Three Common CGT Obstacles For Homeowners

In straightforward cases, a property owned by individuals and used as a main residence throughout the period of ownership will receive a full exemption from capital gains tax (CGT) when the home is sold. But this “main residence exemption” has a number of caveats. Here, we highlight three common scenarios in which a homeowner may face some CGT liability when it is time to sell.

  1. Using your home to generate income

If you use your residence to produce assessable income, you will generally only be eligible for a partial exemption from CGT. Many homeowners will understand that this includes activities like running a business from your home, or leasing the home to long-term tenants. But did you know that this also includes renting out your home – or even just a room – through short-term sharing economy platforms such as Airbnb and Stayz?

The size of your CGT exemption will generally depend on how long you used the home to produce assessable income and the proportion of total floor space that this activity related to.

You may still be eligible for a full main residence exemption if you move out of the home before you start using it to produce income, and choose to continue treating the home as your main residence for CGT purposes. However, you can only choose to do this for a maximum of six years, and it means you cannot treat any other property you live in during that time as your main residence.

If you use the home to generate income before you move out, you will not get a full exemption. Homeowners who use their property to generate income should get tax advice to understand the CGT implications for their specific circumstances.

  1. Land greater than two hectares

Farmers and large property owners should be aware that the main residence exemption covers:

  • your dwelling (and the land directly beneath it); and
  • adjacent land used primarily for private or domestic purposes in association with the dwelling, provided the total area of the dwelling and adjacent land does not exceed two hectares.

This means a residential property (or a residential area of an income-producing farm) greater than two hectares will not be completely exempt from CGT. In this case, the owner can choose which two hectares will attract the exemption and obtain an expert property valuation to substantiate the value of that selected area. If that two-hectare area cannot be separately valued, the exemption is calculated on a proportionate area basis.

  1. Moving home

When buying a new home and selling your old one, you generally have a six-month grace period in which both the old and new homes are treated as your main residence. However, if you are unable to sell your old home within six months of purchasing the new property, the main residence exemption only applies to both homes for the six months before you dispose of the old home. There will be an “excess” period beyond the six-month window that creates a CGT liability. This works as follows:

  • If you choose to claim the main residence exemption for your new home from the time you first move in, you will have a CGT liability to pay in respect of the old home when you sell it.
  • Alternatively, you can choose to continue claiming the exemption for the old home until you sell it, which will not create an immediate CGT liability but will mean your new home only attracts a partial exemption when you eventually sell it.

Plan ahead

The key to maximising your main residence exemption is to be aware of potential traps and to plan ahead, where possible. Contact our office today to discuss your plans for your home and to develop a tax-effective CGT strategy.

 

Increased Super Thresholds For 2019-20

While the concessional and non-concessional contributions caps will remain unchanged for the 2019-20 financial year, certain other important superannuation thresholds are set to increase from 1 July 2019.

The “CGT cap amount” for non-concessional contributions will increase by $35,000 to $1.515 million for 2019-20, up from $1.480 million for 2018-19. The CGT cap amount is an important concession that allows people to make a personal contribution to super from the disposal of small business assets that qualify for the CGT small business concessions.

The CGT cap is not counted towards the non-concessional cap so it enables further contributions above the $1.6 million total superannuation balance limit. The increase in the CGT cap means that eligible individuals will be able to squeeze an extra $35,000 per person into their superannuation from 1 July 2019.

The concessional contributions cap of $25,000 will remain unchanged for 2019-20. This cap is now only indexed in $2,500 increments. At this current rate of wages growth, the concessional cap is not expected to increase to $27,500 until 2023.

The non-concessional contributions cap is also unchanged at $100,000 for 2019-20 (or $300,000 over 3 years, subject to transitional rules).

While the super guarantee is frozen at 9.5% until 1 July 2021, the “maximum contribution base” will rise to $55,270 per quarter from 2019-20, up from $54,030 for 2018-19. An employer is not required to provide the minimum super guarantee support for that part of an employee’s ordinary time earnings (OTE) above the quarterly maximum contribution base. This quarterly maximum represents a per annum equivalent of $221,080 for 2019-20.

