Yearly Archives: 2014

You are browsing the site archives by year.

Personal Property Securities Act (PPSA)

The Personal Property Securities Act (PPSA) commenced 2 years ago, but many businesses are still not sure about how to use it correctly, if at all.
How does this important area of the law impact you and your business?.

  1. Examples of the sorts of scenarios where the PPSA should be considered are:
  2. Fixed and Floating Charges

Where the PPSA should be considered

Examples of the business applications where the PPSA should be considered are:

  • loan agreements
  •  retention of title arrangements, such as: if you sell goods and needs to retain title to those goods until payment is received
  • leasing/hire purchase arrangements
  • structures where assets are owned by a different entity to the trading entity, and
  • consignment of goods

An example of a casualty of the PPSA

This year, an independent meat retailer was placed into administration with debts in the order of $8 million owing to creditors, mostly meat wholesalers. Although the retailer was able to be saved from insolvency by being bought out, the position of unsecured creditors is still unclear. It has been reported that around $5 million was owed to unsecured creditors, who had not registered their security interests on the PPSR, and therefore their fate now lays in the hands of liquidators.
The fallout from the financial collapse of this meat retailer is a good example to suppliers of the benefit of getting registered on the PPSR. Many suppliers conduct business of title arrangements or on consignment, and these arrangements are now considered to be security interests under the PPSA and must be registered on the PPSR to be secured. You won’t be able to just rely on your agreements anymore, and in this radical way the PPSR affects old practices irreversibly.
A useful action plan (if not already completed) is to review terms and conditions documents, and security interests should be properly registered on the PPSR. Reports from the register are that many suppliers have failed to register their security interests as a purchase money security interest (now known as a PMSI), resulting in the loss of the special priority that is provided by the PPSR to retention of title arrangements. The outcome may be that another creditor could have priority over your claim (in specific circumstances).
And although there are transitional provisions in place, ie a 24 month protection for security interests created prior to 30 January 2012, care needs to be taken, as supply of goods after that date may constitute a new security interest not protected by the transitional provisions. So it would be best to get the protection of the PPSR as soon as possible by getting registered!

 

Fixed and Floating Charges

Are you familiar with the concept of a fixed and floating charge? This terminology has been phased out with the start of the Personal Property Securities Act (PPSA).
Under the PPSA there doesn’t exist the concept of a fixed versus floating charge. Rather, there’s just a security interest that attaches to the grantor’s property (or collateral). So what used to be called an “all assets” fixed and floating charge is now called a security interest over a company’s all present and after-acquired property.
Traditionally, a “fixed” charge (one relating to particular and identifiable asset) covers what is now known as non-circulating assets under the PPSA, usually assets such as land or equipment.
A “floating” charge (one relating to any and all assets of the grantor at the time the charge crystallises) covers circulating assets under the PPSA (such as book debts and trading stock).
The practical difference is that the debtor can deal with floating/circulating assets in the normal course of business, while they cannot dispose of fixed/non-circulating assets without the consent of the lender, and this needs to be reflected in the drafting of the security agreement.
Businesses and individuals involved in giving or receiving loans are just some of the many areas that are impacted by this legislation. Any business using retention of title clauses, or that hires out equipment to others, are caught by the legislation and must have proper practices in place or risk serious losses. The PPSA also impacts many other areas that are not always obvious, for example business sales and acquisitions.
Disclaimer: The material contained in this article is provided for general information purposes only and does not constitute professional advice. You should not depend upon any information appearing herein without seeking independent advice as to your specific circumstances

Newsletter: December 2014

Project DO IT nearing end, taxman focus on non-disclosure

The ATO has responded to fears expressed by some taxpayers that disclosing previously undeclared offshore income and assets could set them up for future tax investigations. The ATO has reassured taxpayers that disclosing under Project DO IT will not give them a “red flag”. ATO Deputy Commissioner Michael Cranston said the ATO was far more concerned with taxpayers who don’t disclose than those who do.
TIP: Project DO IT provides individuals with a last chance opportunity to declare their overseas assets and income to the ATO if they have not done so previously to avoid steep penalties and the risk of criminal prosecution for tax avoidance. As at 6 November 2014, some 1,000 individuals have made disclosures worth more than $190 million in income and over $1.1 billion in assets. The last day to come forward under Project DO IT is 19 December 2014.

