Update Large Private Companies – Recent Regulatory & Reporting Changes

11 August 2022

This update alerts you to two important regulatory changes to private companies that were given Royal Assent on 9 August 2022.

These changes may have a significant impact if you have in the past fallen under the existing exemptions and thresholds in terms of lodging financials statements to ASIC and transparency tax reporting to the ATO.

We summarise the key changes below.

Reduction of the Transparency Reporting Threshold for Large Private Companies

In order to increase transparency, the Commissioner is required to publish and make publicly available tax information for Australian corporate tax entities. Under previous legislation the ATO published information for:

  • Australian-owned public or foreign-owned companies with total income of equal to or greater than $100 million
  • Australian-owned private companies with total income of equal to or greater than $200 million

Effective 1 July 2022 the tax information reporting threshold for Australian-owned private corporate tax companies will be reduced from $200 million to $100 million of total income, which aligns the threshold with Australian-owned public entities. Total income is based on disclosures in the entity’s income tax return for the relevant income year.

The tax information reported publicly includes the company’s:

  • name,
  • ABN,
  • total income for the year,
  • taxable income or net income (if any), and
  • income tax payable (if any).

Start date: The law relating to this change received Royal Assent on 9 August 2022 and the new thresholds will apply to all Australian-owned private entities effective for FY22-23 onwards.

Removal of Relief for Exempted Grandfathered Large Proprietary Companies to Lodge Annual Reports

The Corporations Act may require a large proprietary company to lodge annual financial statements with ASIC. These reports are available for the public to download and access.

Currently, a large proprietary company may be eligible for an exemption from the requirement to lodge annual reports with ASIC, if it satisfied the grandfathered exemption conditions. The government recently reviewed the exemption for large proprietary companies and determined that it should be removed, with the objective of aligning all companies with the same lodgement and transparency requirements.

Criteria for Being a Large Proprietary Company 

A proprietary company will be classified as large if it satisfies at least two of the following thresholds: 

Start date: Accordingly, if you were previously a grandfathered large proprietary company, for financial years on or after the 9 August 2022, you will now need to lodge audited financial statements with ASIC within 4 months of year-end. For the affected companies, they continue to be exempt from lodging an annual report with ASIC for the financial year ended 30 June 2022.

Next Steps

These two amendments will result in increased transparency for many large private corporate entities in Australia. It is critical that clients consider their position and how the rules apply to ensure compliance.

Please contact your Cooper Partner’s engagement team to review your situation and determine what action is required.

Authors:
Michelle Saunders, Managing Director
Amy Carter, Senior Consultant Private Client Services

Contact

Michelle Saunders
Managing Director
Head of Strategy

Marissa Bechta
Director
Head of Taxation Advisory

April Sacco
Associate Director
Head of Private Clients & Growth

This newsletter is current as of 11 August 2022, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Before acting upon the content of this newsletter, please contact us to discuss how the above applies to your specific circumstances.

This information is general advice only and neither purports, nor is intended to be advice on any particular matter.
No responsibility can be accepted for those who act on the contents of this publication without first contacting us and obtaining specific advice.
Liability limited by a scheme approved under Professional Standards Legislation.
For further information please refer to our privacy policy 

Fringe Benefits Tax – Ensuring you are ready for the 2022 FBT Season

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14 April 2022

In readiness for the 2022 FBT season, we provide you with the latest updates and developments.

2022 FBT Rates, Dates and Thresholds

For the 2022 FBT year, the FBT rate will remain the same at 47% with the associated Type 1 and Type 2 gross-up rates also remaining unchanged.

Do I need to lodge an FBT Return?

Employers who have an FBT liability must lodge an FBT Return.

If an employer does not have an FBT liability, we recommend that an FBT return is lodged to ensure commencement of the three year amendment period for which the Commissioner can generally amend FBT returns.

If FBT instalments were paid during the year and the employer does not have an FBT liability for the year, an FBT return must be lodged to obtain a refund of the FBT instalments.

Recent Developments

1. Car parking FBT exemption – small business threshold increased to $50m

From 1April 2021, the small business turnover threshold increased to $50m for the purposes of determining whether the car parking FBT exemption is available to small businesses. Certain conditions apply including that car parking space must not be provided in a commercial parking station in order to obtain the FBT exemption.

2. Assistance and benefits provided due to COVID-19

a.    COVID 19 tests

The costs of COVID-19 tests, including Rapid Antigen Tests (RATs), provided to employees to attend a place of work are deductible from 1 July 2021. Therefore, these costs are also exempt from FBT under the ‘otherwise deductible’ rule from this date.

The existing record keeping requirements such as ‘otherwise deductible’ employee declarations are required to be maintained where the benefit is a property fringe benefit (ie the tests are physically given to employees). This can be problematic where there are large numbers of employees.

Employers can use employer declarations where the benefit provided is an expense payment or residual fringe benefit. The minor benefits exemption can also be considered where the benefit is under $300 (including GST) and provided on an infrequent and irregular basis.

b.    Personal protective equipment

The emergency assistance exemption may apply if an employer provided protective equipment such as gloves, masks, hand sanitisers, wipe and anti-bacterial spray to allow employees to safely continue to work. The exemption applies where these benefits are provided to employees that are involved in cleaning premises or required to be in close proximity with customers or clients, e.g. hairdressers, cleaners, medical practitioners and hospitality workers.

If an employee’s specific employment duties do not include the above, the minor benefits exemption may apply.

c.    Car benefits 

Garaging of cars: During a period of COVID-19 restrictions, a car previously provided to an employee is not taken to be available for private use provided:

  • the car has been returned to the employer’s business premises;
  • the employee cannot gain access to the car; and
  • the employee has relinquished an entitlement to use the car for private purposes.

In respect of cars garaged at home, where a car has not been driven at all during the period or has only been driven briefly for the purpose of maintaining the car, the ATO will accept that the employee did not ‘hold’ the car, provided an election is made to use the operating cost method and appropriate odometer records are maintained.

Logbooks: As an impact of lockdowns, driving patterns of employees with car benefits may have significantly changed.  Where an employee has an existing logbook in place, they can continue to rely on this logbook despite changes in driving patterns or make a reasonable estimate of the business kilometres travelled.  Odometer records for the year must be kept as these will show how much the car has been driven during the year, including any lockdown period.

d.    Car park closures

The ATO have confirmed that no car parking benefit will arise for the period when a work car park is closed or if all commercial parking stations within a 1 km radius are closed on a particular day.

e.    Working from home

Work related items such as laptops and mobile phones provided to staff working from home are unlikely to trigger an FBT liability to the extent such items are primarily used for work purposes.

Where employers allow employees to use equipment such as computers, monitors, stationery and computer consumables or pay for internet access, the minor benefits exemption or otherwise deductible rule may apply.

3. Car parking benefits – Definition of commercial parking benefits

The ATO issued guidance on the definition of a ‘commercial parking station’ in TR 2021/2. This extended the interpretation of commercial parking stations to include those that charge penalty rates for all day parking, such as nearby shopping centres and hospitals from 1 April 2022.

As part of the Budget announcements, the Federal Government has announced consultation on the definition of ‘commercial parking station’ to restore its previous interpretation.

4. ATO guidance on travel and accommodation related benefits

In 2021, the ATO released three new comprehensive publications relating to the tax treatment of transport and accommodation expenditure:

  • When are deductions allowed for employees’ transport expenses (TR 2021/1);
  • Accommodation and food and drink expenses, travel allowances and LAFHA (TR 2021/4);
  • Determining if allowances or benefits provided to an employee relate to travelling on work or living at a location (PCG 2021/3).  

These rulings address the circumstances in which travel expenses are ‘otherwise deductible’ to employees and therefore, whether the benefits are not subject to FBT. This requires consideration of several factors including:

  • Whether the travel is within the duties of employment and not as a result of the personal circumstances of the employee;
  • The employer asks for the travel to be undertaken;
  • The travel occurs on work time;
  • While travelling, the employee is under the direction and control of the employer;
  • Home to work travel is generally not deductible;
  • Has an employee relocated from their usual place of residence or is the employee living away from home?

