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Main Residence Exemption for Deceased Estates

The use of testamentary trusts in estate planning (particularly for clients with a reasonable level of income producing investments) is relatively standard practice. It is not uncommon in preparing the Will to pass all of the assets of the testator into one or more testamentary trusts.

The tax advantages of testamentary trusts are obvious: distributions to minors are not restricted to a $416 limit as applies to discretionary trusts, as well as the income splitting advantages of discretionary testamentary trusts.

Of greater importance are the asset protection advantages that a properly designed testamentary trust can provide.

What is often ignored, however, is the special position of main residences under the tax legislation.

A complete exemption from any capital gains subject to a number of conditions - the key condition is the disposing owner is an individual that has used the property as their main residence.

CGT on Deceased Estates

Example: Bruce and Fleur purchased their home in 1992 for a cost of $170,000.

The property is held as tenants in common.

Throughout the period of ownership they have used it exclusively as their main residence. It now has a value of $1,020,000, and after reduction by costs associated with sale, a capital gain of $800,000 is expected.

They are now 73 years of age and executed their Will which passes their interest in the home, together with other income producing assets, into a Testamentary Trust initially controlled by the survivor.

Shortly afterwards, Bruce passes away.

The general rule is that post-CGT assets (assets acquired on or after 20 September 1985) passing into a deceased estate are deemed to have been acquired at the cost base of the testator.

The Main Residence Exemption is extended if the property is sold within two years of death.

But what of the situation where the property passes to a testamentary trust? A ...

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Partnership of Discretionary Trusts (Pros and Cons)

Partnership of Discretionary Trust should be carefully considered before making a decision on the business structure

Table of Contents

Partnership of Discretionary Trust as a Form of Ownership

When contemplating the acquisition of an asset or commencing a new business, the first question that should be considered is the form of ownership.  When more than one family group is involved, the usual options are a company or unit trust.

When determining the suitability of a structure, you must bear in mind the particular advantages and disadvantages of the entity being considered.  No one entity is suitable in all circumstances.

In recent times, some have suggested the use of a partnership of discretionary trusts.  

The purpose of this article is to set out the key advantages and disadvantages of the Partnership of Discretionary Trusts structure which will identify key planning points for this structure.

The advantages and disadvantages of the Partnership of Discretionary Trusts are identified by comparing the features of a company/unit trust alternative.

Partnership of Discretionary Trusts Advantages

Maximum Net Asset Value Test

The small business capital gain tax concessions enable most privately owned businesses to sell their business without triggering this tax.  

To be eligible for ...

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Is my Company Constitution Tax Effective?

Many will think of the Constitution of their company as a predominantly commercial document setting out the powers and procedures for the making of decisions by directors and shareholders, and the rights attaching to shares in respect of dividends, voting and winding up.

As far as tax is concerned the main focus is to allow for different classes of shares.

However, the content of the Constitution has an impact on the tax results in at least three important ways:

  1. Super contributions for directors;
  2. Differential dividends;
  3. Issue of shares of a different class.

Super Contributions for Company Directors

A tax deduction is generally available for contributions made by an employer for the benefit of an employee.

For a number of years the general view has been that deductions also apply for contributions for directors. A basis for this was that the income tax legislation allowed a deductions for superannuation contributions for persons employed by a company, and the legislation deemed directors to be employed by the company (the additional requirements that they be engaged in producing assessable income or in the business of the company would ordinarily be satisfied in a trading business).

However, were substantially changed in 2007 with the Simpler Super Regime.

The revised requirements for employer contributions run as follows:

  1. A deduction is available for contributions for employees (directors do not fall within the ordinary meaning of employee);
  2. Employees are deemed to include those falling within the extended meaning in the Superannuation Guarantee legislation;
  3. There are also the conditions that the employee be engaged in producing the company’s assessable income or its business, that the fund is a complying fund and the employee satisfies certain age conditions.

The Super Guarantee legislation does not deem any director to be an employee. Rather, it deems a director “who ...

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Company Rollover – A Last Resort Option

In the evolution of a business, there may come a time when it is necessary to restructure into a company. Often,  non-tax factors will trigger this: government regulations, a need to attract equity investment, corporatisation leading to a potential buyout, or a need to fund working capital.

On the surface, a company rollover appears the ideal option – no CGT is triggered on the restructure, and the same tax attributes, including cost base, are maintained. ...

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Superannuation Reform 2016 – Planning Pointers

The superannuation reform announced in the 2016 Federal Budget have largely been implemented.
Many of the changes simply adopt the government announcement.