 

Inbound tour operators to contact the ATO

The ATO has issued a statement on a Full Federal Court case in which the ATO Commissioner was successful in arguing that a supply made by an Australian inbound tour operator (ITO) to overseas customers was fully subject to GST.
Although the decision relates to specific facts, the ATO said the Commissioner remains of the view that the decision applies to all ITOs that:
• transact as principal (and not as an agent of a non-resident travel agent); and
• are engaged by non-resident travel agents to enter into contracts with Australian providers for the provision of products to non-resident tourists.
The ATO was of the view that, under the Court’s reasoning, the supplies made by the ITOs to their non-resident travel agent clients are properly characterised as supplies of promises to ensure products are provided, and the supplies are wholly taxable.
TIP: The Commissioner has requested that all ITOs that have transacted as principal and have an outstanding amount due to the ATO to contact the ATO within 28 days of the publication of the statement (ie by 10 December 2014) to discuss payment of the amount owed. ITOs that consider that they are not affected by the decision on the basis that they operate as an agent are also asked to contact the ATO within the 28-day period.

 

Tax win for retirement village operators

The ATO has issued a statement in response to a decision of the Administrative Appeals Tribunal (AAT) which ruled that a taxpayer that owns and manages a number of retirement villages was entitled to a deduction for payments it was contractually required to make to “outgoing residents”. The AAT concluded that such payments were properly characterised as an ordinary part of carrying on the business, and were not capital or of a capital nature and therefore deductible under the tax law.
TIP: The ATO said it will amend Taxation Ruling TR 2002/14 to reflect the Tribunal’s decision. It said the amendment will confirm that, where a retirement village operator makes a payment to an outgoing resident (or to their legal personal representative) that represents a share of any increase in the entry price payable by a new resident (ie the difference between the initial entry price paid by the outgoing resident and the entry price payable by the new resident), such payments will be deductible. In the meantime, the ATO said taxpayers may request that the Commissioner amend an assessment.

 

Crowdfunding could have GST implications, says ATO

The ATO has released information on its views on the GST treatment of crowdfunding. Crowdfunding involves using the internet and social media to raise funds for specific projects or particular business ventures. Typically the promoter of the project or venture will engage an intermediary to operate an online platform that allows the promoter to connect to potential funders. Various models are used to attract funding.
For example, in a “donation-based” model, where funders receive nothing apart from having their contribution to a project or business venture acknowledged by the promoter, the promoter will have no GST liability. However, the intermediary will be treated to have made a taxable supply of services to the promoter that is subject to GST. But in this case, the promoter will be entitled to a GST credit for the services he or she acquires from the intermediary.

 

Couple refused small business tax concession

The AAT has recently affirmed a decision of the Tax Commissioner refusing a couple’s request to apply a capital gains tax concession in relation to the sale of their business.
The husband and wife were the sole shareholders and directors of a private healthcare company which they had sold, via their shareholding, for some $14 million in the 2007 income year. They claimed they were entitled to the tax concession in respect of the capital gain they made on the sale of their shares. In particular, they claimed they satisfied that relevant asset test to be eligible for the concession on the basis that the company had a liability just before the sale to pay them eligible termination payments totalling some $2.75 million.
In rejection of the couple’s argument, the AAT confirmed that the eligible termination payments paid to the couple were not to be taken into account for the purposes of the relevant asset test in determining whether they qualified for the small business CGT concession. The couple have appealed to the Federal Court against the decision.

 

Employee share scheme reform on the way

The Government is reforming the taxation of employee share schemes to bolster entrepreneurship in Australia and support innovative start-up companies. It said the changes to the tax treatment of employee share schemes that were introduced by the former Government in 2009 have effectively brought to a halt the use of such schemes for start-up companies in Australia.
The Government said it would unwind those 2009 changes, beginning with reversing the changes made to the taxing point for options, to ensure that employees may opt to have “discounted” options taxed when they are exercised (ie converted to shares), rather than upon acquisition by the employee. This change would apply to employees of all companies.
The Government also announced that it will allow employee share scheme options or shares that are provided to employees at a small discount by eligible start-up companies not to be subject to upfront taxation, provided that the shares or options are held by the employees for at least three years.
Options issued to employees by eligible start-up companies under certain conditions will have the employee’s taxation events deferred until the sale of the shares. In addition, shares issued to employees by eligible start-up companies at a small discount will have those discounts exempted from tax for the employees.
The Government will also extend the maximum time for tax deferral on discounted options and shares issued to employees by eligible start-up companies from the current seven-year period by a further eight years – that is, a 15-year deferral period.
The Treasurer is expected to consult widely on the draft legislation. The legislation is proposed to come into effect from 1 July 2015.

Privacy Legislation (2013) and individual credit rating

Australia’s privacy legislation rewrite in 2013 will allow credit providers to view a lot more information about individual credit behaviour.

