The impact of taxation touches all of us in many different ways. From general compliance issues to sensible business structures/restructures and estate planning strategies including testamentary trusts and the use of superannuation. Whatever the issue might be, getting advice early is important to ensure you reach the best possible outcome in your circumstances.
Small Business CGT Concessions
Any sale or transfer of business assets is likely to trigger a CGT event and could result in tax being payable. CGT events can also be triggered when you do not expect them, for example changes to company shareholdings can change the CGT status of the company’s assets. The small business CGT concessions provide a number of scenarios where tax relief is available.
The small business CGT concessions apply to sole traders, partnerships, companies or trusts.
They are available when you dispose of an active asset and any of the following apply:
- you’re a small business with an aggregated annual turnover of less than $2 million
- your asset was used in a closely connected small business
- you have net assets of no more than $6 million (excluding personal use assets such as your home, to the extent that it has not been used to produce income).
There are other conditions you must meet to qualify however, the rules are complex and ideally advice should be sought as early as possible to ascertain if a concession is available.
We have been providing specialist advice on small business CGT concessions to clients, accountants and other lawyers since CGT was introduced in 1985. Our firm has obtained numerous favorable private binding rulings from the ATO resulting in significant tax savings and certainty for our clients.
The goods and services tax (“GST”) was introduced by federal legislation enacted in 2000.
GST is a tax levied on the supplier/vendor/seller on the sale of a taxable supply. You make a taxable supply if you are registered or required to be registered for GST and the supply is made for consideration and in the course or furtherance of an enterprise that you carry on.
If GST is not addressed prior to contracts being entered into unwanted consequences may flow. For example the supplier may have to pay GST from the sale proceeds, or the purchaser may have to pay an additional 10% GST on top of the purchase price that they didn’t know about.
JMA Legal has been instrumental in advising clients about the GST ramifications of all types of property transactions.
Commercial Debt Forgiveness
The commercial debt forgiveness rules are often overlooked in commercial transactions. In most (but not all) family dealings, the rules don’t apply as the “natural love and affection” exemption applies.
If an exemption does not apply, forgiving a commercial debt could have significant and adverse tax consequences for the person or entity forgiven.
This is particularly important in an insolvency context as the benefits of a debt being forgiven by a financial institution may be more than offset by the resulting change to the client’s tax position.
Companies are separate legal entities with their own tax profiles. Shareholders (or members) own the shares in a company. Shareholders have their own tax to pay based on their own circumstances including dividends they receive from the company which may be offset by franking credits.
We advise on all aspects of taxation of private companies and in particular the taxation consequences of restructuring or winding up a private company and the sale of company assets.
Landholder duty rules were introduced to stop land owners transferring land by transferring shares in the company that owned the land (or transferring units in a unit trust) and obtaining significant stamp duty savings as the transfer of shares attracts much lower stamp duty than ad valorem duty on the transfer of the land itself.
The rules can be complex and extreme care needs to be taken when transferring shares in a land owning company.
Intergenerational Stamp Duty Exemption
Section 274 of the Duties Act NSW provides a stamp duty exemption on the transfer of NSW family farms to other family members if certain conditions are met including the continuation of the farming business after the transfer.
JMA Legal has been involved in obtaining the exemption for countless simple and complex situations.
When farms are often worth millions of dollars, the stamp duty saving is substantial and an integral part of well-planned family succession of a farming businesses. Care needs to be taken to avoid Division 7A issues if the land is owned by a company.
The effect of a trust is the separation of the beneficial, from the legal ownership of property. Holding assets in trust can protect them from claims by third party creditors in the event of bankruptcy, insolvency, court or family law proceedings.
A testamentary trust is a discretionary trust contained in a Will that comes into effect when the testator dies. A trustee is pre-appointed to manage the trust and may choose how and when the deceased’s assets are distributed to beneficiaries. The flexibility and control in distributing assets has potential benefits including the protection of vulnerable ‘at-risk’ beneficiaries such as minors, those with intellectual disabilities or drug and alcohol addictions.
