05 April 2023

As the end of the 2023 FBT year has arrived, we provide you with the latest updates and tips to ensure you are ready for the 2023 FBT return preparation season. 

2023 FBT Rates and Thresholds

Key Dates

Who needs to lodge an FBT Return?

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

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.

TIPS

• 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.

ATO Audit Activity

The ATO have announced increased FBT audit activity in respect of employers who are not declaring fringe benefits and paying the correct amount of FBT. The ATO suggests that the ‘tax gap’ for underpaid FBT is around 20% of the overall FBT which should be payable, which is mainly attributable to employers who are not participating in the FBT system when they provide benefits to employees.

The ATO’s view is that many employers:

• Do not fully understand the FBT rules and their FBT obligations;
• Are failing to retain the appropriate documentation to reduce the taxable value of fringe benefits (eg declarations and documentary evidence);
• Are treating vehicles as ‘exempt vehicles’ for FBT purposes when the vehicles do not satisfy the exempt vehicle criteria;
• Are incorrectly failing to include benefits provided to ‘contractors’ who should in fact be classified as employees.

With increasing ATO activity, careful attention must be given to FBT compliance and lodgement of correct FBT returns, on the same basis as other tax liabilities.

Recent Developments

1.     FBT exemption for electric cars

In a bid to promote the adoption of electric vehicles, the Government has introduced an FBT exemption for qualifying electric cars.

For the exemption to apply, the following conditions must be satisfied:

• The car is a ‘zero or low emission vehicle’, ie certain battery electric vehicles, hydrogen fuel cell electric vehicles and plug-in hybrid electric vehicles;
• The car benefit was provided to a current employee on or after 1 July 2022;
• The car is first held and used on or after 1 July 2022; and
• No amount of luxury car tax has become payable in respect of the car (the luxury car tax threshold for fuel efficient vehicles is currently $84,916).

Unless the transitional requirements are satisfied, the exemption for plug-in hybrid vehicles will cease for car benefits provided from 1 April 2025.

TIPS

• The rules for the exemption for electric cars are very specific and should be carefully considered to ensure the exemption is available.
• Electric cars which are exempt are still required to be disclosed as a reportable fringe benefit. Therefore, the same record keeping rules that currently apply to car fringe benefits also apply to electric cars.
• Electric cars can be salary packaged by employees.

Be on the lookout for our detailed newsletter on the electric car exemption to be released next week.

2.     Commercial car parking – expanded definition

From 1 April 2022, updated Taxation Ruling TR 2021/2: Car Parking Benefits will apply whereby the ATO has broadened its view of the definition of a ‘commercial parking station’ to include ‘special purpose’ car parking facilities such as shopping centres, hospitals, universities and airports.  

Employers who provide car parking to employees that is located within one kilometre of a special purpose car parking facility may now be subject to FBT on such car parking benefits.

TIPS

• Where employers provide car parking outside of the CBD (ie business premises located in the suburbs), the treatment of the parking should be reviewed as there may now be commercial parking stations within the one kilometre radius.
• If the lowest fee charged by the commercial parking station for all day parking is $9.72 or less on 1 April 2022, a fringe benefit does not arise.
• Where parking provided to an employee is not in a commercial parking station, employer entities with an aggregated turnover of less than $50 million for the year ended 30 June 2022 may be eligible for the small business car parking exemption provided the other exemption criteria are satisfied.

3.     Employees versus Contractors

Distinguishing between employees and contractors is important in the context of FBT (as well as PAYG Withholding and Superannuation obligations), as FBT is payable in respect of employees (and their associates) but not contractors. Where employers incorrectly classify individuals as contractors, an FBT liability and penalties can arise if the ATO conducts a review and concludes the individuals are in fact employees.

Two important High Court decisions were handed down in 2022 which clarified the ordinary or common law meaning of ‘employee’, being the Personnel Contracting[1] and Jamsek[2] cases.

Broadly, the High Court‘s view is that where the terms of the parties’ relationship is comprehensively committed to a written contract, the status of the worker should be determined based on the legal rights and obligations in the contract. Further, the ‘totality of rights’ in the contract should be used to determine who has the right to exercise control over the person’s work and therefore whether the person is working in the payer’s business.