However, there are some changes that are not so obvious which require strategic planning action, and provide opportunities to add value. Our take on these less obvious changes as set out below.
Excess Transfer Balances

  • There is a general misconception that where a member’s balance exceeds the transfer balance cap ($1.6 million), there is a requirement to reduce the balance prior to 1 July 2017. The legislation provides no such requirement.
  • A reduction is only required if the Commissioner gives a determination (Section 136-10).
  • If a failure to reduce causes an excess transfer balance on an after 1 July 2017, the consequence is excess transfer balance tax is payable at the rate of 15% (the same rate that is payable for assets that are not in pension mode). A higher rate of 30% is only payable after 1 July 2019 if the member has previously been liable for excess transfer balance tax for a year that commenced on or after 1 July 2018.
  • Two elements that may make it beneficial to do a reduction prior to 1 July 2017 are to access the cost base upgrade and the transitional excess transfer balance of $1.7 million.
  • Planning Point: failure to reduce by 1 July 2017 simply triggers 15% tax on the excess (the same rate is payable if the reduction had occurred). If the member’s circumstances warrant (for example, lumpy assets), may consider deferring reduction until prior to 1 July 2019 or receipt of an ATO determination.

Excess Transfer Balance Cap

  • There is a maximum cap of $1.6 million per taxpayer that is eligible for the pension exemption. It is not possible to avoid the cap by splitting the superannuation balance over several superannuation funds.
  • A child receiving a pension as a result of the death of a ...

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Superannuation Reform 2016- A Roadmap to Guide You Through The Maze

The 2016 Federal Budget proposed the most significant reform to superannuation since 2007.
Much of the legislation for the implementation of that reform has been implemented with the passing of the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016.

Many of the changes included in the legislation will be obvious: pension exemption limit of $1.6 million, changes in contribution caps, removal of anti-detriment deductions, changes in thresholds, etc.

However, some of the changes included are not so obvious which provide traps for the unwary, but more importantly opportunities to add value.

The not so obvious:

  • Transfer Balance Cap:
              • Where a member exceeds their transfer balance cap, the member or superannuation fund is not automatically required to reduce that balance, but the member is liable for excess transfer balance tax. Rather, the balance only needs to be reduced if the Commissioner gives a determination (Section 136-10).
    • An excess transfer balance is subject to additional tax on excess transfer balance earnings at the rate of 15% if it is the first time an excess balance has arisen in the member’s account, and 30% for a later year commencing after 1 July 2019 when there is an excess balance (Section 294-230 (2) and Section 5 of the Superannuation (Excess Transfer Balance Tax) Imposition Act 2016).
    • Excess transfer balance earnings are not actual earnings, but rather notional earnings based on the GIC rate (Section 294-235).
    • A child receiving a pension as a result of the death of a person, has a separate transfer balance cap (Sections 294-180 and 294-185) in ...

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Foreign Resident Withholding Tax: The Facts

Foreign Resident Withholding Tax – Practical Effects

The general thrust of the new foreign resident withholding tax regime is to require a purchaser to withhold 10% of the purchase price on acquisitions from foreign vendors of real property (real estate), or shares in a company that holds real estate.

However, the rules apply to all transactions involving real property and shares in companies, even if between two residents, unless steps are taken to fit within an exclusion.

Key elements of the new regime

Direct interests

- The regime applies to all transactions involving taxable Australian real property (including a mining, quarrying or prospecting right) exceeding a market value of $2 million just after the transaction, even if the vendor is a resident.

  • Company title is also treated as a direct interest.
  • The obligation is to withhold 10% of the 1st element of the cost base, usually the purchase price or the varied amount if the ATO provides a variation (even if the transaction would not be liable for CGT e.g. deceased estates, CGT rollover). Note: On 6 September 2016 an ATO Legislative Instrument was registered that varied the payment to nil for assets passing under a deceased estate. The instrument also applies to assets passing under a joint tenancy.
  • The $2 million threshold is based on market value, not the purchase price. If only a partial interest is being sold, the $2 million threshold applies to the value of the whole property.
  • For transactions with related party or at an undervalue, the obligation to withhold is based on market value rather than purchase price
  • All vendors must obtain a Clearance Certificate for a period covering the time the transaction is entered into.
  • Declaration by the vendor (see below) will not be sufficient.

Indirect interests

  • Withholding is only required if you know or reasonably believe that any vendor is a foreign resident; the entity has an ...

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Here’s What The 2016 Budget Means For You And Your Business.