It is clear from the rulings that employers should carefully consider whether travel expenses paid for directly or reimbursed to each employee would qualify as ‘otherwise deductible’ to the employee. This requires a review of the circumstances of each employee. Employee declarations are also critical to eliminating FBT on travel expenses.

5. Entertainment expenses – Use of the ‘actual method’

With extended lockdowns and work from home directives, employers may find that the entertainment benefits provided during the year have been significantly lower compared to prior years. If so, the actual method in place of the 50/50 method for determining entertainment benefits will likely result in a better outcome for employers.

6. Recordkeeping!

The reduction of FBT taxable values to nil under the ‘otherwise deductible’ rule requires careful attention to recordkeeping. Depending on the type of benefit (and for many benefits), this requires the provision of invoices and receipts by employees to the employer, as well as the provision of signed employee declarations by the date of lodgement of the FBT return. The Government announced in the 2020/21 Budget that measures would be introduced to reduce FBT recordkeeping requirements by providing the ATO with powers to accept existing corporate records instead of requiring employee declarations. Until such measures are introduced, recordkeeping is critical to the reduction of FBT.

Next steps

If you would like further information on FBT, employment taxes or assistance with your FBT obligations, please contact the authors of this article.

Rachel Pritchard
Associate Director
Head of Human Capital & Corporate

Sejal Mehta
Senior Manager
Leader in Advisory & International Services

This newsletter is current as of 14 April 2022, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Before acting upon the content of this newsletter, please contact us to discuss how the above applies to your specific circumstances.

This information is general advice only and neither purports, nor is intended to be advice on any particular matter.
No responsibility can be accepted for those who act on the contents of this publication without first contacting us and obtaining specific advice.
Liability limited by a scheme approved under Professional Standards Legislation.
For further information please refer to our privacy policy 

ATO releases impacting private family arrangements – Part A

29 March 2022

Last month the ATO released a new draft ruling and other practical guidance relating to their position on various common trust administration practices and structures used in private family arrangements.

In particular, what is referred to as section 100A reimbursement agreements and the ATO’s administration of unpaid distributions to corporate beneficiaries under Division 7A of the Income Tax Assessment Act 1936.

There is a lot of material to digest which as an initial reaction, contain the first indications from the ATO of their interpretation of these specific laws to a broader application of family arrangements to what was considered up to now as normal ordinary family dealings.

The ATO through these releases imply an onus of proof now expected from taxpayers to demonstrate that adult children beneficiaries receive the benefit of declared distributions and evidence as to reasons for any accompanying arrangements. The releases also cover the ATO’s view on gifting back from children to parents or the trust and in some cases, the ATO are suggesting they may apply their new announced views retrospectively.

Particularly surprising, is the timing of the announcements as to “why now” – in light of a recent 100A case decision in Guardian AIT Pty Ltd ATF Australian Investment Trust v FCT 2021 (Guardian) that was held for the taxpayer which we discussed here. The ATO has since appealed this case. 

From the ATO’s comments, it is likely that they want to share their concerns sooner than later, encourage directed focus amongst taxpayers to contain these arrangements and/or change their behaviours whilst waiting for the outcome of that appeal and the decisions in other cases on 100A which ultimately will shape the finalised ATO’s guidance on 100A.

Although the ATO’s guidance has already been subject to vigorous examination with submissions due on 8 April 2022, we don’t necessarily foresee a change in the ATO’s interpretation of the law until it is tested in the Courts.  Therefore, in the meantime you need to consider immediately the implications of the announcements on your past, present and future trust arrangements and determine whether you fall within the White, Green, Blue or Red Zones of the ATO’s draft Practical Compliance Guideline.

This article will be in issued 3 parts covering these new ATO releases;

Part one: Distributing to Adult Children

Part  two: Distributing to Loss trusts and Corporate beneficiaries

Part three: Overturned draft division 7A ruling on UPEs

Distributing to Adult Children

A history lesson into 100A

You would be forgiven if you haven’t before heard of Section 100A. Or at least didn’t consider it would have any real application to those that administered their trust structures with prudent diligence whilst not entering any complex or contrived structuring.

Section 100A of the Income Tax Assessment Act 1936 was introduced in 1978 to combat bottom-of-the harbour era tax avoidance schemes referred to as “trust stripping” whereby a trust’s profits were stripped out by distributing them to a tax-exempt or loss entity, but payment of such profits was instead resettled to other intended beneficiaries.

100A allows the ATO to impose tax at the highest marginal rate on a trustee (instead of the beneficiaries) when conditions of the provision are met.

It has been largely dormant for over 40 years where the ATO has preferred to use the general anti-avoidance provisions of Part IVA. Accordingly, 100A has only ever been raised in a handful of cases of which involve contrived structures and transactions.

It became apparent around 2014 that the ATO was starting to consider application of 100A beyond the impetus of its original intent. In 2016, the ATO released a ‘Fact Sheet’ setting out situations where they viewed 100A would apply (including the structure tested in Guardian) in which they stated that 100A would not apply to ordinary family or commercial dealings, a term which was not defined.

Since 2016, the ATO announced that they would release further guidance as to their views as to the interpretation of ordinary family or commercial dealings. It has since taken 6 years for them to release a suite of draft documents on the operation of 100A.

In our view, and that shared by the industry, the ATO have taken some contentious positions about when the section will be triggered.

The key elements of 100A

Broadly Section 100A applies when:

  • a beneficiary is made presently entitled to trust income;
  • there was an arrangement that another person (usually another beneficiary or the trustee) gets a benefit attributable to that trust income – this is called a ‘reimbursement agreement’;
  • a purpose of the arrangement was someone paying less tax; and
  • the arrangement was not an ‘ordinary family or commercial dealing’
ATO’s new approach on 100A

The contentious issue is what arrangements would fall within the exception. Interestingly, the ATO has noted there is limited guidance on the meaning of “ordinary family or commercial dealing”.

In the recent announcements the ATO expresses in their view an arrangement is an ‘ordinary family or commercial dealing’ when what has happened can be readily explained by family or commercial objects.

 But in examples contained within the guidance documents released, the ATO has taken the position that a number of arrangements albeit common in a family setting are artificial or contrived and therefore, in their view outside this exception. If what has happened is only explicable by tax reasons, the exception for ‘ordinary family or commercial dealings’ will not apply.

The ATO’s position is outlined in the draft Tax Ruling (TR 2022/D1)  and is accompanied by a draft Practical Compliance Guideline (PCG 2022/D1) and a Taxpayer Alert (TA 2022/1).

These can be summarised as follows;

  • the application of section 100A is expanded to arrangements as outlined in the guidance that in the ATO’s view are excluded as ordinary family or commercial dealings;
  • the PCG outlines using a traffic light system to categorise arrangements, into zones of risk;
    • low risk (to which compliance resources will not be dedicated),
    • medium risk (with respect to which the ATO may ask questions), and
    • high risk (to which the ATO will dedicate compliance resources);
  • the arrangements outlined by the ATO are a far broader range of transactions than anticipated particularly concerning as categorised a High Risk Zone to include distributions to adult children where the funds are seen to be applied for the benefit of their parents.

It is this extension to distributions to adult children which is covered by the Taxpayer Alert that has caused major concern amongst families and is the specific focus of Part A of this article. Other scenarios of the ATO’s application of 100A will be covered in our Part B and C of this article.

Why the ATO concern?

The draft Taxpayer Alert says the ATO is concerned about situations where income is appointed to adult children but the ‘parents enjoy the economic benefit of the trust income to meet parental expenses such as the costs of their upbringing, including costs of such as primary schooling and other kinds of ongoing financial support parents would ordinarily provide their children.