 

Lenders currently have access to the following information about you;

  • Your defaults (only over 60 days in arrears),
  • Your insolvency history (ie bankrupt events), and
  • Your credit applications (although they could not see if your application was approved or declined)

 

 

From 1 January 2015 they will be able to see the above, and a lot more…..

  • The date that credit was opened or provided (in other words, if an application was approved)
  • The type of credit approved and what the credit limit is
  • The date that a credit account was closed, and
  • 2 years worth of month by month repayment history on each credit facility that are in place.

Repayment history will report like this (the boxes with numbers represent the days in arrears) –

credit rating table

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Most of Australia’s lenders have agreed to provide your data to the credit reporting agencies. If a lender does not report this information they do not get to see the information from the other lenders. So it is just a matter of time before every licensed credit provider uses this database.

Newsletter: November 2014

Offshore income tax “amnesty” nearing its end

The deadline to take advantage of the ATO’s initiative to allow eligible taxpayers to come forward and voluntarily disclose unreported foreign income and assets with reduced penalties is nearing. The ATO has urged taxpayers with offshore assets to declare their interests ahead of a global crackdown on people using international tax havens.
The Tax Commissioner Chris Jordan earlier this year announced the initiative to allow eligible taxpayers to come forward and voluntarily disclose unreported foreign income and assets. In announcing the initiative, known as “Project DO IT: disclose offshore income today”, the Commissioner warned that it provides a last chance opportunity for those who haven’t declared their overseas assets and income, to come back into the tax system before 19 December 2014, to avoid steep penalties and the risk of criminal prosecution for tax avoidance.
TIP: It should be emphasised that Project DO IT covers both “inadvertent” and “intentional” actions to hide offshore income and/or gains. The ATO has advised that where taxpayers may be unsure as to their eligibility for the initiative, they can contact the ATO’s Project DO IT team to discuss the issue and this can be done anonymously. Please contact our office for further information.

 

Subsidy to encourage employers to hire mature workers

The mature age worker tax offset will be abolished by the Government from the 2014–2015 income year and later income years. However, a new expenditure program being delivered by the Department of Employment, Restart, will provide alternative support by way of subsidy of up to $10,000 to employers who hire mature age job seekers.
The Restart program offers a wage subsidy of up to $10,000 (including GST) to eligible employers of mature age job seekers. The job seekers must be 50 years of age or older, and have been unemployed and receiving income support for six months or more. To receive the full payment, a business must employ the same employee for at least 30 hours per week for an ongoing period of two years. The Restart wage subsidy can also be claimed on a pro-rata basis if you hire a mature age worker part time, for at least 15 hours a week.

 

Doctor obtains tax relief for olive-growing activities

A medical practitioner has been, in the main, successful before the Administrative Appeals Tribunal (AAT) in seeking to have losses from his olive growing activities deducted from his other assessable income. The taxpayer had carried on an olive growing and olive oil production business for 15 years.
The taxpayer had applied to the Tax Commissioner to be relieved from the “non-commercial loss provisions” under the tax law for the 2010 to 2014 income years, inclusive. Under those rules, unless he is granted relief, he has to wait until the olive oil business starts to generate profits before he can claim his losses. The Commissioner refused the taxpayer’s application.
The AAT held the Commissioner’s decision not to allow the taxpayer immediate access to his losses was not the correct or preferable decision. The AAT decided the taxpayer should be allowed the relief from the “non-commercial loss provisions” under the tax law for the 2010 to 2013 income years, but not the 2014 income year.
The AAT also made several recommendations to the Commissioner as a result of issues raised during the proceedings. These were that the Commissioner:
• considers the use of an alternative approved form for applications of this nature;
• ensures, as far as possible, that any alternative approved form:
 asks applicants to provide all the information the Commissioner considers necessary for a proper consideration of the application; and
 takes into account the legislative amendments enacted in 2009 (ie the income requirement which means that taxpayers with taxable income over $250,000 have to rely on the Commissioner’s discretion).
• provides additional guidance to the Commissioner’s officers.