The Government co-contribution “lower income threshold” is set to increase to $38,564 for 2019-20, while the “higher income threshold” is $53,564. A maximum co-contribution of $500 is payable for people with incomes up to the lower income threshold, phasing down for incomes up to the higher income threshold. That is, a Government co-contribution up to a maximum of $500 is payable for a $1,000 personal super contribution.

The “lump sum low rate cap” will increase to $210,000 for 2019-20 (up from $205,000). This is an individual’s lifetime cap on the amount of taxable components of any lump sums they receive that are eligible for a lower, concessional tax rate. Another cap affecting how much tax you pay on lump sum benefits, the concessionally taxed “untaxed plan cap”, will increase to $1.515 million.

The “ETP cap”, which allows concessional tax treatment of part of an employment termination payment, will increase to $210,000 for 2019-20 (up from $205,000). The tax-free amount for a genuine redundancy will increase to $10,638 (base amount) for 2019-20 plus $5,320 for each whole year of service.

The general transfer balance cap will remain at $1.6 million for 2019-20. This also means that the “defined benefit income cap” of $100,000 pa is unchanged.

How Does Listing My Home On Airbnb Affect My Tax?

Millions of Australians are now using the sharing economy to earn some extra money on the side. Thanks to smartphones and user-friendly app technology, people young and old are using peer-to-peer digital platforms to access sharing services like ride sharing, accommodation sharing, “odd jobs” networks and even pet minding.

The government is concerned that some Australians who receive income from sharing platforms may not be paying the right amount of tax – simply because they are unaware of their tax obligations.

While the government is currently thinking about introducing a compulsory reporting system that would require sharing platform operators to report all transactions to the ATO, for the time being taxpayers must self-report any amounts they earn.

In this installment of our ongoing series on the sharing economy, we focus on your tax obligations when earning money from a short-term residential accommodation sharing platform such as Airbnb or Stayz.

Do I have to pay tax on these amounts?

The income you earn from accommodation sharing platforms is assessable income that you must declare in your tax return. The ATO does not consider this to be “hobby” income, even if you only share your property occasionally.

You can claim deductions for relevant expenses you incur, such as:

  • fees or commissions charged by the digital platform;
  • interest payments you make on a loan to purchase the property;
  • utilities like gas and electricity;
  • council rates;
  • insurance premiums; and
  • professional cleaning costs.

However, in many cases you will only be able to claim part of an expense. Expenses that are purely related to renting the property (eg platform fees) are entirely deductible, but you will generally need to apportion an expense where:

  • the expense also relates to a private or personal use;
  • the property is rented out, or is available to rent, for only part of the year; or
  • you only rent out a room, rather than the whole property.

It is a good idea to get tax advice on your deductions to ensure you are calculating your claims correctly. You also need to keep thorough records so that you can substantiate your assessable income and deductions.

Goods and services tax

Goods and services tax (GST) in the sharing economy can be confusing. The good news is that for residential accommodation, GST does not apply. This means rental payments you earn are not subject to GST, even if you also earn income from another type of sharing platform where you are required to account for GST (eg ride sharing, such as Uber). However, it also means you cannot claim GST credits for the GST components of your expenses.

Capital gains tax

Usually, when a taxpayer sells their main residence, they are exempt from paying any capital gains tax (CGT). However, using your residence to produce assessable income – including renting it out through the sharing economy – means you may only be entitled to a partial exemption from CGT. The size of your exemption will depend on how long you rented out your home and the floor space that this rental activity relates to. Generally, the more often you rent out the property and the larger the proportion of floor space that is rented out, the more CGT you will have to pay.

Unsure about your tax position?

As with all rental properties, earning money through accommodation sharing sites requires careful record-keeping and documentary proof. Talk to us today to make sure you are claiming the full range of available deductions or to discuss how your main residence might be affected for CGT purposes.