The common features of the arrangements the ATO are reviewing include;

  • the Trustees or the directors of a Corporate Trustee, are either one or two individuals who are the parents.
  • income derived by the Trust is used during the year to meet the expenses of the Parents.
  • resolutions of the trustee for the year are made to presently entitle the adult children beneficiaries to a share of the income of the Trust.
  • the entitlements are for substantial amounts but do not generally result in the adult children’s taxable income to exceed the threshold for the top marginal tax rate ($180,000).
  • amounts are not paid to the adult children but rather directed by the children to be paid or applied to the benefit of their Parents.
  • the arrangements the ATO are concerned about are those which are more properly explained by the tax outcomes obtained, including the accessing of tax-free thresholds and lower marginal tax rates of family members, rather than ordinary familial considerations.

We have set out some of examples raised by the ATO below that are most typical amongst families with respect to distributions to adult children.

Key takeaways

  • The items described in the ATO tables help to identify whether there is a risk that section 100A applies to an arrangement.
  • The tables set out an ATO compliance approach with items in the red zone being given a higher priority than blue zone.
  • As to whether 100A legally applies will depend on whether there was a reimbursement agreement at the time the beneficiary was made presently entitled to the trust income.

Next steps

Arguably for many modern family arrangements, the sharing and pooling and even gifting, of assets amongst family members is a normal, regular family transaction.  Doing things for the benefit of the family is something families ordinarily and regularly do. It extends to investment decisions, pooling of investments, across generations with the natural extension to the application of funds in the same way.

There is even case law precedent that supports “a redistribution of family assets including a family business, as between husband and wife is a normal, ordinary, everyday family transaction”.

Nevertheless, whilst we wait for clarity from cases subject to the judicial process the ATO have made their position known which cannot be ignored. The best next steps are:

  • identify the actual level of risk of section 100A applying based on your particular circumstances;
  • identify the best options for dealing with any existing or historical risks;
  • maintain evidence as to how beneficiary entitlements have been satisfied to the specific benefit of that beneficiary;
  • ensure going forward you are fastidious in your administration of your trust ensuring that;
    • the trust has a bank account ;
    • all transactions are conveyed through these accounts ;
    • preferably the trust pays entitlements declared to any beneficiary directly;
    • particularly where a child directs the Trustee to pay for an expense on their behalf that appropriate evidence is maintained such as obligations clearly established in the name of the child such as Uni fees issued to the child, investments in name of the child, home deposits, cars, or other assets or expenses in the name of the child.

In the meantime, please contact your Cooper Partners engagement team if you would like any assistance with implementing any of the above steps.

Michelle Saunders
Managing Director
Head of Strategy

Simeran Cheema
Manager
Leader in Advisory Services

Marissa Bechta
Director
Head of Taxation Advisory

Ross Heard
Senior Consultant
Leader in Tax Controversy

This newsletter is current as of 29 March 2022, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Before acting upon the content of this newsletter, please contact us to discuss how the above applies to your specific circumstances.

This information is general advice only and neither purports, nor is intended to be advice on any particular matter.
No responsibility can be accepted for those who act on the contents of this publication without first contacting us and obtaining specific advice.
Liability limited by a scheme approved under Professional Standards Legislation.
For further information please refer to our privacy policy 

Is the change in control of trusts as you actually intend?

8 March 2022

Trusts are a preferred vehicle to accumulate and preserve investments for the benefit of the family group. Overtime assets with significant value are built up and as a result careful consideration is required to ensure the appropriate persons are given control to continue your wishes as to how your trusts are to be administered for the benefit of the next generation.

Passing on control of your trust

Ascertaining the successor controllers of a discretionary trust can be complicated. Careful consideration must be given to ensure the safeguarding of assets that have been accumulated over a lifetime will be achieved, as well as facilitating distributions to the intended beneficiaries, to protect your family’s future financial security. 

We observe there are a number of common objectives when assisting clients determine the future control of their trusts;

  • a desire to preserve assets in an existing trust so as not to trigger stamp duty and accelerate capital gains tax assessments;
  • ensuring that only lineal descendants can benefit from the capital of the trust;
  • concerns as to whether tensions could arise amongst children due to the discretionary nature of trusts in contrast to desiring fixed entitlements.

As part of your estate planning, thought needs to be given to the following areas;

  1. who do you want to hold the power to appoint or remove the Trustee after the death of the current controllers?
     
  2. where the trust has a corporate Trustee, who do you want to own the shares and have the ability to appoint directors after the death of the current controllers?
     
  3. who do you want to give control as to how the income and capital of the trust is to be allocated to different beneficiaries and protect situations against benefiting some beneficiaries to the exclusion of others, including who you want to designate as having the right to vest the trust.

1. Appointor successor

In many cases, transferring the shares in a Corporate Trustee to the designated controllers will not alone be enough to ensure those persons take control of the trust. 

Most trust deeds include terms that give a person the power to remove a Trustee and appoint a replacement. This person is commonly referred to as the Appointor.

Depending on the terms of the deed a succeeding Appointer can be nominated;

  • in the trust deed itself, or with an amendment to the deed,
  • in the Will of the current Appointor,
  • and if no replacement is appointed, the executors of a deceased Appointor.

If there is a risk of a deceased estate dispute, it would be wise to name the successor in the trust deed itself. This may require an amendment to the trust deed.

Usually, the nomination around the successor Appointor should align with whom will receive the shares in the Trustee company.

Care needs to be taken to ensure nomination of the succeeding Appointor is executed and administered within the terms of the existing trust deed. It does require specialist trust law advice as in recent times, a  number of cases have determined that particular attempts to change the Appointor through a deed amendment are invalid as the drafting of the original trust deed did not permit such a change. It is not uncommon for trust deeds, particularly older deeds, to not allow for variations or amendments to the Appointor provisions.

2. Shareholders of the Corporate Trustee 

When dealing with a Corporate Trustee, consideration needs to be given to who owns the shares in the company and therefore, holds the rights attaching to those shares.

Shares in a company that acts as Trustee will entitle the shareholder to have a degree of control of the trust because in some circumstances, such as the death of the only director, the shareholder can determine who acts as directors of the Trustee and makes the day-to-day decisions regarding the assets of the trust.

The ownership of the shares and thus control can be either;

  1. passed to the executors under the Will of the shareholder;
  2. passed to specifically named beneficiaries personally and not in their capacity as executors; or
  3. managed by different classes of shares in the company being issued to different persons.

The difference between the first two approaches is in the case of the second approach the shares do not form part of the assets of the estate but can be retained by the beneficiary personally. By retaining the shares, those persons can appoint themselves as directors of the Trustee and attend to the day-to-day decision making such as decisions around distributions of income and capital of the trust. It is acknowledged that nominating specific beneficiaries may not result in the desired outcome if the Will is challenged.

In such scenarios, the third approach may achieve the desired intent where redeemable special class shares are issued in the Corporate Trustee to the future designated controllers whilst the existing controllers are still alive.  On certain trigger events, the special class shares convert to ordinary shares.

3. Corporate Trustee Constitutions

Most private company constitutions require director and shareholder decisions to
be made by a majority. Accordingly, consideration needs to be given where multiple succeeding controllers are appointed by undertaking ‘what if ‘scenarios at both the Board level and Shareholder level in light of the decision-making matrix pursuant to the Constitution.

For example:

  • if the constitution for the Trustee company requires certain decisions, like director appointments to be a majority of shareholders, there could be situations where particular groups of shareholders outvote others and appoint themselves as the replacement directors of the Trustee.
  • this in turn would then extend to decisions around distributions of income or capital of the trust.

Various approaches to mitigate such risks involve amendments to the Constitution of the Trustee company including:

  • each shareholder has a right to be appointed a director or nominate a representative to act as a director of the Trustee company so that their interests are represented;
  • inserting terms stipulating that any decision of the Trustee to distribute income or capital of the trust other than equally between named beneficiaries requires the consent of all of those named beneficiaries;
  • certain key decisions must be made unanimously (e.g. decisions to amend the constitution or trust deed).