 

Tax claims for R&D costs mostly allowed

The AAT has mostly allowed a company’s deduction claims for research and development (R&D) expenditure at the 125% premium rate, but disallowed other claims in respect of overlapping expenditure.
Over an extended period, the taxpayer conducted various plant trials to test possible ways to improve its copper and lead concentrators and its copper smelter. The taxpayer sought to deduct a considerable part of its expenditure incurred during those plant trials at the premium rate of 125% as “research and development expenditure”.
The Commissioner refused most of the taxpayer’s claims arguing they were not deductible at the premium rate because they were “feedstock expenditure”, which is expressly excluded from the statutory definition of “research and development expenditure” under the tax law. The Commissioner also argued that, due to an overlap of the taxpayer’s R&D activities at its Mt Isa copper concentrator and Mt Isa smelter, certain expenditure became “feedstock expenditure” and was not deductible at the 125% rate.
The AAT allowed most of the taxpayer’s claims, but accepted the Commissioner’s arguments on the overlap issue.
The Commissioner has appealed to the Federal Court against the decision.

 

Compensation for providing domestic help taxable

The AATl has affirmed a decision of the Commissioner that a payment made to an individual for compensation for domestic assistance was assessable as ordinary income under the tax law.
In 1997, the taxpayer’s husband suffered a serious injury while white-water rafting during a team-building exercise organised by his employer. The husband was unable to work and the taxpayer gave up full time work to become a carer.
In 2012, the husband lodged a claim for compensation for domestic assistance under the Workers Compensation Act 1987 (NSW) in respect of the domestic assistance provided by the taxpayer. The Workers Compensation Commission awarded the taxpayer a lump sum of around $179,000.
The AAT said there was no basis that the compensation payment could be described as a loss of income earning capacity as argued by the taxpayer – rather, it was of the view that the payment was to ensure that the taxpayer was provided with a sufficient payment to cover her loss of income.

 

Perfecting a security interest over corporate property

 
A security interest in corporate property must be registered on the Personal Property Securities Register (PPSR) as soon as possible.
A recent Federal Court decision involving a loan from a self-managed super fund (SMSF) to a company which was later placed into voluntary administration has highlighted the importance of understanding the new Personal Property Securities regime. The Federal Court held the SMSF trustee was merely an unsecured creditor in relation to the commercial loan to the company after finding that its security interest had not been registered on the PPSR in time to avoid the interest vesting in the company (in liquidation).
TIP: The take-home message from the case is that a failure to register a security interest on the PPSR within 20 business days of the creation of a security agreement over corporate property leaves the lender/mortgagor in the hands of the gods in terms of later perfecting the security. For corporate property, a failure to register within 20 business days means that the security interest must have been registered at least six months before the administration or winding up of the grantor company.

ATO urges trustees to be SuperStream-ready

The ATO reminded SMSF trustees that from 1 July this year, employers with 20 or more employees will start using the SuperStream standard to send contribution data and payments electronically.

 

From 1 July 2015, employers with 19 or fewer employees will also be required to send contributions data and payments electronically.

 

“With over 350,000 SMSFs in Australia receiving contributions, SMSF employed members should check with their employer about when they are planning to send contributions using SuperStream. You should have all their details organised at least 60 days before the planned start date.

 

“Trustees need to set up an electronic service address – the destination for the contribution message – which can be obtained from a relevant service provider. This allows you to access this information via a login or email, depending on the service

 

“Alternatively most administration software packages will be able to receive SuperStream-complaint messages and integrate with incoming bank account data automatically for their clients. So trustees using accounting or administration services may find they have a simple way to get this done.”

SMF retirement adequacy

A research paper from Accurium, formerly Bendzulla Actuarial, analysing data from 60,000 SMSFs in Australia indicates most SMSF members “stand a very good chance” of enjoying a ‘comfortable’ retirement.

 

The annual budget for a ‘comfortable’ retirement standard for a couple is $58,128, according to the Association of Superannuation Funds of Australia.

 

Accurium’s ‘Retirement Adequacy’ paper indicates that a typical 65 year-old SMSF couple can spend up to this budget per annum, with a high degree of confidence that they will not run out of funds.

 

“The really good news is that they can safely increase this ‘comfortable’ spend in line with inflation and maintain their purchasing power over a long retirement that could last 20 or 30 years or more”, said Accurium’s chief executive Tracy Williams.

 

“Of course the level of retirement spending which can be confidently maintained by typical 65 year-old SMSF couples will increase if they also hold significant financial assets outside of their fund, a not uncommon situation given that compulsory superannuation only commenced 22 years ago in 1992,” Accurium said.

Newsletter: October 2014

Mining tax gone but watch for associated tax changes

The mining tax has been repealed. However, in order to pass the legislation through the Senate, the Government made a deal with the Palmer United Party and Senator Muir to defer the abolition of:

  • the Income Support Bonus to 31 December 2016;
  • the Schoolkids Bonus to 31 December 2016 (and restrict the Bonus to families earning less than $100,000 per annum); and
  • the Low Income Super Contribution to 30 June 2017.