The ATO subsequently released Draft Taxation Ruling TR2022/D3: Income Tax: Pay As You Go Withholding – Who is an Employee and Draft Practical Compliance Guideline PCG 2022/D5: Classifying Workers as Employees or Independent Contractors – ATO Compliance Approach to provide guidance on classifying a worker as an employee or an independent contractor.

• [1] CFMMEU v Personnel Contracting Pty Ltd 2022] HCA 1
• [2] ZG Operations & Anor v Jamsek & Ors [2022] HCA 2

TIPS

• Employers should review their existing and new contracts with individuals to ensure the legal rights under the contract give effect to the desired classification of workers.
• Under the PCG, the arrangement is more likely to be considered low risk and the ATO will not devote audit resources where:
  • There is evidence that both parties agree on the classification;
  • Performance of the arrangement has not deviated significantly from the agreed contractual rights;
  • Specific advice was sought by the payer confirming the correct worker classification; and
  • The payer is meeting the correct tax, superannuation and reporting obligations based on the correct classification.
• Seek advice to ensure that your assessment of contractors can be supported or whether the business faces tax risk which should be addressed.

4.     Entertainment expenses – ‘Frequent’ Benefits

Entertainment benefits provided to employees are steadily increasing now that Covid restrictions have eased and more employees are travelling again. These benefits require careful analysis in respect of each employee to ensure the correct treatment for FBT purposes.

TIPS

• The minor benefits exemption for expenses less than $300 (including GST) only applies where the benefits are ‘irregular and infrequent’. Therefore, where an employee is regularly provided with entertainment benefits (eg client lunches and dinners), the minor benefits exemption is unlikely to apply.
• The ‘actual method’ for determining entertainment fringe benefits commonly results in a better outcome for employers (rather than the ‘50/50 method’). The minor benefits and property on workday exemptions are not available if using the 50/50 method to calculate entertainment fringe benefits. (Note: the actual method requires more detailed record keeping regarding who attended each event).
• Entertainment expenses which are not subject to FBT are not deductible for income tax purposes and GST credits cannot be claimed.

5.     Proposed Record Keeping Concessions  

A series of exposure drafts have been released with the aim of simplifying FBT record keeping and reducing compliance costs for employers who maintain good records in relation to travel diaries and certain relocation transport expenses.

These proposed rules are not yet law and will likely apply from 1 April 2023 (ie the 2024 FBT year).

The rules allow employers to rely on alternative records where certain conditions are met, rather than obtaining travel diaries and declarations in what appear to be quite limited circumstances.

As such, recordkeeping remains critical for the reduction of FBT for the 2023 FBT year.

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.

Contact the Author:

This newsletter is current as of 05 April 2023, however, please note that announcements and changes are being made by the Government and the ATO regularly.  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 

02 March 2023

Following our newsletter from last week, on 28 February 2023 the Prime Minister and Treasurer announced their plans for a cap on superannuation balances that would be eligible for concessional tax treatment.  This cap is $3 million.  For benefits in superannuation greater than $3 million, an additional 15% tax will apply to earnings on assets above that amount. It is expected that this change will impact approximately 80,000 Australians, or 0.5% of the population with a superannuation account

Key Items

The announcement was very high level, with headline items as follows:

1. The cap would not be indexed.
2. The cap would apply from 1 July 2025 to future earnings, and therefore would not be retrospective.
3. This timeframe is after the next election, so people can vote accordingly, although legislation will be introduced and could be passed before the election.
4.  It doesn’t alter the level of money that people can accumulate in superannuation overall, but rather the tax concession that applies to the earnings.
5. All other rules with respect to superannuation will remain the same including:.
   • Contribution rules
   • Preservation and access to benefits
   • Tax treatment of contributions
   • Tax treatment of benefit payments

As per the media storm last week, such an announcement was expected, with much speculation about the limit (would it be $3 million or $5 million), and also what the tax rate may be.  It was expected that any announcement would not force money out of superannuation where the limit was exceeded, but would reduce the tax concessions available.

