Tax on Pre Retirement Age superannuation benefits following Permanent Incapacity

Question Our client is age 47.  His super fund held a Life and TPD policy on his behalf.  He suffers from severe depression and a TPD payment was made to his super fund under the policy terms.  Our client would like to access some of the TPD payment by making a withdrawal from his super fund under the permanent incapacity condition of release. We have been advised his total super benefit today consists only of a taxable (taxed component)  i.e. no tax free component. We would like to confirm our understanding of how the withdrawal will be taxed if taken as follows:  If a lump sum withdrawal is made the following will apply   A tax free component will be calculated using the formula under s307-145(3). The remaining balance will be taxable (taxed) component. As our client is below his preservation age of 60  the taxable (taxed) component will be taxed at 20% plus medicare levy?   If the withdrawal is taken as a pension income stream   There is no tax free component calculation as per 1 above? The taxable (taxed) component will be taxed at our clients marginal tax rate less 15% tax rebate?

Answer David Garde 19 July 2018 What you have said matches the rates and the rebates that apply which appear on the ATO website for lump sum benefits here https://is.gd/WaC6ev and pension benefits here https://is.gd/SvDlTt However there are two other important considerations which will drive the tax the client will pay. Firstly how likely it is that the client may work again in work to which he is suited by education  training or experience. To qualify for release of benefits from the fund under the permanent incapacity ground it must be unlikely (and confirmed by doctors if the client is relying on my second important consideration which is ) Secondly  the client should ensure that the components of the benefits are recalculated to achieve a substantial tax free component for him. The above tax scales only apply to the taxable component.  This website of industry fund MediaSuper usefully summarises how a substantial tax free component can be obtained where the client has suffered permanent incapacity:  https://is.gd/NZE49P - including the necessity for certification by doctors that it is unlikely that the client can ever be gainfully employed in a capacity for which the client is reasonably qualified by education  training or experience.

Main Residence Exemption

Question Our clients purchased their principal place of residence (PPR) in July 1996 and lived in there until March 2011 when property was rented out. In November 2012 property was vacated and repaired. In April 2013 property was re-tenanted until March 2017.  After repairs have been done in May 2017  clients moved back into the property in June 2017. Two months later  in August 2017  the property was sold. Overall  our clients have been absent from their PPR for 6 years and 2 months and they did not have another PPR (i.e. they have been renting). Questions: Did this property lose its main residence exemption as the clients were absent for more than six years and the property was rented out? If yes  does the propertyÕs market value at the time when it was first rented out become the cost base and should the gain be apportioned as clients moved back prior to the sale?

Answer Mark Chapman 19 July 2018 I believe the main residence exemption will be available for the whole ownership period. As you know  the owners of a property can be away for up to six years and still retain the main residence exemption where the property was earning assessable income. The period of absence is indefinite where the property is vacant but not earning assessable income. In this case  the period that the property was earning assessable income commenced in March 2011 and ended in March 2017 (exactly 6 years).  Although the couple did not move back in until June 2017  based on the facts it appears that the repairs in the period between March 2017 and June 2017 were undertaken to make the property habitable again by the couple and hence that period would qualify as a period of habitation by the couple (and hence be covered by the MRE). Alternatively  the property was empty between March 2017 and June 2017 but not earning (or available to earn) assessable income and hence is covered by the indefinite absence period where a property is vacant but not earning income (and also covered by the MRE). In the event that the MRE was not available for that period from March 2017 to June 2017  the base cost of the property would be reset to market value at the date the property was first used to produce income (March 2011).There are no set rules on the dormant trust in asset protection structures (ie  ask 2 lawyers for their advice & get 5 different opinions sadly). The essential nature of the dormant trust is that  because there is a person who

Ownership of shares, asset protection trusts

Question Thank you for your assistance. You mentioned using a dormant trust to hold the shares in company B rather that the wife of the director. Can you please clarify who should be the appointor and trustee of the dormant trust? Is there an issue if that person is the director's wife or should it be both the director and his wife? Or another party altogether? Thank you.