The Government also agreed to freeze the superannuation guarantee rate at 9.5% for seven years. Under the changes, the rate will increase to 10% from 1 July 2021 and by 0.5% per year from 1 July 2022 until it reaches 12% for the year beginning 1 July 2025.
No other changes were made to the legislation, meaning the abolition of the associated measures such as loss carry-back (from 1 July 2013 for 30 June balancing companies), and geothermal expenditure deduction (from 1 July 2014), will proceed.
The reduction of the instant asset write-off threshold for small businesses (from $6,500 to $1,000), and the discontinuation of the accelerated depreciation arrangements for motor vehicles, will also go ahead (from 1 January 2014).
TIP: The abolition of the loss carry-back, the reduction of the instant asset write- off threshold for small businesses and the discontinued accelerated depreciation for cars apply retrospectively. Taxpayers who have made these claims for the 2013–2014 year are now required to amend their returns. The ATO has indicated that it will not impose penalties on those taxpayers who amend their returns if the amendments are lodged within “reasonable time”. Also, in light of the superannuation changes, individuals may want to consider reviewing their retirement savings strategy. Please contact our office for further information.

 

Professional firms and profit distribution under scrutiny

The ATO is investigating arrangements involving the allocation of profits from a professional firm carried on through a partnership, trust or company, where the income of the firm is not personal services income. Firms which could be affected include, but are not limited to, those that provide architectural, engineering, financial, legal, and medical services.
In particular, the ATO wants to take a closer look at arrangements where practice income is treated as being derived from a business structure, even though the source of that income remains, to a significant extent, from the provision of professional services by one or more individuals. The ATO said it was concerned that the general anti-avoidance rules under the tax law could apply to a scheme which is designed to ensure that the individual practitioner professional is not directly rewarded for the services they provide to the business, or receives a reward which is substantially less than the value of those services. The ATO further indicated that the lower the effective tax rate achieved by the scheme, the higher the risk of attracting the Commissioner’s attention.

 

Dividend washing compliance still on ATO’s radar

The ATO has been chasing up individuals who did not respond to its initial letter indicating that the individual may have entered into dividend washing transactions. The ATO has reiterated its position that obtaining two sets of franking credits from one dividend event was not allowed. In March 2014, the ATO issued letters to these individuals asking them to amend their returns in order to reverse franking benefits they may have received from dividend washing transactions.
Having obtained new information, the ATO has also issued new letters to more individuals that it believes may have entered into dividend washing transactions. The ATO said it will continue to monitor dividend washing and apply the law to disallow additional franking credits.

 

Rental property deductions – avoid common errors

The ATO has warned landlords that it is increasing its focus on rental property deductions. The ATO has identified a number of common errors made by rental property owners. Key errors include claiming rental deductions for properties that are not genuinely available for rent, or incorrectly claiming deductions for properties only available for rent part of the year, such as a holiday home.
TIP: If a property is only available for rent for part of a year, a partial deduction reflecting when the property was available for rent could be available. The correct apportionment needs to be made with the relevant documentation to substantiate the claim. Contact our office for further information.

 

Data-matching offshore bank accounts

The ATO is widening the breadth of data it obtains on individuals from financial institutions, possibly revealing hidden or undisclosed offshore income. The ATO has recently announced a data-matching program targeting offshore bank accounts. Under the program, the ATO will collect account details of bank customers from various financial institutions to identify Australian resident taxpayers with offshore bank accounts which may indicate evidence of undeclared income and/or gains.
TIP: The Tax Commissioner earlier this year announced a tax “amnesty” called Project DO IT which aims to encourage individuals to disclose previously undeclared offshore income or assets. Under the program, individuals could be offered reduced penalties for disclosing their offshore income. The ATO has been warning individuals to come forward before 19 December 2014, which is when the project will end.

 

Settlement for damages subject to capital gains tax

The Administrative Appeals Tribunal (AAT) has held that an individual was liable to capital gains tax on a settlement payment of $350,000 received in respect of litigation she pursued for damages for breach of contract and negligence. The litigation was in relation to an agreement to facilitate the retirement of a partner of a law firm and to hand over the clients to another solicitor. The AAT was of the view that the taxable assets in question were the various claims made in her statement of claim. It also held the individual had failed to establish any relevant cost base for legal expenses, which meant she could not reduce the amount to be taxed on.
In making its decision, the AAT said it was clear law that damages received by way of settlement of a legal claim could be subject to capital gains tax. It also affirmed the Commissioner’s decision to impose an administrative penalty of 50% of the shortfall amount for “recklessness”. The AAT noted the taxpayer took no steps to seek independent legal advice in relation to whether tax may be payable on the amount, as well as her failure to keep records as required by tax law.