This article has focussed on Corporate Trustees as being the most common approach to modern day structures. If a trust instead has individual Trustees, it could be opportune to introduce a Corporate Trustee when considering successor appointments when an amending deed is required to reflect the changes in appointed successors. 

Other considerations

Loans from controllers to trusts

The existence of loans or unpaid entitlements owing by the trust to its controllers should be considered as part of their estate planning.

Consideration should be given as to the impact any bequest of loans or unpaid entitlements owing to controllers where they were left to say their estate, where the executors are not the same controllers of the trust.

For example, it may be desired for control of a particular trust to be left to one or more selected children. This could be particularly relevant where there is a family business conducted via a trust and operated by working children in the business. The other children may instead be bequeathed assets that fall outside of the trusts and form part of the deceased’s estate.

Such loans form part of the deceased’s assets whereby such loans could be called upon by the deceased estate putting cashflow pressures on the trading trust with the effective control of the trading trust being passed to its creditors, now being the executor.

Where loans receivable exist as part of an estate plan, consider whether;

  • it is prudent to formalise the terms of the loan covering loan repayment periods, terms and interest rates to avoid it being at called on death and creating cash flow problems for the trust;
  • security should be taken for the loan to secure its repayment;
  • the loan is better to be forgiven on death, although there could be tax implications of this option that should be examined.
Family Charters

There is an increased approach to formulate Family Charters combined with the situation where the deed appoints some of (or all) the children as the replacement controllers. The Family Charter is a governance document that contains the process about how a family wants the trust (and other entities within the family group) to be managed in the future. 

Although not legally binding, such a document contains information to prevent potential conflict and is a mechanism to introduce and manage the expectations of the next generation, including direction regarding how the current controllers would like the trust to be managed, investment ethos, philanthropic intentions and attitude towards income and capital distributions.

It shouldn’t be overlooked as to whether all your children in fact agree to assume control and continue with your trusts after your death. Such discussions ideally occur as part of your estate planning. We do at times witness tensions arising where control passes to several children with different aspirations and don’t share the same future objectives and/or investment risk profiles. Such matters can be covered in the Family Charter including vesting of specific assets from a trust to certain family members and decisions around whether strategies like trusts be wound up on death. 

Key Takeaways

Regardless of whether control is being effected by the terms of the trust deed or your Will, it is vital to refamiliarise, review and understand:

  1. the succession terms of the controlling parties in the existing trust deeds and any accompanying variations including whether those variations and the alleged appointment of various successors is valid;
     
  2. the constitution of the Corporate Trustee including the decision mechanisms, shareholder and director meeting proceedings and voting rights attached to the shares; and
     
  3. the terms in your Will to ensure it covers your intent as to how both the shares in any Corporate Trustee are dealt with together with the successor of the Appointor.

Transferring control of a trust is complicated. This article highlights the importance of giving proper consideration to the Trustees and Appointors of a trust and the shareholders and directors of a Corporate Trustee. Understanding the interrelation between these roles is essential.

Every trust is different, and every family circumstance is different. Accordingly, any changes or updates need to be undertaken with great care tailored to meet the desired intents of the current controllers.

If you would like to understand more about the above as to how it applies to your overall plans with regards to change in control of your structures, please contact the authors of this article.

Authors:

Michelle Saunders
Managing Director
Head of Strategy

Jemma Sanderson
Director
Head of SMSF & Succession

Marissa Bechta
Director
Head of Taxation Advisory

Simeran Cheema
Manager
Leader in Advisory Services

This newsletter is current as of 8 March 2022, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Before acting upon the content of this newsletter, please contact us to discuss how the above applies to your specific circumstances.

This information is general advice only and neither purports, nor is intended to be advice on any particular matter.
No responsibility can be accepted for those who act on the contents of this publication without first contacting us and obtaining specific advice.
Liability limited by a scheme approved under Professional Standards Legislation.
For further information please refer to our privacy policy 

An update on the use of a corporate beneficiary

21 February 2022

It is common amongst private groups to have structures that involve discretionary trusts that have distributed to companies that are eligible beneficiaries of the trust.

Although it was always intended that these distributions were eventually paid down in cash to the company, invariably the trust would not have such sufficient available liquid assets to attend to payment at either the time of the distribution, or shortly thereafter. What consistently then occurred was that the assets supporting the unpaid distribution were retained by the trust and re-invested or otherwise utilised by it.

The ATO has provided guidance expressing concerns about this sort of arrangement whereby the distribution is left unpaid for a period of time and in recent announcements suggested they may use integrity measures to attack these arrangements particularly where the trust owns shares in the company.

Most certainly the ATO’s application of various tax provisions to the use of these structures have evolved into something that is a major source of complexity and confusion for private groups.

For private groups the landscape is changing and strategies that worked in the past will unlikely work into the future.

Corporations as beneficiaries

The advantages of distributing trust income to corporate beneficiaries include:

  • a flat rate of tax that is usually less than the applicable individual tax rate;
  • encouraging retention of profits and accumulating wealth;
  • no ‘tax differential’ to pay on those distributions where they are fully franked;
  • achieving asset protection objectives of a family group where the discretionary trust is commonly used to hold investment assets.

Such arrangements do introduce an element of complexity for private groups implementing such corporate structures. Invariably, unpaid distribution entitlements ( ‘UPE’)  strategies arise. There are various ATO rulings and guidelines which require care when structuring these arrangements so as not to trigger the provisions of Division 7A of the Income Tax Assessment Act 1936, which deems certain payments to shareholders or their associates as dividends.

The UPE strategy

A UPE strategy is where a discretionary trust resolves to make a company presently entitled to some or all of the net income of the trust.

To the extent that the company is required to pay income tax on this distribution, the trust would usually pay at least that amount to the company with the balance of the distribution retained by the trust.

The UPE strategy is used to enable reinvestment of the profits in either the business or by way of financing the acquisition of investment assets held in the trust. This structure brings with it an asset protection strategy.

The tax efficiency of such a structure is also a factor including;

  • the trust is fiscally transparent, so use of this structure does not add further tax liabilities, 
  • the discretionary trust has flexibility in who income is distributed to,
  • this flexibility assists with managing tax liabilities across a family group,
  • a trust can access the CGT 12 month 50% discount,
  • the tax arbitrage on income is a timing difference, with top up tax being paid when the profits are ultimately distributed out of the structure to the individual family members,
  • the tax arbitrage on capital gains is permanent where the gains are distributed directly to individuals.

A common approach to structuring a corporate beneficiary is illustrated below;

  • Discretionary Trust 1 distributes income to the corporate beneficiary,
  • this income will be taxed at the corporate rate of either 25% or 30% subject to whether the company qualifies for the lower base rate of tax,
  • the income will then remain in the Company until the Company decides to distribute the income to its shareholders by way of a future dividend,
  • typically, the only shareholder of the Company will be a second discretionary trust,
  • the income of the Company will ultimately be distributed to the same individual beneficiaries of the first discretionary trust by way of fully franked dividends.

What to do with the distributions paid to the company

Long gone is the notion of using a corporate beneficiary to defer ‘top up tax’ on trust distributions.  Distributions to corporates like any beneficiary, are entitled to receive the benefit and payment of such distributions declared to it.

The distribution ultimately is now required to be paid to the corporate beneficiary and various strategies to utilise these funds include;

  • hold the ultimate distribution until some point in the future when it can be distributed to individuals usually once they retire,
  • in the meantime, invest that part of the overall investment portfolio allocated to non-capital growth type assets such as dividend yielding, revenue-based investments, mortgaged managed funds, property development investments, and fixed interest products,
  • lend the cash to a related entity under an interest-bearing Division 7A-compliant loan arrangement or sub trust arrangement,
  • investing in long term legacy investments acknowledging the compromise in tax efficiency, particularly if it is never foreseen that such investments will be sold but rather viewed as a strong source of franked dividend yield for future generations,
  • undertake or transfer business activities to the company.