2016 Budget Pointers
The passing of each federal budget is of interest to those of us that practice in the tax structuring sphere. We will be keenly conscious of changes that may impact upon strategies that have been used previously and looking for opportunities for the implementation of new strategies.

Topic
Commences
Comments

Business Taxes

Small business entity turnover threshold increase
1 July 2016
** Threshold will be increased from $2m to $10m for small business income tax concessions, with the exception of the small business CGT concessions and the unincorporated small business tax discount.NOTE: $10 million threshold applies to the small business restructure rollover.

Small business tax discount increase
Phases from 1 July 2016
** Increased in phases over 10 years from 5% to 16%. The existing cap of $1,000 per individual for each income year will be retained.NOTE: This will effectively reduce the amount of income required for the full offset of $1000 from about $61,500 to $19,200. It now has a favourable comparison to the reduction in the tax rate for small business companies.

Company tax rate will be progressively reduced
Phases from 1 July 2016
** Reduced to 25% over 10 years.

Transfer pricing amendments
1 July 2016
Addresses transfer pricing issues relating to controlled transactions involving intangibles.

40% diverted profits tax
1 July 2017
Applies to company groups with global annual revenue of $1b or more.

Investment in early stage innovative companies

Includes:

  • • a 20% non-refundable tax offset capped at $200,000 per investor per year; and
  • a capital gains tax exemption, provided investments are held for at least three years and less than 10 years.

The amendments include:

The Value of Legal Expertise In Tax Disputes

Key Points

  1. Court appeals will often cost in excess of $200,000, which most clients will not want to pursue and will wish to avoid (a cost benefit analysis will not pass).
  2. Where the dispute involves an application of the law (as opposed to the calculation of an amount) the ATO view can often be misguided.
  3. A focused and powerful legal submission based on legal principles can often cause the ATO to change their view. This should be adopted no later than the objection stage to avoid the Court Appeal cost.
  4. A valuable example is included in this article.

Background
The Australian income tax system is based on self-assessment. Under this system, the ATO generally accepts returns as lodged. It then selects certain returns for review on various bases. For example, taxpayers in a particular occupation, returns disclosing a particular deduction or type of income, or returns disclosing deductions well above average or income well below average. On occasions, these reviews can occur prior to assessment but usually occur after assessment.

Many would understand that the tax review system adopts the following general process:
Audit/Position Paper > Amended Assessment > Objection > Appeal (AAT or Court)
The Appeal phase of the tax review process is expensive - the cost of running an appeal generally exceeds $200,000, and costs of up to $1 million are not uncommon.

In our experience, where the review concerns application of the law to the client circumstances, the view of the ATO can be misguided. In that instance, a focused submission based on legal principles can achieve the desired results. To minimise costs, these submissions should usually be put forward at the position paper/objection phase.

A recent example illustrates the advantages of focused legal assistance:

The taxpayer had inherited a large area of bushland, comprising several hundred acres. By the time of ...

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Protection of Superannuation

Accredited Tax Specialist and Chartered Tax Adviser

Bankruptcy law excludes some assets from being available to meet liabilities owing to creditors: for example, certain kinds of household property, a motor vehicle worth less than $7,500, and an interest in a regulated superannuation fund. For asset protection planning, the most relevant category is that applying to superannuation.

The exclusion of superannuation often leads to the assumption that superannuation accounts are protected in bankruptcy.

This assumption was recently challenged in the Victorian Supreme Court decision in Australasian Annuities Pty Ltd v Rowley Super Fund Pty Ltd.

Australasian Annuities Pty Ltd v Rowley Super Fund Pty Ltd

In the facts of Australasian Annuities Pty Ltd v Rowley Super Fund Pty Ltd, the sole director, Steven Rowley, arranged for Australasian Annuities Pty Ltd to borrow $2.5 million from Macquarie Bank claiming the funds were taken as a business loan. Rowley treated this money as though it was his to spend freely and, using a large portion of the loan, had the company make super contributions for himself and his family members. This was done on the assumption that the money would be protected in the event of bankruptcy or insolvency. The majority of these contributions were fraudulent, such as paying ‘termination payments’ without actually terminating any employment.

Two Elements

The extent of protection provided to superannuation requires two elements to be considered:

1. Whether the superannuation account balance is an asset that is available to meet claims of creditors;
2. The application of clawback provisions, which operate to unwind or reverse the effect of transactions entered into in the period leading up to bankruptcy.

The main clawback provision applies to transactions where consideration is less than market value. The High Court decision in Cook v. Benson held those provisions do not apply to super ...

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