 

Bitcoin, an ATO perspective

The ATO has released its views on the tax treatment of Bitcoins. Users of Bitcoins and businesses transacting with Bitcoins should be aware that the ATO has confirmed that it does not consider Bitcoins to be money or a foreign currency – rather, the ATO considers Bitcoins to be property. This means, the ATO will treat Bitcoin transactions as barter transactions, with similar tax consequences.
Taxpayers will need to keep transaction records such as the date of the transaction, the amount in Australian dollars (taken from a reputable online exchange), what the transaction was for, and who the other party was (eg their Bitcoin address).
TIP: If you are considering transactions involving Bitcoins and other crypto-currencies, it would be prudent to seek advice on how the transaction would be treated for tax purposes. If you have any questions, please contact our office.

Marriage or relationship breakdown – dividends and deemed dividends

This fact sheet, available on the ATO website, discusses when an amount is taxed as a dividend or a deemed dividend received from a private company because of a marriage or relationship breakdown.
Throughout this fact sheet, a reference to:

  • a marriage includes a de facto relationship
  • a spouse includes a former spouse and a party to a de facto relationship
  • an order of the Family Court includes a consent order.

 

When do these rules apply from?

Apart for one exception, these rules have always applied and you have always needed to include an amount in your assessable income as explained in this fact sheet.
The one exception is where the Family Court requires the private company to pay money to a spouse who is not a shareholder. In that circumstance, the rules only apply where the obligation to pay the money was imposed by the Family Court on or after 30 July 2014.

 

What is a Family Law obligation?

For the purposes of this Fact Sheet, a Family Law obligation arises when a private company pays money or other property to a person because of a marriage or relationship breakdown.
The payment or transfer of property may arise because of an order of the Family Court that is made against either:

  • the private company
  • one of the parties to the marriage.

 

When does an ordinary dividend arise under a Family Law obligation?

An ordinary dividend arises in any circumstance in which a private company pays money or other property because of a family law obligation to a spouse who is a shareholder of the private company.

 

Example 1:

Mal, Justine and a private company are parties to matrimonial property proceedings before the Family Court. Mal and Justine are both shareholders of the private company. The Family Court makes an order requiring the private company to pay Justine $250,000.
On 30 April 2014, the private company makes the payment of $250,000 to Justine.
The payment of $250,000 is an ordinary dividend to Justine for the 2014 tax year.

 

Example 2:

Tim, Helene and a private company are parties to matrimonial property proceedings before the Family Court. Tim and Helene are both shareholders of the private company. The Family Court makes an order requiring the private company to transfer a rental property with market value of $1,000,000 to Tim.
On 30 April 2014, the private company makes the transfer of the rental property to Tim.
The market value of the rental property ($1,000,000) is an ordinary dividend to Tim for the 2014 tax year.

 

When does a deemed dividend arise under a family law obligation?

A deemed dividend arises in any circumstance in which a private company pays money or other property because of a family law obligation to a spouse who is not a shareholder of the private company.

 

Example 3:

Sam, Martha and a private company are parties to matrimonial property proceedings before the Family Court.
Martha is not a shareholder of the private company.
The Family Court makes an order for the private company to pay Martha $100,000. On 30 June 2015, the private company makes the payment of $100,000 to Martha.
The payment of $100,000 is a deemed dividend to Martha for the 2015 tax year.

 

Example 4:

Max, Denise and a private company are parties to matrimonial property proceedings before the Family Court. Denise is the sole shareholder of private company.
The Family Court makes an order for the private company to transfer a rental property with market value of $500,000 to Max. On 30 June 2014, the private company makes the transfer of the rental property to Max.
The market value of the rental property ($500,000) is a deemed dividend to Max for the 2014 tax year.

 

What amount must be included in your assessable income if you receive an ordinary dividend?

If you have received:

  • an amount of money, it is the amount of money which you must include in your assessable income.
  • property, it is the market value of the property that you must include in your assessable income.

 

What amount must be include in assessable income if you receive a deemed dividend?

If the private company has a distributable surplus less than your deemed dividend you include the amount of the distributable surplus in your assessable income.
If the private company has a distributable that is equal to or more than your deemed dividend, you include the amount of your deemed dividend in your assessable income.

 

Example 5:

Assume the same facts as example 4 except the private company has a distributable surplus of $300,000.
As the distributable surplus ($300,000) is less than the market value of the property ($500,000), only $300,000 is included in Max’s assessable income for the 2014 tax year.

