpayer’s appeal from the Administrative Appeals Tribunal in this case, since the Tribunal had relied on a critical fact that was not included by the Commissioner in the facts of the arrangement stated by him for the purposes of the ruling. The court held that the Tribunal was not free to make its own findings of fact – it was confined to the facts stated by the Commissioner in the ruling. That is in stark contrast to the usual jurisdiction of the AAT in reviewing a taxpayer's objection against an assessment, where the Tribunal must reach its own conclusions of both fact and law.
More: In this case a plan by the trustee of a discretionary trust to acquire property and develop it in joint venture with an unrelated company was abandoned after acquisition of the land, because of the global financial crisis. The land was sold several years later for a substantial profit, which the taxpayer claimed should be taxed solely under the CGT regime. The AAT had found as a fact that the taxpayer was carrying on business in relation to the land, although that was not a fact included by the Commissioner in his description of the arrangement for the purposes of the private ruling. Disregarding the AAT's finding that the taxpayer was carrying on business, the court held that the profit on sale was outside the profit-making scheme for which the land was acquired and its sale was consequently the mere realisation of a capital asset. (Rosgoe Pty Ltd v FC of T [2015] FCA 1231)
In brief: A recent application for leave to appeal to the Queensland Court of Appeal is a good reminder of the practical difficulty in contesting disputed Queensland payroll tax (and duty or land tax). Section 69(1)(b) of the Taxation Administration Act 2001 (Qld) provides a right of appeal only if the ‘taxpayer has paid the whole of the amount of the tax and late payment interest payable under the assessment to which the decision relates.’ Leave was refused in this case – an arrangement for payment of the assessed payroll tax by instalments did not mean that the tax was no longer ‘payable’ for the purposes of s69(1)(b).
More: The need for the disputed tax and late payment interest to have been paid in full is a substantial obstacle to any further appeals if the Commissioner of State Revenue has disallowed an objection. This may be particularly so in the case of payroll tax, where the disputed liability might arise from recurring payments to workers over a substantial time. This highlights the importance of addressing and managing payroll tax risks. (Commercial Property Management Pty Ltd v Comm of State Revenue [2015] QCA 209)
In brief: In Taxation Ruling TR 2015/4, the Commissioner expresses his views about how an unpaid present entitlement of a beneficiary connected with a trust is treated for the purposes of the $6M net asset value test. The view expressed is that the UPE should be counted only once – in whose hands it will be counted depends on whether or not the UPE is the subject of a so-called sub-trust arrangement or is an absolute entitlement to one or more trust assets.
In Taxation Determination TD 2015/20, issued on the same day, the Commissioner says that the release by a private company of its UPE will constitute a ‘payment’ under s109C(3)(b) of Division 7A, provided that the release represents a financial benefit to an entity.
More: An example in TD 2015/20 involves the assets of the trust with the UPE obligation becoming worthless due to external factors without any breach of duty by the trustee. The ATO concludes in those circumstances that there is no financial benefit and consequently no ‘payment’ for Division 7A purposes. The Determination does not address the more difficult question of the circumstances in which a UPE might constitute an equitable debt, so that the release of the UPE could amount to a forgiveness of debt for Division 7A under s109F. However, the Commissioner's responses to submissions on the draft version of the Determination suggest that he may be unlikely to apply s109F.
In brief: In a recent Taxpayer Alert, the ATO warns about accessing company profits through a partnership in which the company is a partner. In the examples provided in the Alert, income is channelled to a partnership in which a private company is a partner. The company becomes entitled to most of the partnership profits and is taxed at the corporate rate on those profits accordingly. Partnership funds are subsequently loaned or paid to shareholders of the company or their associates.
More: The obvious aim of such arrangements is to skirt Division 7A. However, as is usual in Taxpayer Alerts, the Commissioner poses a long list of possible technical concerns about the arrangements. In this instance, those include concerns about whether there is a partnership under the general law – recent AAT cases involving purported limited partnerships failed for that reason, although those cases are now on appeal to the Federal Court. (Taxpayer Alert TA 2015/4)
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.
