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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)
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.