Answer Clifford Hughes 18 July 2018 There are no set rules on the dormant trust in asset protection structures (ie  ask 2 lawyers for their advice & get 5 different opinions sadly). The essential nature of the dormant trust is that  because there is a person who is the trustee  and the only asset is the shares in Company B  there is no need for a trust bank account  a TFN  to lodge ITRs  no annual financial statements required  no ASIC annuall returns (ie  if there was a corporate trustee). This of course changes if the clients decide that Company B is going to declare a dividend to the trust shareholder.  My view is that in determining the structure  the 2 factors are: (1) who is available? (2) what is the quality of the trust deed?  (1) the wife is likely suitable to be trustee whilst she remains compliant  retains mental capacity and is willing. I tend not to use the husband to be trustee as any search of his name would show the shares in company B as an asset on the ASIC register. The husband can  subject to (2) below  be the appointor/principal of the dormant trust if desired.  (2) this is the very important issue in my view. The appointor/principal mechanism in the trust deed needs to be robust and take account of multitude potential possibilities so that there is no possibility of the appointor position becoming vacant. It needs to specifically provide that if the current appointor is declared bankrupt then they lose the position until their bankruptcy is discharged and that the trustee in bankruptcy cannot exercise the appointor's powers (there are cases which say this is the case  but having it clearly stated in the trust deed removes possible arguments). Similarly  if the current appointor loses mental capacity etc (ie dementia) they cease to act as appointor. Importantly  the appointor provisions must also provide for a backup person to automatically assume the position where the current occupant is disqualified because of bankruptcy/criminal conviction/lack of capacity (and also death).

Members Mezzanine Financing on top of LRBA and giving Personal Guarantees

Question Good morning We have a client proposing to purchase a commercial property in their SMSF for $2.0M. The will need to take out a loan in the SMSF for $1.5M to complete the acquisition.  This loan to valuation ratio is outside the banks standard lending rations (LVR) and they have requested additional security. Our questions are as follows: Under the SIS act:  Can the members provide personal guarantees for the loan? The members have unencumbered assets (other property) outside their superannuation fund.  Can this additional property be provided as security for the SMSF loan? Can the members get the maximum loan from the bank through the SMSF (using the property being acquired as security)  but then make a further loan to the superannuation fund from personal funds to make up the shortfall (note all non-concessional contribution caps have been utilized)? Any other thoughts or suggestions.

ANSWER Clifford Hughes July 18 2018 Re your 4 questions:  Yes  subject to comments below re Q4. Yes  subject to comments below re Q4. Yes  subject to compliance with the ATO's views in PCG 2016/5. Query though whether the fact the members will also need to lend money to the fund (ie  in addition to what the bank will lend) means that such member mezzanine financing is non-commercial because it is more than the bank will lend? I am aware these issues have been raised in discussion of ATO views but am unaware of any ATO statements on mez financing (as opposed to the primary loan being in excess of bank LVRs). Further  there will be commercial law issues in respect of bank priority for first loan/mortgage  subserviance of member's loan and then whether failure to make repayments on time on the member's loan is uncommercial etc. In respect of Q1&Q2  should the bank call upon the guarantees and/or exercise security over the non-SMSF assets  the amounts paid to the bank or realised by it  will (on ATO views) constitute contributions by the members to the SMSF which may well breach NCC caps etc and result in extra taxation. Warnings should be given in writting to members now so that they are aware for the future and you have covered your liability issues.

Family Trust Distribution

QUESTION We have a client with a discretionary family trust that distributes to family members. If some of these family members owned their own company (that was independent of our client) can we still make distributions to this company as part of the family trust. Ideally we want this comapny to have the family members as the sole directors and shareholders.  We are just concerned about the nexus between the family trust and company. If this is not possible  would it be ok if our client is still a director and / or different class of shareholder of this company to allow us to still distribute to the company?