Recent ATO audit activity

In its 2020-21 Federal Budget, the Government announced that $1 billion would be provided over 4 years to extend the ATO Tax Avoidance Taskforce. The ATO has announced its “Next 5,000 program“, designed to see the ATO undertaking “streamlined assurance reviews” of relevant taxpayer groups over a 4-year period (mirroring the approach undertaken in the Top 1,000 tax performance program that applied to public and multi-national companies).

One of the areas of particular interest to the ATO is section 100A of the ITAA 1936 and recent guidance and ATO audit activity that is being tested in the courts signals a tighter and tougher application of section 100A to trust distributions.

The much-anticipated ATO ruling is expected to be released this week as to how it is likely that the Commissioner will apply this section to use of corporate beneficiaries.

Why the concern?

In simple terms, Section 100A has the effect of not recognising for tax purposes, distributions of trust income to beneficiaries where those distributions resulted in a reduction in the income tax payable by a taxpayer where they do not in the short term receive payment of the distribution and the arrangements around the distribution were not part of ordinary family or commercial reasons. Instead, the trustee is taxed on the income. 

It is anticipated that the ATO intends to take an extremely narrow view on what constitutes ordinary family or commercial dealings. For instance, the ATO may not accept that there is an ordinary family reason for not paying distributions owing to adult children.

A particular target appears to be where a Trust owns 100% of the shares in a company, which also receives distributions as a corporate beneficiary of the trust. Often such arrangements are put in place with a view to maintaining a simple structure and avoiding the incorporation of additional entities. Subject to the ATO ruling, consideration should be given to whether any UPEs can be paid out, or restructuring to use new companies going forward.

Furthermore, in a very important development, the Federal Court has recently ruled on Section 100A and the Part IVA anti-avoidance provisions in Guardian AIT Pty Ltd ATF Australian Investment Trust v Commissioner of Taxation [2021] FCA. This case involved an arrangement where a trust made a distribution of income to a corporate beneficiary, and the corporate beneficiary in sequence distributed a dividend back to the trust. This type of arrangement was one of several examples provided by the ATO of arrangements in its ruling that may attract section 100A.

On the particular facts of this case, the Court ultimately held that section 100A had no application to the taxpayer group’s circumstances, determining that no agreement or scheme existed at the relevant testing times particularly when the structure was established and when the distribution was declared to the corporate beneficiary.

Not surprisingly, the Commissioner has appealed this decision to the Full Federal Court in respect to this decision where we are hoping that they expand on the legal issue of ordinary family dealing in more depth to assist advisers in the application of this principal.

Key Takeaways

Although the use of corporate beneficiaries is common, simply taking advantage of their lower rates of tax is not without consequence or risk.

The ATO considers that Division 7A may apply to an unpaid present entitlement owing to a corporate beneficiary where the trust and the beneficiary are related entities.

Furthermore, where the distributions are not ultimately paid into the company but are directed to benefit other family members, the ATO are likely to approach this arrangement tougher in their audit activity.

Accordingly, it is important to review current arrangements, ensure appropriate structures are in place and use of a corporate beneficiary is correctly implemented for the valid reasons.

This article has summarised the potential benefits of using corporate beneficiaries such as:

  • to hold retained earnings and franking credits until needed,
  • an effective asset protection vehicle,
  • to use loans to related entities to purchase assets tax efficiently,
  • an effective structure to accumulate wealth and asset succession.

We will be issuing updates on ATO announcements expected in the following weeks on their application of various tax provisions as to how they apply to trusts, adult children and corporate beneficiaries.

If you would like to understand more about the above as to how it applies to you or would like a health check review of your corporate structures, please contact the authors of this article.

Authors:

Michelle Saunders
Managing Director
Head of Strategy

Jemma Sanderson
Director
Head of SMSF & Succession

Marissa Bechta
Director
Head of Taxation Advisory

Simeran Cheema
Manager
Leader in Advisory Services

This newsletter is current as of 21 February 2022, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Before acting upon the content of this newsletter, please contact us to discuss how the above applies to your specific circumstances.

This information is general advice only and neither purports, nor is intended to be advice on any particular matter.
No responsibility can be accepted for those who act on the contents of this publication without first contacting us and obtaining specific advice.
Liability limited by a scheme approved under Professional Standards Legislation.
For further information please refer to our privacy policy 

Who should be Trustees, Appointors, Shareholders and Directors?

14 February 2022

Discretionary trusts and companies are common vehicles used as business and family group structures. Both entities have advantages and disadvantages and where correctly structured they provide a layer of asset protection for the ultimate beneficiaries and shareholders of these entities. In order to achieve your asset protection and succession objectives consideration should be given as to whom is most appropriate to carry out the various roles in such structures.

Typical Asset Protection Structure

Whilst there are various other structures and asset ownership entities that can be used to suit particular circumstances and objectives the below illustrates a simple business structure commonly used;

  • Passive investments and capital growth assets such as shares and property are owned by a discretionary trust together with a Corporate Trustee.
  • A separate company is incorporated to undertake business operations. If claims arise in the trading company, the passive investment assets are held by the trust and should be protected where one has been diligent not to expose the trust.
  • The discretionary trust owns the shares in the trading company. The dividends pass to the discretionary trust shareholder, from where they can be distributed to beneficiaries at the discretion of the Trustee.

Discretionary Trusts

Discretionary trusts provide a high level of protection in various circumstances which have made them an advantageous structure for asset protection purposes. However, to ensure they are managed with the right intentions the roles of both the trustee and appointor in particular should be given due consideration.

Generally speaking, a trust involves the legal ownership of the property by the trustee for the benefit of the trust’s beneficiaries. With a discretionary trust no individual person owns the benefit of the assets as it is up to the trustee to decide who receives income or capital distributions from the trust.

Roles in the trust

There are a number of very important roles in the trust and the people or entities that carry these roles, will have an impact on asset protection strategies. In particular. this article discusses the roles of the trustee and the appointor who control a trust.

Role of Trustee

The trustee holds the legal ownership of the assets of the trust. The trustee is responsible for the assets of the trust, and the operation of the trust itself.  The trustee has the powers to manage the assets of the trust and conduct the trust on a day-to-day basis in accordance with the trust deed and trust law. Importantly, the trustee can decide to whom to distribute the income and capital of the trust.

1. Individual v Corporate Trustee

One of the main questions that arise in relation the role of the trustee is – should the trustee be an individual or a company?

Generally, a trustee is personally liable for any debts or liabilities incurred in its role as trustee of a trust. This is so regardless of whether or not it has a right to be indemnified from the assets of the trust. Most trust deeds and common law permit the trustee to be indemnified out of the assets.

However, there are situations where this restriction may be lifted such as where the assets of the trust are not sufficient, the trustee has acted outside of the powers of the trust, and various provisions of the Income Tax Assessment Acts which make the trustee personally liable for the trust’s tax debts.

A trustee can contractually agree with a third party that their liability is limited to the assets of the trust and that the trustee will not be personally liable. Such a provision is commonly used by larger trusts, such as managed investment trusts but is rare for smaller private trusts.

It is for these reasons it is prudent to have a corporate trustee.

The main advantages of a corporate trustee from an asset protection viewpoint are:

  • as a company is a separate legal entity, having a corporate trustee limits the liability of individual controllers of the trust;
  • individual trustees can be personally liable for debts incurred in the trust – which exposes personal assets of the individuals to risk;
  • the succession of a corporate trustee is much simpler; and
  • a corporate trustee can exist indefinitely unlike an individual who will eventually pass on.
2. Directors and Shareholders of a Corporate Trustee

Where it is decided that the trustee is a company it is then necessary to review the identity of its directors and shareholders.

Whilst it is best practice to have a corporate trustee so that personal assets are generally not at risk, it must be understood that the directors are not totally immune from the debts of the corporate trustee. Directors are subject to various legislation where they may face personal liabilities such as under the Corporations Act and the Income Tax Assessment Acts.

