Monthly Archives: September 2014

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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