 

Can I claim a franking credit?

Yes, you can claim a franking credit regardless of whether you receive an ordinary dividend or a deemed dividend provided the private company has franked the dividend.

 

Example 6:

Assume the same facts as example 5 except the private company franks the deemed dividend such that Max becomes entitled to a franking credit of $90,000.
Max must include the following in assessable income:

  • a franked dividend of $300,000
  • franking credit of $90,000.

Max is also entitled to claim a tax offset of $90,000.

Newsletter: September 2014

Share transfer to family partnership ineffective

A husband and wife have been unsuccessful before the Administrative Appeals Tribunal (AAT) in arguing that they had transferred shares in a family company to a family partnership, and that therefore they should not be assessed on dividends issued by the company to themselves. The AAT examined the partnership agreement and was of the view that, under the terms of the agreement, the couple was not required to actually transfer their shares in the family company to the family partnership. It was also emphasised that the couple remained the full registered owners of the shares. In doing so, the AAT affirmed the Tax Commissioner’s decision that the couple were each assessable on the dividends of some $1.8 million. The taxpayers are seeking to appeal the decision in the Federal Court.

 

Property developers and use of trusts under scrutiny

The ATO is examining arrangements where property developers use trusts to return the proceeds from property development as capital gains instead of income on revenue account. ATO Deputy Commissioner Tim Dyce said the ATO has “begun auditing property developers who are carrying out activities which conflict with their stated purpose of capital investment”. He said a “growing number of property developers are using trusts to suggest a development is a capital asset to generate rental income and claim the 50% capital gains discount”.
Mr Dyce warned that penalties of up to 75% of the tax avoided can apply to those found to be deliberately using special purpose trusts to mischaracterise the proceeds of property developments. The ATO said it has made adjustments to increase the net income of a number of trusts. It said penalties will be significantly reduced if taxpayers make a voluntary disclosure.

 

Residency depends on facts and circumstances of each case

The ATO has issued a Decision Impact Statement following an individual’s legal win in arguing that he was not a tax resident of Australia during the 2009 to 2010 income years. The taxpayer had moved to Saudi Arabia to work on a project for a number of years before moving back to Australia. Key factors that were taken into account by the AAT in deciding in favour of the taxpayer were the man’s intentions at the relevant time to live and work indefinitely in Saudi Arabia. The ATO said the decision was reasonably open to the AAT. However, it said the decision does not change its approach to residency cases. It said these matters involve questions of fact and degree and different facts may result in different conclusions as to residency. The ATO said it will continue to approach residency cases by weighing all the relevant facts and circumstances and applying the relevant tax law and authorities to those facts.

 

Billions in lost super waiting to be claimed

According to the ATO, more than $14 billion in lost super is waiting to be claimed. The ATO said $8 billion in super was sitting in accounts that have not received a contribution in five years. A further $6 billion in super was sitting in accounts where funds have not been kept up-to-date with changes to personal details. ATO Assistant Commissioner John Shepherd said it was “easy for this to happen because when people get married or move house, the last thing on their mind is updating their name and address details with a super fund”. However, he said it was important to provide funds with tax file numbers (TFNs) which can help individuals be reunited with their super.
TIP: The ATO’s Superseeker service enables individuals to enter their name, TFN and date of birth to conduct an online search of the Tax Office’s Lost Members’ Register available at www.ato.gov.au/Calculators-and-tools/SuperSeeker.

 

ASIC eye on SMSF property investment advice

The Australian Securities and Investments Commission (ASIC) has raised concerns about advice being given to self managed superannuation funds (SMSFs) to invest in property. ASIC Commissioner Greg Tanzer said the regulatory body was aware there had been a sharp rise in promoters recommending that investors either set up or use an existing SMSF to invest in property. ASIC is concerned these promoters may not be complying with the law. Mr Tanzer said ASIC was concerned that, with the increased popularity of SMSFs and property investment, real estate agents and property advisers may not realise they may be carrying on a business of providing financial product advice and may need an Australian financial services (AFS) licence, or authorisation under an AFS licence, when making recommendations or statements of opinion to a person to use an SMSF to invest in property. Mr Tanzer said ASIC is now working with individual businesses suspected of engaging in unlicensed conduct to help them understand their obligations.