 

Tax residency rules reassessed in recent Full Federal Court decision

The recent Full Federal Court decision of Harding v Commissioner of Taxation is an important tax case for Australian expatriates living and working overseas. The Court analysed two of the tests for when an individual will continue to be a tax resident of Australia.

What happened in Mr Harding’s case?

Mr Harding permanently departed Australia in 2009. He started living in an apartment in Bahrain and commuted across the causeway to his permanent position in Saudi Arabia. The plan was that Mr Harding’s wife and youngest son would join Mr Harding in Bahrain at the end of 2011, when their second son finished high school in Australia. Until then, Mr Harding’s wife would continue to live in the family home on the Sunshine Coast. Mr Harding bought a car in Bahrain for his wife, enrolled his youngest son in school in Bahrain and looked for a family house in Bahrain when she visited. But Mrs Harding never moved to Bahrain, and they subsequently separated, and then divorced.

The ATO assessed Mr Harding on the basis that he was a tax resident of Australia for the 2011 income year.

Tests for Australian tax residency

Under the domestic tax law in Australia, an individual will be a tax resident if they meet any one of the following four tests

  1. The person ‘resides’ in Australia – based on the ordinary meaning of the word ‘resides’.
  2. The person’s domicile is in Australia, unless the Commissioner is satisfied the person’s ‘permanent place of abode’ is outside Australia.
  3. The person has actually been in Australia 183 days or more in the tax year (subject to one exception).
  4. The person is either a member of the superannuation scheme established by the Superannuation Act 1990 or an eligible employee for the purpose of the Superannuation Act 1976 – or the spouse or child under 16 of that person. This test often applies to commonwealth government employees.

The decision in Harding concentrated on the first two tests.

How does the decision in Harding help Australian expatriates?

Two aspects of the decision should provide some comfort to Australians living and working overseas.

First, the ATO argued that Mr Harding did not have a ‘permanent place of abode’ outside Australia because his first apartment was only ‘temporary’ while he waited for his wife and youngest son to join him in Bahrain. The ATO also pointed out that Mr Harding could move by packing his belongings in two suitcases and moving to an apartment on a different floor.

The Full Federal Court rejected the ATO’s argument, and concluded that the relevant consideration was whether Mr Harding had abandoned his residence in Australia.

This conclusion may help Australian expatriates living in serviced apartments or hotels on long‑term arrangements, where they can show they have abandoned their residence in Australia.

Second, the ATO argued that a person’s subjective intention should not trump objective ‘connections’ with Australia. The ATO pointed to a list of objective connections Mr Harding continued to have with Australia.

The Full Federal Court concluded that the taxpayer’s intention is relevant. In fact, in Mr Harding’s case, some of the objective connections supported the conclusion that Mr Harding was not a resident of Australia.

What key risks remain for Australian expatriates living and working overseas?

Australian expatriates who maintain a family home in Australia will continue to be high risk and will need to review their circumstances carefully.

Mr Harding’s case was described by the learned primary judge as ‘unusual’, and it is worth noting that the ATO did not assess the income years after Mr Harding and his wife were separated.

The number of days that a person is physically present in Australia (even if well under 183 days) will continue to be a risk indicator that the ATO will consider.

If a taxpayer is a tax resident of the country where they are living and working, there may be a double tax agreement that applies. The effect of the residency article in double tax agreements is generally to deem the individual to be solely a tax resident of one country rather than another. This is based on a series of ‘tie-breaker’ tests. The ‘tie-breaker’ tests vary between the double tax agreements. Care needs to be taken in interpreting double tax agreements, as the rules of interpretation are different to interpreting Australian domestic law.

How to substantiate being a non-resident

The taxpayer’s evidence will always be critical to persuading either the ATO, or a court or tribunal, that the person has stopped ‘residing’ in Australia and has established a ‘permanent place of abode’ outside Australia.

The non-resident taxpayer must make sure they keep relevant, contemporaneous evidence so that they can support their position in any ATO audit.