Further Detail

Further details were released yesterday in a 1 March 2023 Treasury paper, with the following areas to note:

1. 15% tax would apply to the earnings where the total superannuation balance (TSB) at the end of a financial year is over $3M.
2. The tax would be in addition to the tax position on the amount under the $3M:
   • if the amount under the $3M is all in pension phase, then you would still receive the pension 0% tax rate on that proportion of the earnings, with the proportion of the earnings that relates to the over $3M threshold being taxed at 15%;
   • if the amount under the $3M is all in accumulation, then the earnings amount below the $3M would be taxed at 15%, and the amount above would be taxed at an additional 15%.
3. The amount of any earnings within the member account for the year would be a reference to the difference between the total superannuation balance (TSB) at the end of a financial year and the beginning of the financial year, with adjustments for contributions (net of tax) and withdrawals.
4. The proportion of earnings that would then be subject to the additional tax is based on the TSB at the end of the current year, less the $3M threshold, divided by the TSB of the current year.
5. Accordingly, unrealised capital gains will be included in any calculation, as the TSB refers to market values.
6. If an individual makes an earnings loss in a year (including an unrealised loss), it can be carried forward to a future year.
7. The first test time will be 30 June 2026, and the first notices of assessment will be issued during the 2026/2027 financial year once super fund’s have reported the relevant balances (this could be as far out as May / June 2027 in terms of the lodgement due dates for SMSFs).
8. Individual’s can choose whether to pay the additional tax personally, or the super fund pays it.

Examples (from the Treasury Paper):

Calculation of Earnings:

Carlos is 69 and retired. His SMSF has a superannuation balance of $9 million on 30 June 2025, which grows to $10 million on 30 June 2026. He draws down $150,000 during the year and makes no additional contributions to the fund.

This means Carlos’s calculated earnings are:

• $10 million – $9 million + $150,000 = $1.15 million

His proportion of earnings corresponding to funds above $3 million is:

• ($10 million – $3 million) ÷ $10 million = 70%

Therefore, his additional tax liability for 2025-26 is:

• 15% × $1.15 million × 70% = $120,750

Carry forward of earnings loss:

Dave is 70 and has two APRA-regulated funds and one SMSF. At 30 June 2025, his TSB across all funds was $7 million. During 2025-26, he withdraws $400,000 from his SMSF and makes no contributions. At 30 June 2026, his TSB across all funds is $6 million.

This means Dave’s calculated earnings are:

• $6 million – $7 million + $400,000 = – $600,000

His proportion of earnings corresponding to funds above $3 million is:

• ($6 million – $3 million) ÷ $6 million = 50%

The earnings loss attributable to the excess balance is $300,000. Dave can carry forward the $300,000 to offset future excess balance earnings.

At 30 June 2027, Dave’s funds make earnings on his excess superannuation balance of $650,000. He carries forward the earnings losses attributable to his excess balance at 30 June 2026 of $300,000 and is only liable to pay the tax on $350,000 of earnings.

This means his tax liability for 2026-27 is:15% × $350,000 = $52,000

Preliminary Musings

Although the detail will only be evident once the draft legislation has been released, we provide the below preliminary comments:

1. Not indexing the cap is likely to be highly criticised, as it will not keep pace with inflation and general increases in value, and therefore ultimately be unfair (and not align with the objective of superannuation).
2. The way the formula works is that there can be the situation where the effective tax rate on the earnings above $3M is not 15%, but a lot lower, depending upon the extent to which the member accounts are over the $3M threshold.
3. There is no comment with respect to the impact of the individual paying the tax rather than the fund – it would then add to the TSB in the following year, so could exacerbate any excess in the following year.
4. The payment of the tax itself may well be 12 months and beyond from the end of the financial year, depending on the timing of the issue of the notices.
5. From the examples, there doesn’t seem to be a proportionate concession when applying previous proportionate losses. This is generally a complex area in applying carry forward losses, so no doubt Treasury wanted to simplify any initial draft.
6. The proposed additional tax is to be calculated on the growth of the members account and not on realised income and gains. This is a major deviation in terms of current fiscal policy and tax law.
7. Given the earnings component is based on differences in value, and not on realised earnings there could be some cashflow implications where assets are illiquid, and a tax liability needs to be paid. 
8. As the additional tax is based on paper gains, if an investment is highly valued in one year and then becomes worthless, there may be tax payable upfront where no actual gain is realised in the future, which doesn’t align with the fairness principal in the proposed objectives of superannuation.
9. There could be situations from a death benefits perspective when the tax position is prohibitive, and also where realised capital gains are subject to double taxation. 
10. Individual’s may be disincentivised to make extra contributions to superannuation, as they no longer benefit from the tax concessions that encourage the accumulation of superannuation above a certain limit.  If they have the option of investing within superannuation or outside, under the current rules superannuation can be compelling as there is concessional treatment on any realised capital gain on the sale of an asset, with the trade-off being unable to access the proceeds net of tax for lifestyle spending. If those concessions are not available, then people may prefer to invest entirely outside of superannuation as they would likely be paying similar to the corporate tax rate, and would be able to access the funds from the sale of a capital growth asset at any time and not be subject to preservation or access restrictions (albeit with some additional tax implications if they want to spend the money for personal lifestyle outgoings).
11. The operation of the limit may give rise to some valuation arbitrage, particularly in light of the benchmark being the TSB at 30 June of each year, (i.e. a comparison of a higher TSB at 30 June 2025 for comparative purposes for the following year).
12. The operation of the limit may motivate some members who are eligible to withdraw money out of superannuation in the lead up to a 30 June so as to remain under the threshold to mitigate the additional tax.  Where the $3M TSB threshold is not exceeded, then the additional tax won’t apply.  In saying that, if the individual is not far over, then the proportionate additional tax payable is not that prohibitive given the formula. 