For these reasons with regards to director positions, the typical approach is to appoint the designated ‘at risk’ spouse in this role.

Thus, the importance of this person to have no or limited assets under their ownership and the ‘non-risk’ spouse in controller positions like the shareholder and appointor where these two latter positions combined ultimately control a trust.

Role of Appointor

The role of appointor is one of the most, if not the most, important role in a family discretionary trust. The appointor is the party who has the ultimate control over the trust because the appointor can appoint and remove the trustee.

The appointor may also have other powers subject to the terms of the trust deed, which confer more control to the appointor. This may include:

  • amending the trust deed;
  • changing the vesting date of the trust; and
  • changing the beneficiaries of the trust.

Based on this and because the appointor is the ultimate controller of the trust there are asset protection considerations to consider when deciding whom the appointor should be namely:

  • who is desired to have ultimate control of the trust?;
  • the succession of the appointor, not just upon death but importantly also upon incapacity;
  • the ability of the appointor to voluntarily resign; and
  • separate the control from the risk – the appointor should not be taking on any risk such as personal guarantees etc.

Due to control being invested into the appointer role, typically the ‘at-risk’ spouse would not be the appointor. Or if it is preferred due to individual family circumstances not to have someone solely act in this role, to have both spouses act jointly with appropriate succession clauses so that control passes to the continuing party such as;

  • what is to occur in the event that the appointor dies;
  • a mechanism for the appointor to resign and appoint another person or entity, instead of just automatic succession clauses. This is particularly important for relationship breakdowns.
  • a mechanism to provide where the position is vacated in the event of incapacity, bankruptcy or family breakdown period.

Companies

Many businesses choose to use a company due to their capped tax rate, ability to retain and reinvest profits in the business without any undistributed profit issues and its suitability to facilitate with ease of entry and exit to the entity.

However, the most compelling advantage of a company from an asset protection point of view is the ability to separate business operations and assets from the personal assets of the individuals involved.

For this reason, companies are becoming the preferred entity to undertake trading business operations.

As was the case for the Corporate Trustee roles, asset protection consideration needs to be given when identifying shareholders and directors of the corporate trading entity.

1. Who should be the directors?

Directors of companies are generally protected from creditors through the corporate veil. However, there are many circumstances where a director can be held personally liable for breaches by the company and creditor claims when have provided personal guarantees.

For this reason, this role should be restricted to the designated ‘at-risk’ spouse where limited or no personal assets are held in their name.

A director is required to comply with the powers granted under the Constitution and legal obligations under the Corporations Act, and has a responsibility to understand their duties in this role, before they consent to act in this capacity.

2. Who should be the Shareholders?

Shareholder’s liability is generally limited to the value of the shares owned in the company. As such, from a practical perspective the shareholders of any company should ideally be a low- risk entity.

Typical structures involve a discretionary trust as the shareholder of a trading company. This is advantageous not only from a tax perspective but also an asset protection view. To not compromise this strategy, care needs to be taken to avoid exposing the shareholder’s other assets such as providing shareholder guarantees for the company’s business operations.

Key Takeaway

Asset protection is not about hiding your assets or acting unlawfully to avoid financial responsibility. Rather, its about using legally permissible techniques to ensure you are protecting your assets.

Due consideration needs to be given to the roles which control trusts and companies to ensure you are best placed in the event of an unfortunate circumstance.

The challenge is to get the right combination of persons as trustees, directors, shareholders, appointors and beneficiaries and where relevant customise the terms of the trust deed and the constitution of a corporate trustee so as to achieve your asset protection, business succession and estate planning objectives.

In the meantime, if you would like to understand the above asset protection measures or would like a health check review of your asset ownership structure, please contact the authors of this article.

Authors:
Michelle Saunders, Managing Director                   Jemma Sanderson, Director
Marissa Bechta, Director                                           Simeran Cheema, Manager

Michelle Saunders
Managing Director
Head of Strategy

Jemma Sanderson
Director
Head of SMSF & Succession

Marissa Bechta
Director
Head of Taxation Advisory

Simeran Cheema
Manager
Leader in Advisory Services

This newsletter is current as of 14 February 2022, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Before acting upon the content of this newsletter, please contact us to discuss how the above applies to your specific circumstances.

This information is general advice only and neither purports, nor is intended to be advice on any particular matter.
No responsibility can be accepted for those who act on the contents of this publication without first contacting us and obtaining specific advice.
Liability limited by a scheme approved under Professional Standards Legislation.
For further information please refer to our privacy policy 

Asset protection lessons for Small to Medium Enterprises

7 February 2022

Asset protection is a key consideration in any business continuity plan, to not only protect the business but also its future owners including family members from the three ‘D’ of claims – debt, divorce & death.

Safeguarding your personal assets

It’s the front of mind concern for corporate directors or owners of small to medium-sized enterprises (SMEs): how do you appropriately protect your assets against creditors, business partners or personal relationship breakdowns or other claimants if something goes wrong?

The solution is to have a sound asset-protection plan in place that is implemented with rigour and continual review to reflect any change in circumstances.

It’s our observation that most clients aim for simplicity, but unfortunately simple structures often do not offer the best tax or asset protection outcomes.

It’s important when establishing a structure that it not only provides tax efficiency but also protection of non-business assets and accumulated wealth from claims against the business entity and/or its directors. Accordingly, any structuring should be tested against playing out the future ‘what ifs’. We walk through the below scenarios to illustrate some common traps.

Scenario 1– Protecting the family home and personal assets

Sometimes people think that establishing a business in a company or trust structure gives the owner the protection of the corporate veil and that creditors only have access to the company’s or trust’s assets, and this is generally true.

But as a director or trustee, if the structure has a deficit of assets to pay its debts, the claimant can sometimes access the personal assets of the director or trustee.

With prudent structuring you can mitigate such exposure;

  • As covered in our recent newsletter, personal valuable assets such as the family home should be placed in the non-risk spouse name.
  • However, for this strategy to be effective, it is essential to ensure this spouse isn’t in any ‘at risk’ positions like directorships or provision of personal guarantees for say, any loans of the business.
Scenario 2 – Your structures determine your personal liability

The way you have structured your business has implications not only for your tax but also determines your potential personal liability.

If you are a sole-trader or a small business your personal assets may be at greater risk than if you’re structured as a company.

A company offers many benefits as a business entity and one of the topmost benefits often pushed lies in its power for asset protection.

For example, a typical approach to structuring ownership of assets for a couple who operate a business is to:

  • acquire their home in the name of the non-risk spouse – but not jointly;
  • hold investment assets in an investment discretionary trust that is controlled by the non-risk spouse;
  • operate the business through a company and have a single director who is not the spouse who owns the family home;
  • for separate valuable business assets like key intellectual property, it may be appropriate to hold in a special purpose entity distinct from the trading entity.
Scenario 3: Loaning personal funds to the company

Capital is often required in business where it is not uncommon that the shareholders or family members loan their own funds to the company.

To help alleviate the risks, it’s important to properly document the particulars of the loan from the outset:

  • ensure the terms of the loan are properly documented in a loan agreement;
  • establish a security Interest as part of the terms of the loan ensuring that the lender can access assets of the company ahead of unsecured creditors if the debt isn’t repaid;
  • where appropriate register the security interest on the Personal Properties Security Register.
Scenario 4: Giving personal or director guarantees

Whilst personal guarantees are best avoided altogether, they are often required by banks, landlords or other business alliances.

Consider the below when it comes to signing a personal guarantee:

  • if the business is a family business, avoid having both spouses as directors of the company. Instead, the “at-risk” spouse takes on the business risk including the signing of personal guarantees and the other non-risk spouse owns the personal assets, such as the family home;
  • a personal guarantee is not released upon the individual’s resignation as a director, or the company’s de-registration. The grantor’s consent is required to release the personal guarantee;
  • if a personal guarantee is unavoidable, aim to limit the exposure by placing a financial limit on the liability as well as a time limit such as the period whilst a director.
Scenario 5: Contractual warranties and indemnities

It is common that a seller of a business will need to provide various warranties and indemnities to cover various representations made as part of the sale process.