Logan J gave an important reminder in the Harding decision – that the facts of a particular case should not be elevated to matters of principle. The law has to be applied to ‘the overall circumstances of a given case’.

The critical task for the taxpayer is to ensure that they have sufficient evidence of their ‘overall circumstances’ so that the legislation can be applied to those particular circumstances.

Source : https://www.cgw.com.au/publication/tax-residency-rules-reassessed-in-recent-full-federal-court-decision-how-does-harding-affect-you/.

Greater Flexibility For Accessing Company Losses

The ability to carry forward tax losses is important for business growth and innovation. A tax loss arises when a taxpayer has more deductions in an income year than assessable income. Being able to carry forward tax losses and deduct these against future assessable income encourages businesses to undertake entrepreneurial or innovative activities that may not initially be profitable.

Under the current law, a company that has experienced a significant change in ownership or control may only carry forward its tax losses to a later income year if the company meets the “same business test”. This test broadly requires that the company currently carries on the same business as it did before the change of ownership or control, and that it does not derive any income from a new kind of business or a new kind of transaction that it previously did not enter into. These rules are designed to prevent “loss trading” (i.e. selling tax losses by selling a loss company to new owners).

Recognising that these rules may be too strict and discourage some companies from legitimately innovating or adapting their businesses to meet changing economic circumstances, the government now proposes to introduce an alternative “similar business test” to make it easier to access prior losses.

Under the proposed new rules, a company that has experienced a significant change in ownership or control will be able to carry forward its losses if it meets either the existing “same business test” or the new “similar business test”.

The word “similar” is not defined in the proposed new rules, and whether a company carries on a “similar” business will be a question of fact. There is no limit on the factors that may be taken into account when determining this. However, the following four factors must be taken into account:

  • the extent to which the assets (including goodwill) used in the current business were previously used in the former business;
  • the extent to which the activities and operations of the current business match those of the former business;
  • the “identity” of the current business compared to the former business – this is a broad-ranging enquiry into all of the characteristics of the business; and
  • the extent to which any changes to the former business result from development or commercialisation of assets, products, processes, services or marketing or organisational methods of the former business – this looks at whether any changes are part of the natural organic development of the former business (suggesting similarity) rather than merely reasonable or commercially sensible changes (which would not necessarily support similarity).

The ATO has already published draft guidance on its view of the proposed test. It says that “similar” does not mean a similar “kind” of business. It further says that it will be more difficult to meet the test if “substantial new business activities and transactions do not evolve from, and complement, the business carried on before the test time”. On the other hand, new products or functions that develop from the business activities previously carried on are more likely to indicate a similar business.

If enacted by Parliament, the proposed new alternative test will apply for tax losses arising from the 2015–2016 income year onwards. The new test will also apply to net capital gains and deductions for bad debts.

Make the best use of prior losses

Utilising prior year losses is an important tax planning issue for many businesses. Contact us for advice on the company tax loss rules and to consider whether your business activities are likely to meet the new “similar business test”.

Get your Rental Property claims right

Claims for rental property tax deductions contain errors in 90 per cent of cases, the Australian Taxation Office reports. It is planning a blitz on what it calls ‘its next big area of focus’.

The ATO says it recently completed investigations of 300 rental property claims and found errors in almost nine out of 10.

Errors include incorrect interest claims for the entire investment loan where it has been refinanced for private purposes, incorrect classification of capital works as repairs and maintenance, and taxpayers not apportioning deductions for holiday homes when they are not genuinely available for rent.

“When you consider that rentals include over 2.1 million taxpayers claiming $47.4 billion in deductions, against $44.4 billion in reported income, you get a sense of the potential revenue at risk,” the ATO says.

This is the ATO’s next big area of focus when it comes to individual taxpayers. Eighty-five per cent of taxpayers with rental properties are represented by an agent, so that ATO will be targeting tax agents with clients claiming rental property deductions.

The ATO provides guidance to help rental property owners avoid common tax mistakes.

