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For Qld duty purposes, s30 of the Duties Act 2001 provides that ‘transactions must be aggregated and treated as a single dutiable transaction’ if they ‘together form, evidence, give effect to or arise from what is, substantially 1 arrangement.’ And the section specifies that all relevant circumstances (including those listed in the section) must be taken into account in determining whether there is substantially 1 arrangement.
Section 30 creates practical difficulties for taxpayers, particularly since it is difficult to be definitive in various situations as to whether or not aggregation should apply. In a recent decision in the Queensland Civil and Administrative Tribunal, it was held that the Commissioner of State Revenue was wrong to aggregate 2 separate transfers to different groups of beneficiaries under a testamentary trust.
The decision is noteworthy because the transferor was the same for each of the transfers – namely, the trustees of the trust. And whether any parties to any relevant transactions are the same, is one of the circumstances that must be taken into account for the purposes of s30 (the 2 groups of transferees were also cousins in this case). The Tribunal nevertheless held that there were 2 separate transactions, separately negotiated, not conditional on each other in any way and not with any intention for the properties to be used by the respective transferees for any common purpose. The circumstances were also a bit easier for the taxpayers since there was no relationship between any prices for the separate transactions – the transfers were trust distributions so no negotiations in relation to price had been necessary. (Rawlings v Commissioner of State Revenue [2015] QCAT 10)
The Full Federal Court has dismissed the taxpayer's appeal against the assessment of tax on the transfer of land for the purposes of a joint venture, of which the taxpayer was a party. The Full Court agreed with the primary judge that the transfers, to give effect to a deed of trust and joint venture agreement, amounted to a settlement for the benefit of the taxpayer and other parties in the joint venture. Consequently, CGT event E1 happened.
What occurred in this case proved disastrous for the taxpayers involved. In addition to the adverse tax outcome, the Victorian Court of Appeal previously held that stamp duty applied to the land transfers and the High Court refused to grant special leave to appeal from that decision. It is a good reminder of the complexity and high risks of tripping up (on one or more of income tax, duty and GST) when one tries to alter ownership interests in property, particularly where matters of trusts law are involved. (Taras Nominees Pty Ltd v C of T [2015] FCAFC 4)
Following on from the May 2014 decision of the AAT in Re Dempsey and C of T [2014] AATA 335, a taxpayer has succeeded, in even more stark circumstances than in Dempsey's case, in arguing that he was not a resident of Australia in the 2011 year of income, prior to 29 April 2011 when he permanently returned from working overseas.
This is an interesting decision since, unlike Mr Dempsey who was a single man, the taxpayer in this case was married with 4 children. And he stayed at the family home with them in Perth for the period of 62 days in aggregate during the 2011 year of income when he was in Australia before returning permanently on 29 April 2011. However, there was evidence from both the taxpayer and his wife that their marriage was strained, the Tribunal referring to the relationship as ‘fractured’.
This is a further decision against the Commissioner's traditional reliance on a ‘continuity of association’ test in relation to the tax residency of an individual taxpayer. In rejecting the Commissioner's argument that Perth was the taxpayer's base, the Tribunal said that:
‘Mr M’s work ties outweighed his family ties, even though he financially supported his family by sending the bulk of his income to the joint bank account held with his wife in Australia. Mr M ordered his lifestyle around his work commitments.'
(Re The Engineering Manager and C of T [2014] AATA 969)
In 2 recent interpretive decisions, the Commissioner has expressed the view that the transfer of benefits by journal entry from the account of a deceased member will not amount to the payment of a superannuation death benefit or satisfy the requirement for benefits to be cashed. The hypothetical facts in both interpretive decisions are the same – an intended transfer of benefits in an SMSF by journal entry, from the account of a deceased member to the member's spouse. (ATO Interpretive Decisions 2015/2 and 2015/3)
The AAT has agreed with the Commissioner that Part IVA applied to a scheme carried out to enable access to the small business CGT concessions on the sale of a business. The Tribunal was not satisfied that the steps in the scheme contributed to the taxpayers’ asserted motive of asset protection – saying in the context of considering penalties that it ‘did not come anywhere near "reasonably arguable"’ that Part IVA did not apply.
The facts are complex but, in very general terms, related to steps taken on 28 June 2005 to enable the net asset value test ($5M at the time) to be satisfied for the sale of the business, which occurred on 1 July 2005 for a price of approximately $8M. The steps on 28 June 2005 included capital distributions to unit holders from accumulated funds in a unit trust forming part of the group and the rearrangement of loans within the taxpayer group. In arguing that there was no ‘tax benefit’ for the purposes of Part IVA, the taxpayers ironically argued – though unsuccessfully – that the scheme had not been effective in enabling the $5M net asset value test to be satisfied. But the taxpayers were partially successful on other aspects – the Commissioner conceded that amended assessments for several of them were out of time and that assessments issued to several corporate beneficiaries could not be supported under Part IVA, since it was unreasonable to expect that discount capital gains would have been distributed to corporate beneficiaries apart from the scheme.
The circumstances of this case illustrate the importance of continually monitoring the ability of business clients to access the small business CGT concessions on a sale of the business, including on transfer to family members as part of succession arrangements. Access to the concessions is an all or nothing matter and reasonable steps can be taken before the business and wealth of a particular business family grows to a point where it is no longer possible to access the small business concessions. And, plainly, steps taken shortly before a sale will always be subject to more scrutiny and will inevitably create a much higher Part IVA risk. (Track v C of T [2015] AATA 45)
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.