It is justified to have multiple entities to hold different business operations so that any potential future claim under such contractual warranties is limited to that entity. For example, utilising separate business structures is used in industries such as property development.

Strategies to address exposures to valuable assets from risks created from such contractual obligations include;

  • establish multiple structures for special purpose operations;
  • this potentially extends to having separate trusts as shareholders for each company so that any warranties provided by the shareholder vendor is protected against dormant risk issues with prior contractual indemnities impacting on the value of future investments;
  • commence wealth accumulation in other seperate entities that are not part of any guarantees or contractual warranties.
Scenario 6: Death of a director or shareholder

Departure of a key person in a business through death or illness can impact on the smooth succession of a business.

We have observed where these events have not been given due attention in the planning phase and often intentions are not realised. This could be due to family or shareholder dynamics, blended families, or lack of funding to buy out the exiting owner.

In such scenarios, negotiations fall into a state of stalemate and relationships become strained and broken.

One solution is to have a shareholder agreement and succession plan in place. These can be complemented by a buy/sell agreement to provide a mechanism for the succession of the business. It is also vital to give due consideration to the nomination of executors of a Will, the trustees and appointors of a trust and the shareholders and directors of a corporate trustee or other company. Understanding the interrelation between these governing instruments is vital, as commonly documents such as trust deeds or corporate constitutions don’t enable the intended plan of succession and it only needs one resentful relative in the wrong role to derail a carefully planned process.

Ten lessons learned

Below we list 10 practical lessons to take away from the various scenarios highlighted above;

  1. Make sure you have the right structure in place;
    • Have a corporate trustee, rather than individual trustees;
    • Avoid running a business as a sole-trader;
  2. Ensure trading operations are separate to passive asset-holdings;
  3. Where possible implement a ‘non-risk spouse’ strategy to own the personal and family investments;
  4. Consider the individual who controls your entities and review control positions such as the;
    • trustee;
    • directors of the corporate trustee;
    • appointors of trusts; and
    • separate as much control as possible from any “at risk” potential beneficiaries;
  5. Review the succession and dispute resolution mechanisms in trust deeds and corporate constitutions;
  6. Consider a Family Charter to protect the business, particularly for intergenerational businesses;
  7. If there is potential for a will dispute or estate family maintenance claim, look at limiting the assets forming part of the deceased’s estate;
  8. Review loans from directors or shareholders to companies and consider the terms of that loan and impact those loans have on the ongoing ability of the company to operate if those loans are called up;
  9. Review status of charges including:
    • charges and security over assets; and
    • personal or director guarantees of debt;
  10. Have adequate and appropriate insurance in place.

Next steps

A well-developed asset-protection plan should consider tax minimisation, estate-planning strategies, and intergenerational wealth issues. Because every person or family situation is different, there is no one-size-fits-all solution so seeking professional advice is important.

If you would like to understand the above measures in further detail, please contact the authors of this article.

Michelle Saunders
Managing Director
Head of Strategy

Jemma Sanderson
Director
Head of SMSF & Succession

Marissa Bechta
Director
Head of Taxation Advisory

This newsletter is current as of 7 February 2022, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Before acting upon the content of this newsletter, please contact us to discuss how the above applies to your specific circumstances.

This information is general advice only and neither purports, nor is intended to be advice on any particular matter.
No responsibility can be accepted for those who act on the contents of this publication without first contacting us and obtaining specific advice.
Liability limited by a scheme approved under Professional Standards Legislation.
For further information please refer to our privacy policy 

Beneficial Superannuation Legislation Passes Through Parliament

11 February 2022

Last night (10 February 2022) legislation passed both houses to implement the bulk of the changes to superannuation announced in the federal Budget in May 2021..

This includes:

  1. Reducing the age where the downsizer contribution is available to 60
  2. Removing the work test up to age 75 for non-concessional contributions and salary sacrifice contributions (the work test still remains for personal deductible contributions)
  3. Extending the three year non-concessional contribution provisions to age 74
  4. Removing the $450 threshold for superannuation guarantee obligations on employers
  5. Providing choice with respect to the treatment of segregated current pension assets in a superannuation fund where there are instances in a financial year where 100% of the fund is in pension phase

All of the above measures will apply from 1 July 2022, save for the last one, which will apply for the 2021/2022 financial year.

Remember, the following will still apply for 2021/2022:

  1. Work test (40 hours of gainful employment in a consecutive 30 day period) between ages 67 and 75
  2. Single year non-concessional contribution limit for people aged between 67 and 75
  3. Downsizer contribution eligibility age of 65
  4. The three year non-concessional contribution is only available to those under age 67 at 1 July 2021
  5. Any non-concessional contributions are subject to the total superannuation balance provisions (this is also the case into 2022/2023)

Still to come

We are still waiting on legislation with respect to

  1. The definition of an Australian Superannuation Fund, whereby people overseas can set up and maintain an SMSF, as well as make contributions to that SMSF, without there being any compliance implications.
  2. The proposed two year amnesty to wind up legacy pensions. 

So, watch this space.

The Next Steps

If you would like further details or assistance with respect to any of the above changes, superannuation in general, or wish to have your position reviewed in light of the above, please contact our office on 08 6311 6900.

Jemma Sanderson
Director
Head of SMSF & Succession
Financial Adviser No:
001 000 382

Marissa Bechta
Director
Head of Taxation Advisory
Financial Adviser No:
001 000 438

Michelle Saunders
Managing Director
Head of Strategy
  Financial Adviser No:
001 000 435

This newsletter is current as of 11 February 2022, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Before acting upon the content of this newsletter, please contact us to discuss how the above applies to your specific circumstances.

Cooper Partners Financial Services Pty Ltd AFSL 000 327 033

The information and opinions in this presentation were prepared by Cooper Partners Financial Services (“CPFS”) for general information purposes only. Case studies and examples are included for illustrative purposes only.

In preparing this newsletter CPFS has not taken into account the investment objectives, financial situation and particular needs of any particular investor. The information contained herein does not constitute advice nor the promotion of any particular course of action or strategy and you should not rely on any material in this presentation to make (or refrain from making) any decision or take (or refrain from making) any action. The financial instruments, services or strategies discussed in this publication may not be suitable for all investors and investors must make their own investment decisions using their own independent advisors as they believe necessary and based upon their specific financial situations and investment objectives.

This information is general advice only and neither purports, nor is intended to be advice on any particular matter.
No responsibility can be accepted for those who act on the contents of this publication without first contacting us and obtaining specific advice.
Liability limited by a scheme approved under Professional Standards Legislation.
For further information please refer to our privacy policy 

ASSET PROTECTION – Protecting your family home

24 January 2022

There have been a number of recent developments that have impacted the future structuring of asset ownership particularly for business owners. It is now timely to review structures and succession planning from a practical perspective to ensure your assets are protected.

What has become evident is asset protection considerations in isolation without appropriate estate planning isn’t adequate and leaves you exposed. This is the first of an ongoing series of 5 articles on this topic.

Article 1 – Protecting your family home

Article 2 – Asset protection lessons for Small to Medium Enterprises

Article 3 – Who should be Trustees, Appointors, Shareholders and Directors?

Article 4 – Update on use of a corporate beneficiary/ bucket company

Article 5 – Is the change in control of trusts as you actually intend? 

Protecting your family home

A recent decision of the Full Federal Court has brought into question the effectiveness of a common asset protection strategy employed by many Australian families.

It has been a wise strategy to split spouses into the ‘at-risk’ spouse and the purportedly ‘risk-free’ spouse. So that the at-risk spouse, being a Director, Professional or Business Owner, is focussed on running their businesses and building wealth, whilst the family’s assets reside in the name of the risk-free spouse as a protection against creditor claims.