Make sure the property is available for rent. The property must be genuinely available for rent before the owner can claim a tax deduction. The owner must be able to show a clear intention to rent the property, such as advertising the property. The rent should be in line with similar properties in its area and there should not be unreasonable rental conditions.

Portioning expenses. If your rental property is rented out to family or friends below market rate, you can only claim a deduction for that period in proportion to the amount of rent. You can’t claim any deductions for periods when friends or family stay in the property free of charge, or for periods of personal use.

If you own a rental property with someone else, you must declare rental income and claim expenses according to your legal ownership of the property.

Mortgage interest. You can claim interest as a deduction if you borrow to purchase a rental property. If you use some of the borrowing for personal use, such as going on holiday, you cannot claim that interest cost incurred during that period. You can only claim the part of the interest that relates to the rental property.

Borrowing expenses. Borrowing expenses include loan establishment fees, title search fees and the cost of preparing and filing mortgage documents. If your expenses are more than $100, the deduction has to be spread over five years. If they are less than $100, you can claim the full amount in the same year you incurred the expense.

Purchase costs. You can’t claim any deductions for the costs of buying your property. These costs, which include conveyancing fees and stamp duty, are added to the cost base of the property, which is used to work out any capital gains tax liability.

Repairs, improvements and construction costs. Ongoing repairs that relate directly to wear and tear or damage that happened as a result of renting out the property, such as fixing a hot water system, can be claimed in full in the same income year you incurred the expense.

Initial repairs for damage that existed when the property was purchased are not immediately deductible. These costs are added to the cost base and used to work out the capital gain when the property is sold.

Work such as replacing a roof or renovating a bathroom is classified as an improvement and not immediately deductible. These can be claimed at 2.5 per cent each year for 40 years from the date of completion. Likewise, capital works, such as extensions and alterations, can be claimed at 2.5 per cent of the cost over 40 years from the date the construction is completed.

Capital gains. If you make a capital gain on the sale of the property, you will need to include the gain in your tax return for that financial year. If you make a capital loss, you can carry the loss forward and deduct it from capital gains in later years.

 

Source: https://therub.com.au/rub-featured/tax-man-warns-get-your-rental-property-claims-right/

 

New PAYG laws to place focus on on-time BAS lodgment

Late last year, new legislation to deny an income tax deduction for certain payments if the associated withholding obligations have not been complied with were passed.

Payments that are impacted includes salary, wages, commissions, bonuses or allowances to an employee; director’s fees; payments under a labour hire arrangement; payments to a religious practitioner; and payments for a supply of services.

The deduction is only denied where no amount has been withheld at all or no notification is made to the commissioner.

BDO partner Mark Molesworth said accountants should advise their clients on the importance of on-time lodgment of BAS if they want to hold on to their deductions.

“The on-time lodgement of BASs is now even more important than ever, because a failure to lodge the BAS on time may result in a business permanently its tax deduction for wages paid,” said Mr Molesworth.

Mr Molesworth said the new law will also mean businesses have to take particular care in obtaining a valid ABN from their suppliers and to withhold at the top marginal rate of tax if an ABN is not provided.

“While this requirement has been part of the law since 2000, many businesses have ceased to focus on it… a renewed focus on obtaining a valid ABN from all suppliers is suggested.” he said.

“An exemption is available for voluntary notification to the ATO of mistakes in relation to compliance with withholding requirements. Therefore, provided a business rectifies its mistake before the ATO asks them about it (e.g. where a business lodges their BAS late, but before the ATO initiates an enquiry) they will still get their tax deduction.

“Businesses should not intend on relying on this exemption however, because the ATO’s data collection systems are sophisticated at picking up non-compliance in real time and launching enquiries.”

RSM senior manager Tracey Dunn had previously said that businesses should take the opportunity to review payments made to employees and contractors to ensure withholding obligations are being met.

Source: Article by Jotham Lian – www.acccountantsdaily.com.au

Statement from Commissioner Chris Jordan about transition to Single Touch Payroll for small employers

The ATO has provided a tailored approach to comply with STP for small employers.

