In this edition:
ATO Attack on Trusts & Unpaid Present
Entitlements Continues
Use of Private Company Assets
FBT Time Again
Financial Services Available
ATO ATTACK ON TRUSTS & UNPAID
PRESENT ENTITLEMENTS CONTINUES
In December 2009, the ATO released a draft ruling (TR 2009/D8)
outlining how Division 7A should apply to private companies with an
unpaid present entitlement from a trust.
The draft ruling outlines when the ATO considers that an unpaid
present entitlement should be treated as a loan. A
consequence of treating an unpaid present entitlement as a loan
under Division 7A is that, unless the loan satisfies certain
requirements, the loan will be treated as a deemed dividend for tax
purposes.
DIVISION 7A - BACKGROUND
Division 7A is designed to ensure that private companies are not
able to distribute profits to shareholders by way of non-arm's
length payments or loans rather than as taxable dividends.
Where Division 7A applies, such payments and loans are treated
as dividends in the hands of the shareholders.
DRAFT RULING
The draft ruling is concerned about when a private company will be
taken to have made a "loan" to a shareholder for the purposes of
Division 7A.
More specifically, the draft ruling is concerned about the
situation where:
• a private company has a present entitlement to an amount
from a related trust (ie it can call for immediate payment of the
amount by the trust);
• the amount remains in the trust rather then being
distributed to the private company (ie there is an unpaid present
entitlement); and
• the amount is used by the trust for its own purposes or
intermingled with other trust funds (as opposed to being held by
the trust on a sub-trust for the company).
The draft ruling provides that there will be a Division 7A loan
where:
• a private company beneficiary lends (by agreement,
authorisation or ratification) money in satisfaction of an unpaid
present entitlement;
• the trustee creates a loan for the benefit of the private
company beneficiary pursuant to the trust deed instead of creating
an unpaid present entitlement;
• there is a subsisting unpaid present entitlement and the
private company has in substance effected a loan or provided
financial accommodation in respect of that unpaid present
entitlement; or
• an unpaid present entitlement has been allowed to remain
outstanding for use by the trust generally (as opposed to being
used or invested or lent for the absolute benefit of the corporate
beneficiary).
Based on some of the examples in the draft ruling, it is
important to note that an unpaid present entitlement can be
converted into a loan as a result of acquiescence.
In this regard, the draft ruling states that there may be a loan
(by way of financial accommodation) where a private company
authorises (including by acquiescence with knowledge) the continued
use by the trust of funds representing the company's unpaid present
entitlement by not calling for:
• the payment of that unpaid present entitlement; or
• the investment of the funds representing the unpaid
present entitlement for the company's absolute benefit (as opposed
to the funds being intermingled with the trust's other
funds).
USE OF PRIVATE COMPANY
ASSETS
In the 2009/10 Federal Budget, the Government announced its
intention to tighten the rules relating to the taxation of benefits
provided by a private company to its shareholders or their
associates through the use of "lifestyle" assets (ie cars, boats,
holiday houses, hobby farms).
Exposure draft legislation has now been introduced to implement
the proposed changes to Division 7A. The professional bodies
are currently preparing submissions in relation to the exposure
draft legislation.
DRAFT LEGISLATION
The draft legislation removes the scope for private companies to
allow company assets - such as real estate, cars and boats - to be
used for free, or at less than their arm's length value without
paying tax.
Under the current Division 7A, certain payments and loans by
private companies to their shareholders are treated as deemed
dividends.
Under the new legislation the definition of "payment" has been
expanded so that it includes a lease, licence or right to use
company assets.
This means that all of the following scenarios could fall foul
of Division 7A (subject to any exemptions being applicable):
• farmhouses used by farmers where the farmhouse is owned
by the farming company and the company (rather than the farmer) is
carrying on the farming business;
• any use of a company car, holiday house, boat or other
asset by shareholders of the company; and
• the right to use part of a shop or medical practice to
live in where the relevant dwelling is owned by a company and the
living space is more than 10% of the dwelling.
FBT TIME AGAIN
With the end of the fringe benefits tax (FBT) year only a matter
of weeks away - 31 March 2010 - it's that time of year to make sure
you
are on top of your FBT obligations. To get prepared, we suggest
you:
- check whether you have provided any fringe benefits to your
employees in respect of their employment that are taxable; and
- make sure you are ready to lodge your FBT return and pay any
FBT liability on time.
YOUR FBT BASICS CHECKLIST FOR 2010
- The current FBT year runs from 1 April 2009 to 31 March
2010
- As an employer, you are responsible for calculating your FBT
liability, if there is one, and paying any FBT liability.
- If you have an FBT liability, you must lodge your FBT return
and pay your FBT liability by 21 May 2010.
- FBT is separate from income tax and is levied at the top
personal marginal rate of income tax, including the Medicare levy
(ie currently 46.5%).
- You can generally claim an income tax deduction for the cost of
providing fringe benefits and for the FBT you pay.
- Where the total taxable value of reportable fringe benefits for
an employee is more than $2,000 for the current FBT year, you will
have to disclose this value (grossed-up) on the employee's payment
summary.
FINANCIAL SERVICES AVAILABLE
TO YOU
In association with Count Wealth Accountants, we are uniquely
qualified to offer you and your family a range of financial
services that can be tailored to suit individual needs and
circumstances. We offer independent professional financial
planning advice that encompasses managed fund investments,
superannuation planning, retirement planning, personal risk
insurance, home and investment loans, business loans and
leasing.
If you wish to discuss your financial plans, please contact Tony
Maclean or Matt Van Riessen of this office.