Tax Facts

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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  • SMSF's breaches in connection with buy-sell agreement

    In brief:  A recent Interpretive Decision has expressed the Commissioner's view that breaches of the Superannuation Industry (Supervision) Act 1993 will result from the purchase of a life insurance policy by an SMSF in the circumstances dealt with in the ID. The circumstances postulated are in connection with a buy-sell agreement entered into between 2 brothers who are the only shareholders in a company carrying on a business controlled by the brothers. Under the agreement, the company is to make super contributions to one brother's SMSF, to be used to pay premiums on a life policy held by the trustee of the SMSF on his life. In the event of that member’s death, his spouse will receive the death benefit from the SMSF but his shares in the company are to pass to the deceased's brother for no consideration.

    More:  The Commissioner's view is that the sole purpose test is breached because of the significant objects of the arrangement apart from the SMSF trustee simply holding death cover on the life of a member. Because of the sibling relationship in the circumstances considered, the Commissioner also takes the view that there is a breach of s 65(1)(b) of SIS. That provision prohibits the giving of financial assistance using the resources of the fund to a member of the fund or relative of a member of the fund. The Commissioner believes that such prohibited financial assistance will result, given that the aim of the buy-sell agreement is that the SMSF member's brother will obtain complete ownership of the company without cost in the event of the member's death. (ATO ID 2015/10)

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    07 May 2015

    Topic: SMSFs

  • No impact of dividend access share

    In brief:  In a controversial decision, the Administrative Appeals Tribunal has decided that the small business participation percentages in a company were not affected by the existence of an issued share with discretionary dividend entitlements. Consequently, the small business CGT concessions could be applied to the capital gain of nearly $4.4M derived by the company from its sale of shares in another company.

    More:  At issue was the effect of the words ‘the percentage of any dividend that the company may pay’ in item 1 of the table in s 152-70(1) of the Income Tax Assessment Act 1997. A commonly held view is that if the whole of a dividend may be declared as payable to the holders of dividend access shares, ordinary shareholders cannot be said to hold any percentage at all of any dividend that the company may pay. The Tribunal took a contrary view, deciding that the holders of ordinary shares in this case had the only rights to dividends until the directors first took the step of resolving that a dividend be paid on the dividend access share. To some extent, the matter is one of construction of the particular company's Constitution against the background of corporations law generally. But if the affect of the company's Constitution is that the directors may declare a dividend on ordinary shares or the dividend access share, to the exclusion of the other class shares in either case, it is difficult to see how the holders of any class have any greater rights than the holders of the other. The Commissioner will undoubtedly appeal against this decision. (Devuba Pty Ltd v C of T [2015] AATA 255)

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    07 May 2015

    Topic: CGT/Income Tax

  • 'Control' of trust sufficient for freezing order

    In brief:  In a recent unreported decision, the Queensland Supreme Court made a freezing order against the trustee of a discretionary trust called The Babes in Paradise Trust, restraining the trustee from disposing of trust assets. The applicant for the freezing order had successfully sued the ‘controller’ of the trust, with damages to be assessed. There was evidence that the controller had dissipated his own assets and that the trustee's brothel business on the Gold Coast was for sale. The applicant claimed that there was a real danger that the proceeds from disposal of that business would also be dissipated and that his judgement for damages, once assessed, would not be satisfied.

    So the trustee had no liability itself under the primary action. The applicant for the freezing order nevertheless successfully argued that such an order should be made on the trustee, on the basis that the controller's ‘interest’ in the trust property amounted to property for the purposes of relevant provisions of the Uniform Civil Procedure Rules 1999 (Qld). The order was made on the basis of the control exercised over the trust – the controller was the sole shareholder, director and secretary of the corporate trustee, as well as being the sole appointor and guardian of the trust. The Judge relied on the reasoning of French J (in the Federal Court, before His Honour's appointment as Chief Justice of the High Court) in the Richstar decision (ASIC v Carey (No 6) [2006] FCA 814).

    More:  It should be noted that, like Richstar, this case involved an interlocutory type application under specific (subordinate) legislation, rather than a case disposing of the primary legal dispute. And there is much merit in appropriate cases in the status quo being preserved until there can be full argument about primary issues, although one might say that the machinery to achieve that should be made stronger so that judges need not unnecessarily push substantive legal principles. The lengths to which trust control can tend towards the notion of property in the general law has not been authoritatively determined in modern cases and the Richstar decision itself has not been accepted as binding in other contexts.

    This case nevertheless represents another warning about some straightforward, though critical, planning points in relation to the control of discretionary trusts. The first is an obvious one. If trust deeds are drafted appropriately, a trust controller is free to relinquish or take steps to reduce the level of control before a dispute reaches such a critical point – there will normally be plenty of time in the lead up to such a point. Secondly, it is essential that trust deeds are drafted so that elements of control through a person's role as a protector/appointor/guardian cease automatically in cases such as the bankruptcy of the controller. And that trust deeds actually deal with the resultant change in control in a considered, thoughtful and practical way. Thirdly, although the law has not developed to the point where this is necessarily advisable in the mainstream and it is most often contrary to the reality of the situation, trusts can be established or altered so that control is less concentrated in one person. (Leach v Ross No 5201 of 2010)

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    07 May 2015

    Topic: Trusts

  • Treasurer's announcement of measures for small business

    In brief:  Foreshadowing the Government's Jobs and Small Business package to be announced in the 2015 Budget next week, the Treasurer yesterday announced several changes to benefit small business owners. One proposal is that, from July 2016, ‘new start-ups’ are to have an immediate deduction for professional costs associated with starting a business (rather than deductions over 5 years under the ‘blackhole’ rules). More significantly, ‘small business owners will also be able to change the legal structure of their business without incurring a CGT liability.’ This is presumably also intended to start from July 2016.

    More:  The ability to change the legal structure will be a welcome benefit if the Government can successfully legislate it. There will presumably be minimum cost to the Revenue, since most small business owners already have access to the small business CGT concessions. But such a change should substantially reduce compliance costs and, for those less than 55 years old, obviate the need to pay the CGT exempt amount under the retirement exemption into a complying super fund. The range of beneficiaries will be limited, unless the Government expands the $2M turnover threshold that currently defines a small business. And it will be interesting to see how narrow the change is – so, for instance, whether it will be possible to pass businesses to children of the proprietors. Since there are times when it is very beneficial to deliberately trigger a CGT event for a small business, some business proprietors wanting to achieve that might ironically try to avoid application of the new concession.

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    07 May 2015

    Topic: CGT/Income Tax