Parliament has now passed legislation to extend Single Touch Payroll (STP) reporting to include all small employers (those with fewer than 20 employees) from 1 July 2019. STP is pay day reporting by employers to the ATO as it happens, this reporting having started on 1 July 2018 for large employers (20 or more employees).

Extending STP to all employers will help ensure all Australians get their full superannuation entitlements, give greater transparency and help ensure a level playing field for small business. This initiative is also an important step in streamlining business reporting and keeping pace with the digital age.

We understand the move to real-time digital reporting may be a big change for employers, especially small business, so the ATO will adopt a supportive, tailored approach to help them undertake this change.

  • We understand that many small businesses and other small employers do not currently use commercial payroll software and they will not be required to purchase such software to report under STP.
  • The ATO is working with software providers to develop low and no-cost reporting solutions including simple payroll solutions, portals and mobile apps. We will publish a list of providers on our website at ato.gov.au/stpsolutions.

I want to reassure small business and give my personal guarantee that our approach to extending Single Touch Payroll will be flexible, reasonable and pragmatic. In particular, the ATO understands there will be circumstances where more time is needed to implement STP or lodge reports.

  • We will offer micro employers (1 to 4 employees) help to transition to STP and a number of alternative options – such as allowing those who rely on a registered tax or BAS agent to report quarterly for the first two years, rather than each time payroll is run.
  • Small employers can start reporting any time from the 1 July start date to 30 September 2019. We will grant deferrals to any small employer who requests additional time to start STP reporting.
  • There will be no penalties for mistakes, missed or late reports for the first year.
  • We will provide exemptions from STP reporting for employers experiencing hardship, or in areas with intermittent or no internet connection.

Pleasingly, many small employers have already taken up STP reporting and they have provided positive feedback that STP makes payroll reporting easier.

The best thing to do is contact us if you have any questions or concerns about STP or any other tax matters, on 13 28 61 or at ato.gov.au/stp.

Chris Jordan

Commissioner of Taxation

Source: https://www.ato.gov.au/Media-centre/Articles/Transition-to-Single-Touch-Payroll-for-small-employers/

Downsizer Superannuation Contributions

In an effort to reduce pressure on housing affordability, the government wants to encourage older Australians to sell their home in order to improve housing stock. To achieve this, the government has introduced a new opportunity for older Australians to contribute some of the proceeds from the sale of their home into superannuation.

Under the new measure, which took effect in July 2018, individuals aged 65 years and over who sell their home may contribute capital proceeds from the sale of up to $300,000 per member as a “downsizer” superannuation contribution.

This means an eligible couple can potentially contribute up to $600,000 from the sale of their home. Downsizer contributions:

  • do not count towards the member’s non-concessional contributions cap;
  • are not subject to the “work test” that usually applies to voluntary contributions by members aged 65 years and over; and
  • may be made even if the member’s total superannuation balance (TSB) exceeds $1.6 million.

However, downsizer contributions, once made, will increase the member’s TSB. The usual limit on transferring benefits into the tax-free retirement phase also applies. This means that if you have already met your $1.6 million transfer balance cap, any downsizer contribution you make will need to stay in accumulation phase where the earnings will be subject to income tax of 15%.

To qualify for downsizer contributions, a member or their spouse must have owned the home for 10 years prior to the sale and the sale must qualify for the CGT main residence exemption, either partially or in full. For pre-CGT assets (i.e. those acquired before 20 September 1985), it is required that the sale would have qualified for the CGT main residence exemption had the home not been a pre-CGT asset. Despite the name, “downsizer” contributions can be made even if the member does not purchase another replacement property.

Additionally, the member must make the downsizer contribution within 90 days of receiving the sale proceeds, and must complete a specific form and provide it to their superannuation fund when, or before, they make the contribution. Members should therefore plan their downsizer contribution carefully before transferring any proceeds into superannuation to ensure the contribution is valid. The ATO says that downsizer contributions that are later identified as ineligible will be re-reported as personal contributions, which may result in the member exceeding their non-concessional contributions cap.