As part of this approach, this involved registering legal title of the family home in the name of the ‘low-risk’ spouse.

Recent comments from the Full Federal Court of Australia have highlighted that the simple act of legal registration is, of itself, insufficient to prevent claims from the creditors of a ‘high-risk’ spouse.

While the strategy is not without merit, ‘high-risk’ individuals who wish to protect the family home should review the extent to which this strategy may assist them in their asset protection objectives and employ further steps at the outset to protect the family home.

Case Background

The recent upheaval in this area of the law has stemmed from the Full Federal Court’s decision in Commissioner of Taxation v Bosanac [2021] FCAFC 158. In this case the Australian Taxation Office (ATO) was successful in recovering a tax debt owed by Mr Bosanac against his former family home, despite that home being legally registered in the name of his ex-spouse.  

Mr and Mrs Bosanac purchased the $4.5 million home in 2006 using a jointly owned deposit of $250,000 and a joint loan facility. Despite the contributions from both spouses, Mrs Bosanac was registered as the sole legal proprietor of the property.

During the period of ownership, the couple resided at the property. In addition, Mr Bosanac used the property to secure loans of some $3.6 million for his share trading activities. Following the couple’s separation in 2015, Mr Bosanac left the property while Mrs Bosanac continued to reside there.

While trying to recover outstanding tax liabilities owed by Mr Bosanac, the ATO argued that 50% of the beneficial interest in the home was held on trust for Mr Bosanac’s benefit and therefore, accessible to the ATO in the settlement of his debts. 

Mrs Bosanac argued that the ‘presumption of advancement’ applied such that any contribution to the property made by Mr Bosanac was in effect a non-recoverable gift to his spouse.

Court Findings

The Full Federal Court determined that:

  1. Mr Bosanac’s decision to incur a significant loan liability was inconsistent with an intention to gift the property to Mrs Bosanac; and
  2. The fact that Mr and Mrs Bosanac purchased and used the property as their matrimonial home indicated that it was for their joint use and benefit.

As a result, the Court determined that the ‘presumption of advancement’ was rebutted and that Mrs Bosanac held 50% of her interest in the property on trust for Mr Bosanac.

Such a finding is significant as it shows the Courts willingness to rebut the presumption of advancement when the factual scenario before the Court does not indicate that a gift was intended to be made.

Based on this case it is a reasonable inference that a husband, in the scenario who has contributed substantially to the purchase of a matrimonial home would not do so, for no beneficial interest in the property whatsoever.

What does this mean for you?

The key takeaway from this case is that simply registering legal title to the family home in the name of a low-risk spouse may not be effective in protecting that home from future creditors.

Those that wish to ensure their family home is protected from potential creditor claims must consider their reliance on the ‘presumption of advancement’ and, where possible, should ensure that the circumstances of their purchase or transfer point toward the contributions of the ‘high-risk’ individual being a genuine gift to the ‘low-risk’ spouse.

In addition, consideration should be given as to whether the application of this judgement could be applied to broader asset protection and estate planning objectives as to whether ownership of any other assets could be protected from potential creditor claims in a more effective manner.

Implementing strategies to reduce the risk to the family home

Placing the matrimonial home in the name of the low-risk spouse is still considered a worthwhile asset protection strategy despite the Full Federal Court’s view in Bosanac.

However, certain actions could be taken at the time of purchase of the property, such as entering a deed of gift which confirms:

  • The high-risk spouse is making a gift of the property to the low-risk spouse;
  • The high-risk spouse has no beneficial interest in the property; and
  • If the high-risk spouse is a joint borrower on the purchase loan, they have no rights of contribution against the low-risk spouse in respect of the property and the mortgage.

Dealing with ownership of existing property is more complicated due to transfer costs like stamp duty and compromising the main residence exemption. The course of action will be dependent on your particular situation.

  • It maybe still be prudent to put in place legal documentation which states your intention regarding contributions that have been made or will be made into the family property.
  • Gift and loan back strategies.

Contact the Author:

If you would like to understand the above measures in further detail, please contact the authors of this article.

Michelle Saunders
Managing Director
Head of Strategy
Jemma Sanderson
Director
Head of SMSF & Succession
Simeran Cheema
Manager
Leader in Advisory Services
Ross Heard
Senior Consultant
Leader in Advisory Services

This newsletter is current as of 24 January 2022, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Before acting upon the content of this newsletter, please contact us to discuss how the above applies to your specific circumstances.

This information is general advice only and neither purports, nor is intended to be advice on any particular matter.
No responsibility can be accepted for those who act on the contents of this publication without first contacting us and obtaining specific advice.
Liability limited by a scheme approved under Professional Standards Legislation.
For further information please refer to our privacy policy 

Mandatory Director Identification Number – Have you applied?

24 November 2021

Director ID Numbers required for both current and future directors

All company directors can now apply for their new Director Identification Number (DIN). Directors will need to verify their identity as part of a new DIN regime being administered by the newly created Australian Business Registry Services (ABRS) via the implementation of the Modernising Business Registers Program.

The unique DIN will remain with a director for life. The DIN regime is aimed to help prevent the use of false or fraudulent director identities in the future. The original intent was also to protect the privacy of directors by allowing them to be identified on public registers without disclosing personal information that is currently available.

When do you need to apply by?

For entities governed by the Corporations Act 2001 (Cth), the application date depends on when you were appointed as a director:

Who is required to apply for a DIN?

If you are a director or alternate director acting in the capacity of a director (including overseas residents) of an entity governed by the Corporations Act 2001 (Cth), you are required to apply for a DIN.

This includes directors of the following entities:

  • A company (including trustee companies);
  • A body corporate that is a registered Australian body (for example, an incorporated association  that has registered with ASIC);
  • A registered foreign company;
  • Aboriginal and Torres Strait Islander corporations registered under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth;.
  • Not-for-profit or charities incorporated under the Corporations Act.

How to apply for a DIN?

A director can now apply for a DIN online via the ABRS website using their myGovID for their unique DIN: https://www.abrs.gov.au/director-identification-number

You will need the following information:

  • Your Tax File Number – this is optional however will speed up the process;
  • Your residential address as recorded by the ATO;
  • Information from two documents to verify your identity (such as an ATO Notice of Assessment, PAYG Payment Summary, bank account or superannuation account details).

The process for foreign directors may be more complex and a paper application may need to be provided with certified copies of documents.

If you have not yet set up your myGovID, you can apply here: https://www.mygovid.gov.au/set-up

Managing your DIN

Directors must provide their DIN to the relevant company or entity for whom the director acts. This may be the company secretary, another director or an authorised agent of the company.

Where a director’s personal information changes, the following must occur:

  • The director should update their DIN online through the ABRS website;
  • The director must notify their company within 7 days of the change;
  • The company must notify ASIC of the changes within 28 days to avoid late fees.

Failure to comply with the DIN obligations and offences relating to a DIN can lead to fines and/or criminal charges.

Frequently Asked Questions

1. Can someone else apply for the DIN on your behalf?

No, due to the identity verification steps involved.

2. What is a myGovID?

myGovID is an app that you can download on your smart device. This is different to the myGov app. 

3. Do you need to inform ASIC of your ID number? 

At this stage, No. This regime is administered by the ABRS and it is expected by September 2023 that company registers will be transferred from ASIC to ABRS. 

Next steps

If you would like further assistance regarding how to apply for your DIN, please contact your Cooper Partners engagement team on 08 6311 6900.

Authors:
Rachel Pritchard, Associate Director
Simeran Cheema,  Manager.

This newsletter is current as of 24 November 2021, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Before acting upon the content of this newsletter, please contact us to discuss how the above applies to your specific circumstances.

This information is general advice only and neither purports, nor is intended to be advice on any particular matter.
No responsibility can be accepted for those who act on the contents of this publication without first contacting us and obtaining specific advice.
Liability limited by a scheme approved under Professional Standards Legislation.
For further information please refer to our privacy policy