Given the statistics that this announcement would only impact 0.5% of the population, it is expected that it won’t sway any election results (in contrast to Labor’s previous franking credit removal debacle).

Next Steps

We await any draft legislation with no doubt substantial consultation amongst the industry bodies, before we can provide further guidance on any restructuring requirements.  As noted above, the devil will be in the detail in the legislation, as to the precise intricacies and operations of the proposal contained in the consultation paper.

In the meantime, there no need for immediate action, and continue as normal with respect to your superannuation.  Where you are looking to invest in a more substantial asset within superannuation, it may be appropriate to give us a call to discuss the implications and considerations, particularly where you are below age 55 to 60, and the expectation is that the proposed investment will generate a reasonable return that may push you over or close to the limit.  As always, if you want to discuss further, or have any other general superannuation questions, please reach out to any member of our super team.

CONTACT OUR SUPERANNUATION TEAM:

This newsletter is current as of 02 March 2023, 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 

23 February 2023

You may have heard that the Federal Treasurer, the Honorable Jim Chalmers, released a consultation paper on 20 February 2023 with draft wording for the objectives of superannuation in Australia to be enshrined in Legislation.

The proposed wording is as follows:

“The objective of superannuation is to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way.” 

This is the second release since 2014 of proposed wording – initially undertaken by the previous government based on recommendations made in the 2014 Financial Systems Inquiry.  Draft legislation released in this regard in 2016 lapsed in 2019 given agreement couldn’t be reached on the wording.

Implied Criticism of Current Superannuation

The announcement on 20 February had substantial press attached to it, particularly with respect to comments regarding limiting the ability for Australians to access their superannuation too early, which arguably wouldn’t align with the above objective.  This included criticism of the COVID-19 measures that enabled those Australians who had lost their jobs or had a substantial cut to their income as a result to COVID to access up to two lots of $10,000 from their superannuation.  Indeed, this did result in many Australians then no longer having superannuation benefits. However, it is considered by most Australians that it was appreciated and necessary to ensure that they were able to be financially viable. 

That measure was temporary, and there are very limited other circumstances where individual’s can access their superannuation prior to retirement, restricted to compassionate grounds or because of financial hardship.  These provisions are quite difficult to be eligible for, and have limitations on what can be accessed, but have been a welcome backstop for many Australians to ensure that they could pay for vital medical treatment, or ensure that the bank wouldn’t foreclose on their home.  There have been proposals to enable those subject to domestic violence to be able to access the superannuation of the offender in order to move on with their lives and rebuild. 

Superannuation is to provide for the retirement of Australians, which is why even the exceptions outlined above are difficult to qualify.  The intention of super providing for retirement is also reflective in the concessional taxation treatment of superannuation, incentivising the accumulation of superannuation through contributions, especially given access to superannuation is not until at least age 60 (currently). 

Superannuation in Australia is one of the most robust pension and superannuation systems in the world, and has been accredited in past as being the reason that Australia isn’t as badly afflicted by global shocks to economic markets. given the regular superannuation guarantee contributions being made to superannuation by employers (currently 10.5% of salary).  It is also the most tax effective investment vehicle in Australia, which is one of the reasons that many Australians aim to build up wealth within such structures for their retirement, and also over their lifetimes to manage the tax position of their family. 