 

Bad debt deduction for “unpaid trust entitlements” refused

A taxpayer has been unsuccessful before the AAT in a matter concerning bad debt deduction claims for the 2012 income year in relation to certain trust distributions. The taxpayer, a beneficiary of a trust, had claimed bad debt deductions under the tax law for debts he argued were unpaid trust entitlements. He argued the debt written off had the same character as the trust distributions included in his assessable income in the 2005 and 2007 income years. Following analysis of the distribution transaction and the trust deed, the AAT was of the view the taxpayer’s entitlement was paid in the manner prescribed by the deed, and once paid, lost its character as unpaid entitlement. The AAT concluded the debt written off was different in character to the income included in the taxpayer’s assessable income in the 2005 and 2007 income years.

 

Family fails to prove assessments excessive

Six members of a family have been unsuccessful before the AAT in arguing that various amended and default tax assessments were excessive. The AAT heard details of unexplained moneys flowing through family bank accounts, sums paid from an overseas business arrangement, as well as the acquisition of various residential properties in the names of family members, despite the taxpayers’ claim they earned very little income. The Tax Commissioner used the “asset betterment” analysis to raise the assessments. Despite acknowledging inherent flaws in the method used by the Commissioner to derive the tax assessments, the AAT found the family members had failed to establish that the assessments were incorrect and that the amount of money for which tax was levied by the assessment exceeded the actual substantive liability of the taxpayers.
TIP: In making a default assessment, the Commissioner is not required to follow the ordinary processes of ascertaining assessable income and allowable deductions and need not make inquiries of the taxpayer (or the taxpayer’s agent). However, the assessment may be invalid if the Commissioner estimates the taxpayer’s assessable income upon no intelligible basis or simply plucks a figure out of the air.

 

Tax consequences following marriage break-up

The ATO has recently released a taxation ruling on the tax effects of matrimonial money or property transfers. According to some commentators, the game-changing ruling may affect the manner in which property settlements are able to be arranged for family groups under s 79 of the Family Law Act 1975.
In Taxation Ruling TR 2014/5, the ATO confirmed that payments or transfers of property under Family Court orders to a husband or wife from a private company will be considered a distribution of profits from the company. Such transactions will therefore be assessed as dividends either pursuant to the ordinary dividend assessing provisions (s 44 of the Income Tax Assessment Act 1936) or Div 7A in almost every matrimonial property or cash settlement, regardless of whether the parties are shareholders (or associates of the shareholders) in the private company or whether the private company is a party to the Family Court order.
TIP: The rules can be complex and various different taxation consequences could arise depending on the type of Family Court order that has been made. Please contact our office if you have any questions.

Fair Trading sends clear message to real estate agents

NSW Fair Trading Minister Matthew Mason-Cox has released the results of NSW Fair Trading’s recent compliance audit targeting the trust accounts of real estate agents across the State.

 

Mr Mason-Cox said Fair Trading received 506 qualified audits for the 2012/13 financial year with 51 matters referred for further investigation and 83 warnings issued to agents.

 

“Five penalty infringements notices have already been issued with a number of follow-up inspections to occur,” he said.

 

“Eighty-seven audits required on-site inspections and 285 audits required no further action.”

 

Mr Mason-Cox said an additional 1,702 random audits were undertaken with 170 real estate agents found to be in breach of the law for failing to submit an audit report or having discrepancies in the audit report submitted.

 

“Further on-site inspections are continuing with a view to taking disciplinary action against agents found to be in breach,” he said.

 

Mr Mason-Cox said Fair Trading’s real estate compliance checks send a clear message to dishonest agents that they will be held to account if they flout the law.

 

“In the 2013/14 financial year, six real estate agents were convicted of offences involving trust account fraud, with five licensees receiving custodial sentences,” he said.

 

“Millions of home-owner and landlord dollars go through trust accounts every year.

 

“Do not be mistaken, to misappropriate this money is fraud and agents can find themselves in prison if they break the law.”

 

Under the Property Stock and Business Agents Act 2002, licensees who held or received trust money during the financial year must have their trust accounts audited by an auditor.

 

Fines of $550 for an individual or $1,100 for a corporation apply for failure to have trust account records audited or to submit a qualified audit report to Fair Trading. Offences involving trust account fraud carry custodial sentences of up to 10 years.

 

Qualified Audit reports that identify a breach of the law or any discrepancy about the trust account, including a failure to keep accurate and up to date records must be flagged with Fair Trading.

 

Real estate agents are reminded to have their trust accounts records audited for the 2013/14 financial year and to submit any qualified audits to Fair Trading for inspection by 30 September 2014

 

To view the original document visit – http://www.fairtrading.nsw.gov.au/ftw/About_us/News_and_events/Media_releases/2014_media_releases/20140717_fair_trading_sends_clear.page