ANSWER Mark Chapman September 26, 2018 The answer depends on whether the trust deed permits it and secondly whether there is a family trust election in place. If the companies in question are listed as potential beneficiaries in the trust deed  then distributions can be made. If the companies are not listed (either specifically or indirectly by way of a general clause giving the trustees general power to distribute beyond named beneficiaries) then the distributions cannot be made. It is important to check whether a family trust election is in place. A family trust election is a choice by a trustee to specify a particular individual (the test individual) around whom a family group is formed.  This family group then sets the maximum range of beneficiaries amongst whom the trustee can distribute to without triggering significant adverse tax outcomes  such as family trust distributions tax.

The choice as to who will be the test individual is crucial  as not all family members will be part of the family group for tax purposes.  Broadly  the family group includes:  The test individual and their spouse; Any parent  grandparent  brother or sister of the test individual (or the test individuals spouse); Any nephew  niece or child of the test individual or their spouse  and any lineal descendent of these individuals; The spouse of anyone mentioned above.  Entities such as companies  partnerships and trusts can also be members of the family group  although this will generally only be the case where the family members listed above have an entitlement to all of the capital and income of the entity.

Accounting for Taxation

QUESTION I am auditing an SMSF  and the accountant has prepared financials on an accrual basis and prepared the tax return on a cash basis. Is it acceptable  and if yes  then how do we reconcile member balances/financials moving forward to future years? As the balances as per ITR will be different to what balance sheet will have.

ANSWER Ashley Course September 28 2018 This question would appear to relate to the Part A auditors report.  According to the ATO SMSF auditors report  the responsibility of the SMSF auditor is to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement.  The auditors responsibility does not extend to forming an opinion on whether the funds tax return is correct.  This is the responsibility of the person lodging the return  not the auditor. As the financial report of a SMSF is generally a special purpose financial report (GPFR)  and as there are no legislative requirements or Australian accounting standards which prescribe how the funds financial statements are to be prepared  it is generally up to the trustees to ensure the financial statements are prepared in accordance with the needs of the users (the members). The trustees / accountant therefore can essentially account for tax on either an accrual or cash basis in the financial statements. 

The auditors responsibility is therefore to form an opinion on the appropriateness of the tax treatment based on whichever method the notes to the financial statements state has been used.  i.e. if the notes to the accounts state than tax has been accounted for on an accrual basis  then the auditor is to form an opinion on whether this is reasonably correct.  If the notes to the financial statements state that tax has been accounted for in the financials on a cash basis  then the auditor should confirm this is reasonably correct. Whether the tax is accounted for in the tax return in the same manner is not the responsibility of the auditor.  Whoever is responsible for the lodgement of the tax return shall ensure this has been accounted for correctly.

Duty on Put and Call Option arrangement in NSW

QUESTION Put and call option deed query A put and call deed commonly specifies that the call option is exerciseable within a certain period and thereafter the put option is exerciseable if the call option has not been exercised. Is there any reason why the call option period and the put option period can't be exactly the same?

ANSWER Willian Cannon November 25 2018 I am not sure if there is a property law reason. Cant really think of one except that if the put is exercised during the call period  does that terminate the call. I assume the call and put could be drafted so that the exercise of one terminates the other. For stamp duty purposes  under the stamp duties Act put and calls were treated as an agreement for sale. I recall if the put period was after the call period  the put and call was not caught by the legislation. Put and calls are no longer treated as agreements for sale in NSW (other than for lanholder purposes). Subject to the operation of the anti avoidance provision discussed below  if the put is exercised and the call is not  it seems section section 22(4) may not apply so the consideration paid for the call would not be included in the consideration.