The tax-effectiveness of super has resulted in some substantial wealth being accumulated within superannuation – particularly for those Australians who had the capacity to make significant contributions to superannuation from their available resources pre 2006 when there was no limit on the level of contributions that could be made from after-tax money to superannuation.  This is further enhanced by investment returns experienced since that time, and also the fact that there is no requirement (unlike prior to 2007) for individual’s to withdraw money out of superannuation where they are not working and have reached retirement age. 

The level of wealth that is in some superannuation accounts is due to be paid out of superannuation over the next 10 to 20 years.  This is because upon the passing of a member who may have a substantial super account, the bulk of it must be paid out of the superannuation environment, even where they have a spouse, as the spouse is only able to retain an amount within superannuation up to their Transfer Balance Cap. 

Accordingly, the main criticisms of the current superannuation platform are:

• there are circumstances when people have been able to access their retirement savings in recent times that shouldn’t be permissible, as superannuation should be to provide for retirement and ensure that our system is sustainable.
   
• Superannuation is not a vehicle to build substantial wealth in a tax effective way – it is to provide for a dignified retirement, and therefore it is inappropriate for there to be large member balances in superannuation.

Previous Substantial Changes to Superannuation

Over the past 20 years, there have been two substantial changes to superannuation (of most note) that required consideration for many Australians, particularly those at or approaching retirement:

• In 2007 with the introduction of superannuation contribution limits, removal of Reasonable Benefit Limits making pensions, and any super drawdowns over age 60 being tax-free.
   
• In 2017 with the introduction of the Transfer Balance Cap, limiting the amount of assets that could be held in retirement phase pension accounts that were exempt from tax, and further limiting the contributions being able to be made to superannuation. 

Implications of the Announcement

It is understandable that with the proposed objectives announced, there is some concern regarding what this announcement means for superannuation savings going forward. 

For now, the proposed wording is subject to consultation, due 31 March 2023, where professional bodies and other interested parties will provide their feedback on the proposed wording. 

Where any legislation in this regard is introduced and passed by parliament, it in itself doesn’t mean that there will be substantial changes to superannuation That is the overriding objective of enshrining the objective is to prevent any substantial changes in the future and unnecessary tweaking, whilst ensuring that Australian’s have confidence in the system where a reasonable amount of their salary is directed to superannuation from a young age. 

It is acknowledged, that the passing of legislation in this regard does then pave the way for changes in the future by a Government, where the basis of those changes may be from an equitable and sustainable perspective, in accordance with the objectives. 

It is impossible to crystal ball gaze in this regard, and indeed if any adverse changes were proposed, there would be substantial consultation and feedback from the industry, and also lead-time in order to make any strategic changes as required. 

The Next Steps

As and when there is at least draft legislation, we can at that point meaningfully speculate regarding any subsequent changes that may be announced.  The federal Budget on May 9 2023 will provide further insight in this regard, and either confirm or deny other rumours that have been circulating regarding limiting the amount of assets that people can accumulate overall in superannuation. 

Accordingly, we suggest no action is required until further announcements.  It is not necessarily advisable (where you might be eligible) to be withdrawing your superannuation pre-emptively for changes that may not occur. This is particularly given that the ability to make contributions to superannuation under current legislation is restrictive. 

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 Superannuation Team.

CONTACT OUR SUPERANNUATION TEAM:

This newsletter is current as of 23 February 2023, 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 

03 February 2023

More than a million Australians now own at least one cryptocurrency. Despite its elusive status as an unregulated and decentralised asset and numerous warnings about its volatility, it does not escape the reach of the Australian tax authority.

With its cryptocurrency data matching program, the Australian Taxation Office has been able to keep track of any cryptocurrency transactions since 2019. Whether you have been a regular trader of cryptocurrency or just made a one-off sale, it is likely you will see these details appear on your ATO pre-fill report when you log into your personal myGov Account. Therefore, it is important to understand your tax responsibilities.

Investor vs Trader

The ATO has laid out different tax rules for investors, and for taxpayers who earn regular income from trading in cryptocurrency.