Could this affect my Age Pension entitlements?

Yes. Broadly, while the family home is not assessable for the purposes of determining Age Pension eligibility, superannuation savings are. This means that selling the family home and placing the proceeds into superannuation may result in either a complete loss of entitlement to the Age Pension or reduced pension entitlements.

This will be a key consideration for many members. These individuals should seek advice to weigh up the loss of Age Pension benefits against the expected return on their superannuation investments (and taking into account the expected long-term capital growth of the main residence if retained).

Looking to downsize your home?

If you are thinking of selling your home and implementing a “downsizer” contribution, talk to us about whether you will qualify and whether you may require financial advice about this strategy. It is important that this contribution forms part of a long-term retirement plan that covers the relevant taxation, superannuation and Age Pension issues.

 

Reforming The Taxation Of Discretionary Trusts

A key feature of discretionary trusts is the ability to distribute income on a “discretionary” basis, which means no beneficiary has a particular entitlement to any income or capital assets in the trust and the trustees can make distributions at their discretion.

Importantly, distributions are generally taxed at the individual marginal tax rate of the beneficiaries, enabling tax-effective “income splitting” strategies to direct income to those on lower marginal tax rates. While this offers considerable planning flexibility, there are some concerns about the taxation advantages obtained through the use of these trusts, and certain corners of the community are agitating for reform.

A recently released report authored by RMIT University and commissioned by the ATO, Current issues with trusts and the tax system, highlights the extent of trust use in Australia. According to the report, the number of trusts in Australia increased by almost 700% between 1990 and 2014. Notably, around 33% of all Australian trusts are discretionary trusts engaged in trading (business) activities, which the report says is unique compared with most other countries. Another 40% are discretionary trusts used for holding investments.

The report identifies three key risk areas posed by trusts that may adversely affect tax revenues and undermine community confidence in the tax system:

  • A fundamental design issue in our trust tax laws where the calculation of tax liabilities relies on concepts that can sometimes be manipulated by the trustees simply by exercising certain powers in the trust deed, giving those trustees the legal ability to influence the tax outcome.
  • Related to the above point, mismatches between the economic benefits actually received by beneficiaries and the tax outcomes. This does not accord with the general principle that tax outcomes should follow economic benefits.
  • Administrative challenges for authorities in identifying trusts and tracing trust income.

The report also focuses on risks associated with “complex distributions”, which may involve arrangements such as multiple trust structures (or “chains” of trusts) that make it difficult to identify ultimate beneficiaries, and questionable distributions to entities such as low-taxed or tax-preferred entities where someone other than that beneficiary receives the actual benefit of the distribution.

Is change on the horizon?

There has been talk for a number of years about the need to reform trust taxation, and change may finally be afoot. The Labor party announced in mid-2017 that, if elected, it would introduce a standard 30% minimum tax rate on all discretionary trust distributions to adult beneficiaries in a bid to curb “aggressive tax minimisation” strategies. Where a higher tax rate would apply under the normal marginal tax scales, the higher rate would apply. This reform would only apply to discretionary trusts (not “fixed” trusts) and there would be specific exclusions for certain types of trusts such as farm trusts, charitable trusts and testamentary (deceased estate) trusts.

Although the full technical detail of this proposal is not yet known, the introduction of a minimum 30% rate on distributions clearly presents a crack-down on the income-splitting strategies that are so popular today.

Do you operate a discretionary trust?

As we approach a federal election, it will be crucial to stay abreast of any further policy announcements on trusts, including any transitional arrangements that might apply should Labor win government and implement its reforms. In that event, we can assist businesses and investors who operate in discretionary trusts to consider their structuring options, taking into account the full detail of the new laws, the beneficiaries’ needs for asset protection and succession planning, and the tax implications of transferring to any new structure. Contact our office at any time to discuss tax planning for your structures.