There might be an argument it should be included in any event  applying  Chief Commissioner of State Revenue v Dick Smith Electronics Holdings Pty Ltd [2005] HCA 3. Care would need to be taken to ensure that the fact that the call and put period are the same does not result in the agreement in fact constituting an agreement for sale or transfer.   As noted above  the other consideration is whether the anti avoidance provision would treat such an agreement as an agreement for sale. There must be some risk that they would. If the normal arrangement is that the put period only commences after expiration of the call period  apart from delaying the time from which duty is payable  the question would be what is the commercial purpose for having the put and call period the same? The risk of the anti avoidance provision applying would be increased if say the amount paid for the call option exceeds what might reasonably be expected to be paid with a view to the call option fee falling outside section 22(4).

GST Registration

QUESTION I have a new Company resident client and the company received a contract from foreign company to work here at the mine. The foreign company provides everything only the company received the labour or services payment working at the mining. The company income received from foreign company for first year is $150,000 and 2nd year is $246,000.

Does the company require to register for GST for the income received from the foreign company? Just need to confirm and if you can give me some GST rulings for foreign resident contracting Australian company to work with them would be a great help for my future reference.

ANSWER by Tony van der Westhuysen BA LLB (Tax Law) MBA November 8 2016
Where a non-resident makes a supply in Australia, that supply will be connected with the Indirect Tax Zone under s 9-27 of the GST Act. For all practical purposes, the Indirect Tax Zone is simply another name for "Australia". On the face of it therefore, that non-resident company would have an obligation to register for GST if the value of their taxable supplies met or exceeded the registration turnover threshold of $75,000. In your case, the value clearly exceeds this limit.

A non-resident can avoid this requirement if they enter into a reverse charge agreement with the resident company (see s 83-5(1) (d) of the GST Act). Where such an agreement is in place, the GST is "reverse charged" so that the recipient of the supply (the resident company) agrees to pay the GST on behalf of the non-resident supplier. The GST in this case would be 10% of the price of the supply (in your case $15,000 in the first year and $24,600 in the second year). If the supply represents a creditable acquisition for the resident company under s 11-5 of the GST Act, then they will be entitled to an equal and offsetting input tax credit for the GST that was reverse charged.

Capital Works Amortisation

QUESTION My client owned half share of a commercial rental property (acquisition date 21/6/1999) and recently purchased the other half share. When the commercial property was initially bought it was used in the printing industry (construction date 19/03/93). The building capital works rate used for the first purchase was 4% PC. On purchase of the remaining half share the client has completed an office fitout for commercial office rental. What rate should the following items be:

• Initial half share - is this still 4%?
• Purchase of the remaining half share?
• Building construction costs associated with office fitout?

ANSWER by Mark Chapman B.Comm LLM (Tax Law) January 18 2017
The capital works deduction is not spread over a fixed term but is calculated according to the use of the building. The 4% rate will only apply where the building is being used for an eligible industrial activity. A commercial office rental does not qualify as an industrial activity and therefore for the purposes of Div 43, the building is no longer an industrial building. Accordingly, all three elements (the original 50%, the newly acquired 50% and the recent office fit-out) should be depreciated at the 2.5% rate.

Deduction for Gift Donation

QUESTION A question for commentary/case law on S 30-222 Income Tax Assessment Act to do with GST deductions on gifts (in this case artwork). Particularly interested in sub section below:

(2) In deciding what is a reasonable amount, have regard to the effect of those terms and conditions, or that *arrangement, on the *GST inclusive market value of the gift.

ANSWER by Tony van der Westhuysen BA LLB (Tax Law) MBA January 17 2017
The definition of "market value" is modified to account for any input tax credit that a donor would be entitled to if he orshe purchased the thing being valued. So the net effect on an entity’s resources in acquiring something that is donated must allow for the fact that the cost to the donor is partly offset by the input tax credit that he or she is entitled to.

The term" GST-inclusive market value", as defined in the GST Act will be inserted in the Dictionary to the ITAA 1997, so when this term is used it expressly includes the GST component without adjusting for any input tax creditentitlement. Accordingly s 30-220(2) inserts a specific rule for adjusting that value that the donor can claim as a deduction to account for the input tax credit entitlement.

CGT on Sale of Retirement Unit

QUESTION The question is capital gains arising on disposal of a retirement home unit.

