Capital Gains Tax (CGT) Reform and Trusts

Taxation Returns & Advice GST Consultants Wealth Creation Investment Plans & Advice Finance & Loan Consultants Business Development CERTIFIED PRACTISING ACCOUNTANTS Superannuation BUSINESS & FINANCIAL ADVISERS Small Business Specialists ABN 36 752 376 592 PO BOX 585 CAMPBELLTOWN NSW 2560 (SHOP 1, 5-7 LITHGOW STREET CAMPBELLTOWN NSW 2560) PH 02 4628 9555 FAX 02 4628 9944 WEB www.flegg.com.au EMAIL [email protected]

THE REPORT October 2004

Tax News, Views and Clues

Interposed Entity Therefore, where a trust is The ruling explains that a TLP is required to make an IEE to be an association of natural persons Elections included in a family group in receipt of ordinary or statutory Readers will recall that the trustee because of another trust’s family income jointly and that a TLP is of a discretionary trust will often trust election, that trust should formed from the time that the make a family trust election. The also consider making a family persons jointly commence an benefit of doing so is that tax trust election. That way, it takes activity from which income is, or losses are typically easier to carry on no additional restrictions, but will be, received jointly. forward and utilise, and benefici- benefits in relation to tax loss and Once a TLP comes into existence, aries may have greater access to franking credit utilisation. franking credits arising on trust it is a GST entity separate from its partners. Consequently, a TLP distributions of dividend income.  TIP: The Tax Office has provided may carry on an enterprise, make Where a family trust election is a one-off opportunity for taxpayers to lodge retrospective supplies or acquisitions and have made, any distributions of income elections. Taxpayers who are assets and liabilities. or capital outside of a defined required to lodge a tax return for family group (including certain the 2004 income tax year will be The ruling has a wide application family owned entities and required to provide details of their and has the potential to affect any charities) attract family trust election when they lodge that persons jointly holding property. distribution tax at the top marginal return. Taxpayers not required to Many detailed examples of TLPs rate. So, the trustee’s distribution lodge a 2004 return were required including property syndicates, to provide details of the election family member partnerships and flexibility is strictly limited to and declaration within two months family members and family situations involving a single lease of the end of the 2004 income agreement are also discussed. entities. year. Another trust or a company can Please contact us for further make an interposed entity election GST Treatment information. (IEE) so that it is included in the of Tax Law family group and can receive Superannuation Tax distributions without penalty tax. Partnerships Reduction Strategies An entity that makes an IEE is The Tax Office has recently subject to the same distribution released a ruling regarding the The Tax Office has recently restrictions as the family trust. GST treatment of transactions confirmed that several commonly However, the making of an IEE carried out by tax law partnerships used superannuation tax reduction does not assist a trust with (TLPs). The ruling focuses on the strategies will not attract the anti- utilisation of its tax losses (if any) leasing of co-owned properties by avoidance provisions of the law. and does not allow beneficiaries TLPs and the GST implications Two of the strategies that are greater access to franking credits. for the individual partners. allowable under the law include:

. . . over please . an individual taxpayer private investment company for an withdrawing an Eligible annual fixed rate of return. employee’s dismissal is a bona Termination Payment (ETP) fide redundancy. A bona fide For each relevant year, the tax from their superannuation redundancy usually occurs where audit calculated the total amounts fund and then re-contributing the actual type of work carried out gained by the taxpayer from her a similar amount to the same by the employee is no longer de facto partner in excess of the fund or another fund (e.g. a required, or is no longer required transferred amount and deemed spouse’s fund) for the purpose at that site. The termination of each receipt to be assessable of establishing a employment must not be due to income. The taxpayer argued that superannuation pension; and the performance of the employee. the amounts assessed were . an individual taxpayer making excessive on the grounds that each a large undeducted contri- Under the taxpayer’s employment receipt was not solely made up of bution to their superannuation agreement, a voluntary redun- investment returns. fund before they receive an dancy may be offered in the event ETP. that the employee’s services can The Court found that the amounts no longer be effectively used. The gained by the taxpayer in excess Both strategies take advantage of taxpayer applied this clause to his of the fixed rate of return and the law’s concessional ETP situation as he argued that a new other dividends were payments for treatment. The first strategy position in the restructured division domestic expenses and child reduces the assessable portion of wouldn’t fully utilise his skills. maintenance. The Court ordered the annual pension while the Based on the Tax Office’s that each assessment be set aside second reduces the amount of the and re-calculated accordingly. tax payable on the ETP. evidence, the AAT found that the divisional restructure would not  CAUTION: The Tax Office has have made the taxpayer’s skills CGT a Major Focus warned superannuation contri- redundant and that his position butors to beware of promoters for ATO in 2004/05 was not excess to the Tax Office’s offering early access to The Tax Office has announced superannuation funds to pay for requirements. that capital gains tax (CGT) will homes, cars, boats and to pay off Accordingly, the AAT rejected the loans. The Tax Office believes be a major area of focus in its these arrangements are an taxpayer’s appeal on the grounds 2004/05 compliance program. All attempt to get around laws that that the taxpayer’s termination of taxpayers, from individuals, to preserve and encourage employment was due to his small and large businesses, stand superannuation savings. intention to retire and not because to be affected. Major areas of his position or his skills were increased CGT scrutiny include: Taxpayer’s redundant due to the restructure. Redundancy not . The Tax Office believes that Taxpayer Challenge some legal practitioners may Bona Fide not fully consider the implica- A recent Administrative Appeals Successful tions of CGT and CGT record Tribunal (AAT) decision has held The Federal Court has recently keeping when advising clients. that payments received by a held in favour of a taxpayer who taxpayer upon retirement were challenged the validity of her . Real property transaction data assessable in full, as the amounts amended income tax assessments matching is already in place were not paid in respect of a bona on the basis that the amendments and the Tax Office plans to fide redundancy. were excessive. expand its operations with several state revenue offices in The taxpayer was an officer in the The taxpayer had only lodged one order to ensure that capital Tax Office legal division for over tax return in five years. After a tax gains are being correctly 35 years. Due to an imminent audit, the taxpayer received disclosed by taxpayers. internal restructure of his division amended assessments for the and changes in his position income years 1994–99. . The incorrect use of Small description, the taxpayer chose not Business CGT concessions by to apply for a new position and Throughout this time, the taxpayer micro-businesses and small instead instigated proceedings to was involved in a series of and medium enterprises will be offered a severance payment complex property and investment be examined. (package). transactions with her de facto partner. The taxpayer transferred . The sale of ‘high value/high Broadly, terminations will qualify money into her de facto partner’s growth’ properties will be for concessional treatment if an scrutinised where signs of

Important: This is not advice. Clients should not act solely on the basis of the material contained in this Bulletin. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. The Bulletin is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval. Taxation Returns & Advice GST Consultants Wealth Creation Investment Plans & Advice Finance & Loan Consultants Business Development CERTIFIED PRACTISING ACCOUNTANTS Superannuation BUSINESS & FINANCIAL ADVISERS Small Business Specialists ABN 36 752 376 592 PO BOX 585 CAMPBELLTOWN NSW 2560 (SHOP 1, 5-7 LITHGOW STREET CAMPBELLTOWN NSW 2560) PH 02 4628 9555 FAX 02 4628 9944 WEB www.flegg.com.au EMAIL [email protected]

THE REPORT October 2004

Tax News, Views and Clues deliberate evasion may be present.

. . . over please