Even modest estates may benefit from having a testamentary trust, particularly where the testator is part of a blended family.
Trusts are complex and sound advice is important to ensure the trust is compliant, structured to achieve the required objectives, and that any stamp duty and taxation implications are considered.
Making the most of your superannuation
Death benefits of a superannuation account are paid to an eligible ‘dependant’ determined by the fund trustee, or in accordance with a Binding Death Benefit Nomination (BDBN).
Consideration of the way death benefits are taxed in the hands of the recipient, is important to ensure the most tax-effective results are achieved.
Essentially, a spouse or partner will be considered a tax-dependant under taxation law and accordingly, will receive death benefits tax free. Alternatively, whilst adult children are considered dependants under superannuation legislation, they are not ‘tax-dependants’ and will need to pay tax on any death benefits.
A BDBN will ensure that your superannuation benefits are paid to the intended beneficiaries and receive the most advantageous tax treatment.
Superannuation Trust Deeds
A self-managed superannuation fund (SMSF) provides members with more flexibility and autonomy over investment choices and fund management than traditional funds.
Funds must be compliant and follow strict regulations to ensure members can access the various income and capital gains tax concessions which have been implemented to encourage people to save for their future.
The fund is not a separate legal entity, so its activities are carried out by a trustee (individual fund member or corporation).
The fund must be carefully structured, and its activities governed by a superannuation trust deed which is integral to its compliance and operations. The deed should be drafted to ensure that it:
- Is compliant with superannuation and other laws and allows for variations and updates;
- Provides flexibility regarding investment choices including permitting the fund to borrow to invest in property;
- Sets out clear processes for completing binding death benefit nominations.
Varying your superannuation trust deed
Occasionally, it may seem desirable to ‘replace’ an old trust deed with a new version to take advantage of changes in superannuation laws or new investment strategies. This is not recommended, as replacing an existing deed with a new version could constitute the creation of a new fund which could potentially attract capital gains tax and stamp duty.
In these circumstances, a deed of variation enables a comprehensive update of the old deed without triggering a tax or duty liability.
Strict processes must be followed, and it is recommended that a legal / financial advisor is consulted to review and upgrade the existing trust deed. If the trustee is a corporation then appropriate resolutions must be passed, and minutes recorded.
Binding Death Benefit Nominations (BDBN)
A BDBN is a direction to the trustee of a superannuation fund to pay death benefits to an eligible beneficiary or beneficiaries, or to your estate.
The superannuation trust deed should include provisions allowing members to make BDBNs which may be tailored to account for various contingencies, such as the inclusion of cascading provisions to provide for alternate beneficiaries if one or more die before the fund member. A BDBN can also identify certain assets to be left to particular beneficiaries and, if permitted, nominate how benefits are to be paid such as by lump sum or pension.
Limited recourse borrowing
An SMSF may borrow funds to purchase certain acquirable assets provided the borrowing arrangements satisfy strict requirements and the asset passes the ‘sole purpose test’. The superannuation trust deed must contain provisions to facilitate these arrangements.
An acquirable asset includes real estate for investment purposes. The sole purpose test generally means that the asset must support the investment strategy of building wealth for retirement.
The asset is held on trust and the lender’s rights against the SMSF trustee for default under the loan are limited. This means that other assets held by the fund may not be used as security. Lenders may however require personal guarantees from individual members.
Investment in real estate through an SMSF can deliver many benefits such as having control of the investment, structuring rental income to take advantage of reduced income tax, and reduced capital gains tax rates if the property is sold or transferred.
Notwithstanding the benefits, these arrangements are complex and certain pitfalls may arise through common mistakes. Compliance and procedural errors can result in additional taxes, duties and substantial penalties.
Most lenders require that the trustee is a corporate entity and a bare trust must be established to hold the property on behalf of the fund. It is essential that the correct entity is named on the purchase contract.
Trusts are complex arrangements and must be carefully managed and administered to ensure compliance and to prevent unintended taxation consequences.
The potential benefits of having a SMSF can be achieved through sound planning and advice, and a well-drafted superannuation trust deed.