For the owner it was her main residence however 7 years ago the owner moved into high care nursing home and so the retirement unit was then rented. The owner has now passed away and the executer of the deceased estate will now put the retirement unit up for sale. Given the property has earned assessable income for over 6 years will the sale of the unit be subject to capital gains tax.

If the unit is subject to tax will the special rule in s118-192 not apply as the retirement unit was not in use as a main residence by the owner at time of death, in which case the executor will need to allow for capital gains tax based on number days used as the principal place of residence.

ANSWER by Mark Chapman B.Comm LLM (Tax Law) 2nd Dec 2016
PBR 61605 addresses substantially the same facts (understanding that the home was acquired after 19 September 1985). As the same provisions in s118-145 can still apply then, as the unit was rented out, a maximum 6 years of absence in the nursing home can apply to the unit as her main residence if the owner had no other main residence. CGT would apply pro rata (1/7) in relation to the seventh year to which the main residence exemption cannot apply.

In regard to the second question I agree with the member’s observation which also matches the ruling. Neither way of attracting the effective exemption for the two year period following death in s118-195 is attracted so CGT applies pro rata to the period of ownership by the estate following death also.

It follows that the period of occupation prior to going into care and no more than 6 years of the absence in the nursing home, during which the unit was rented out, attract a (partial) CGT main residence exemption. The remainder of the period of ownership by the owner and her estate attracts CGT.

Residency of Trust and CGT

QUESTIONOur question concerns the residency of a trust with a corporate trustee and the related capital gains tax implications (if any). The relevant background facts are as follows:

Our client (individual) ceased to be an Australian tax resident (permanent move to Singapore) from January 2015; He is the sole shareholder and director of a company. This company was incorporated in Australia; The company is also the trustee of a discretionary trust. We note the following:

Under Australian taxation law, a trust is deemed to be a resident trust if the trustee is a resident OR the central management and control of the trust is located in Australia; and Under the Corporation law, a company is deemed to be a resident where it is incorporated in Australia OR the central management and control is in Australia. The Double Tax Treaty between Australia and Singapore is not clear on the capital gains tax impact of a change in residency.

Given the above, does the trust ever cease to be an Australian resident under domestic tax law and, if so, would capital gains tax event I2 be triggered?

ANSWER by Clifford Hughes Bjuris, LLM (Tax Law) FTIA December 14 2016
On the facts that you have instructed it is most likely that the trust will remain an Australian resident and not cease. However, the client has other issues in that the company is in breach of the Corporations Act.

Under Sec.6(1) ITAA36, "resident trust for CGT purposes" is referred to the meaning under the ITAA97.

In sec.995-1 ITAA97, "resident trust for CGT purposes" is relevantly defined on the basis that:

(a) for a trust that is not a unit trust, a trustee is an Australian resident or the central management and control of the trust is in Australia; or

As the trust in your query has a corporate trustee, we then need to revert to sec.6(1) ITAA36 where para (b) to the definition of "resident" provides that:

(b) a company which is incorporated in Australia, or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia.

Given your instructions that the corporate trustee is incorporated in Australia, the result of combining those definitions is that, whilst the same company remains the corporate trustee, the trust could never cease to be a "resident trust for CGT purposes".

Note that residency of a company determined under the Corporations Act is not relevant for the purposes of determining tax residency of that company.

In order for your client trust to cease being a resident trust for CGT purposes the present corporate trustee would need to be placed with a company incorporated overseas (and which does not have it' central management & control in Australia), or with an individual who is not tax resident of Australia.

Corporations Act

Section 201A Corporations Act provides that at least 1 director of a company must be ordinarily resident in Australia. On the facts you have instructed, your client is in breach of that provision.

Where the resident director requirement is breached, the company is required to remedy the breach as soon as possible. If it does not, ASIC can decide to issue a penalty notice (currently $1,062.50) or commence prosecution for breach of the Act.

You should therefore make your client aware of the above requirement and recommend they rectify as soon as possible.