An investor holds cryptocurrency as a stock over an extended period with the aim to build wealth through profit made from long term capital gains. Majority of Australian users fall in this category. Thus, any profits earned, or losses incurred will be subject to capital gains tax (CGT). Selling, buying, trading, or exchanging to another cryptocurrency will trigger CGT.

On the upside, where the investor is an individual they will pay 50% less tax on crypto gains if held for one year or more before disposing. Any capital losses will only be able to be offset against future capital gains ( derived from any asset class)  rather than being be able to be claimed against other types of ordinary income.

A trader is one who actively generates income from cryptocurrency, and functions as a business. In other words, there is an intention and purpose to generate profit from purchase and sale of cryptocurrency. Traders often have business plans, strong record-keeping, and a very high quantity of trades. For this purpose, the disposal will be treated as income and taxed at marginal income tax rates and not relevant for CGT.

If you are earning income by running a crypto-trading exchange, mining business or regular buying and selling for short term gains, the ATO will consider you a trader.

Personal use assets

One of the common misconceptions taxpayers  have about this exemption is that cryptocurrency valued under $10,000 are not taxable. The ATO considers cryptocurrency as a non-personal use asset if it were held or used:

• As an investment;
• Intention to making a profit; or
• Carrying on a business.

The personal use asset exemption only applies in rare circumstances where cryptocurrency was purchased and used or disposed of immediately to purchase personal goods or services.

Furthermore, the ATO will regard cryptocurrency as a hobby if the individual can demonstrate that the digital currency was acquired for a personal technological interest rather than profit-making purposes. However, given the nature of the cryptocurrency, it is difficult to persuade the Commissioner that digital currencies are obtained as a hobby.

The longer the cryptocurrency are held, the more likely the ATO will classify it as an investment.

Loss or stolen private key

In some situations where the cryptocurrency private key is lost or stolen, a capital loss can be claimed on the value of the digital currency. The ATO provides detailed information on what proof you may need to justify claiming a tax loss:

• When the key was acquired and lost;
• The wallet address that the key relates to;
• The cost incurred to acquire the lost or stolen digital currency;
• The amount of cryptocurrency at the time the key was lost or stolen;
• The wallet was held by you;
• That you own the hardware that stores the wallet; and
• Transactions to the wallet from a digital currency exchange for which you hold a verified account or that is linked to your identity.

Cryptocurrency and Fringe benefit tax

If your business pays an employee using cryptocurrency as a salary sacrifice, then the payment would be classified as a fringe benefit. Where there is no salary sacrifice arrangement, the payment would be classified as salary or wages and PAYG withholding taxation on the value that is calculated in AUD will apply.

Record keeping

Maintaining accurate records of any cryptocurrency transactions will help you stay ahead of your tax obligations.

A key challenge we have experienced is translating the sometimes-complex technical language and extracting data into a functionable format. 

Record-keeping includes noting:

• Transaction date
• Cryptocurrency value (in AUD) on the date of transacting
• Transaction purpose and trading party details

Board of Taxation review of the tax treatment of digital assets and transactions

The Government has tasked the Board of Taxation with undertaking a review into the appropriate policy framework for the taxation of digital transactions and assets in Australia, including crypto assets.

The review was to be completed by 31 December 2022.

It is contemplated that the review will consider the:

• current taxation treatment of digital assets & transactions in Australia, and emerging tax policy issues,
• taxation of digital assets and transactions in comparative jurisdictions and how international experience may inform the taxation of digital assets and transactions within Australia, and
• possibility of changes to Australia’s taxation laws and/or their administration, and what those changes should be in the context of digital assets and transactions, both for retail and wholesale investors.

We will keep you abreast of the outcomes of this review but in the meantime the ATO guidance in determining any tax liability should be adhered.

Next Steps

Blockchain is a continuing area of development which are challenging traditional laws.

From our wealth of experience in revenue tax law we can provide advice on the following areas of cryptocurrency:

• the income tax treatment of cryptocurrency transactions;
• applications for private binding rulings regarding the appropriate income tax treatment of cryptocurrency dealings;
• advice on the GST implications when trading cryptocurrency and transacting in cryptocurrency.

Stay ahead by contacting the authors of this article to understand your tax implications pertaining to your crypto transactions.

Authors:

This newsletter is current as of 03 February 2023, 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 

25 August 2022

The ATO has issued their finalised view on when an unpaid present entitlement (UPE) owing to a corporate beneficiary constitutes the provision of financial accommodation for the purposes of Division 7A.

This new approach applies to trust entitlements that arise on or after 1 July 2022.  

For trust entitlements that arose on or before 30 June 2022 the current approach will continue to apply.

What is the new approach? 

Division 7A ( Div 7A) of Pt III of ITAA 1936 operates to prevent private companies from making tax-free distributions of profits to shareholders or their associates by way of payments, loans or forgiven debts.

A private company will be taken to pay an unfranked dividend if it makes a loan to a shareholder or their associate and the loan is not either fully repaid before the company’s lodgment date or falls within the exclusions.

For the purposes of Div 7A, a “loan” includes a provision of credit or any other form of financial accommodation.

It is relatively common practice for trustees to distribute trust income to a corporate beneficiary.

Company beneficiary with UPE

A private company beneficiary with a UPE will provide financial accommodation to a trustee if it has knowledge of an amount that it can demand immediate payment of from the trustee and does not demand payment.

Where the company and the trustee have the same directing mind and will, the company is taken to have knowledge of the amount when the trustee does.

In this circumstance, the company is taken to have consented to the trustee continuing to use the retained amount for trust purposes.

As a result, the company provides financial accommodation to the trustee under the extended definition of a loan.

The ATO clarifies in their view that the time when a beneficiary’s entitlement is known will typically arise after the end of the financial year, that is, in the income year after the entitlement arises.

Typically, the distributable income of a trust for an income year can only be determined with sufficient certainty to quantify the amount of an entitlement when the financial statements are finalised.

Key timeline

The main difference with this new approach from the ATO, is that as of 1 July 2022, no longer are Trustees able to place the UPE arrangements initially on 7 year interest only arrangements to then extend into a further 7 year principal and interest complying loan.

Refer to the below example which highlights a potential timeline in relation to a UPE that was subsequently put on a complying loan agreement under the new revised ATO approach.

The time when the amount of a beneficiary’s entitlement is known will typically arise after the end of the income year, that is, in the following income year, in which the entitlement arises.

Therefore, UPEs arising during the 2022-23 income year may generally give rise to the provision of financial accommodation in the following year (i.e. 2023-24).

Sub-trusts to phase out

Sub-trust arrangements were often used where the amount in the sub-trust was invested in the main trust in working capital, plant and equipment, or real property acquisitions.

The interest-only feature was commercially attractive to private groups enabling trading or property trusts to finance their business or property investments on interest only terms.

While the ATO will accept sub-trust arrangements, the requirement is that the funds on sub-trust need to be held for the exclusive benefit of the corporate beneficiary, and not used by a shareholder or associate of that corporate beneficiary, including by the main trust. This means that few, if any, are likely to enter into these type of sub-trust arrangements. 

Clarification for pre-16 December 2009 UPEs   

The ATO have clarified that: 

• taxpayers can continue to rely on the ATO’s past approach in relation to trust entitlements that arose on or before 30 June 2022 whereby such UPEs can be placed on interest only arrangements for no longer than 7 years. Presumably, these arrangements can then be converted to a complying principal and interest only loan after the initial interest only 7 year period;  and
   

• their recent finalised view does not apply to unpaid present entitlements arising before 16 December 2009. Accordingly, these arrangements can continue where qualify, to be placed on interest free terms.

What does the final ATO release mean for you? 

1. Where a trust declares present entitlements and either pays those in full or the UPE is discharged and placed on complying Division 7A loan terms, the effect of the finalised ATO view should be minimal.  
    
2. Where there has been a practice of interest only sub-trust arrangements, the change in ATO views will be a material change for present entitlements arising on or after 1 July 2022.
    
3. Care and review is required to ensure up to date year end resolutions, accounting, and loan documentation for the 30 June 2023 year to ensure compliance with the final ATO’s view on the operation of Division 7A.

Next Steps

Cooper Partners regularly advises on Division 7A and UPEs. If you have any questions about what the ATO views may mean for you and your arrangements, please contact your Cooper Partner’s engagement team to review your situation and determine what action is required.

Authors:

Michelle Saunders, Managing Director

Nicholas James, Senior Manager

This newsletter is current as of 25 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 

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

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 

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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.

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 

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.

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 

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.

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 

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:

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