Client Information Bulletin June 2010
Newsflash!! Update on Commissioner's position on application of Division 7A to distributions made to companies from trusts
Further to our article in the April edition of our newsletter, the Commissioner has now issued a final ruling relating to this issue. TR 2010/3 deals with the Commissioner’s arguments on what and when an unpaid present entitlement (UPE) to income becomes a loan by the company to the trust. In addition, a draft practice statement has been issued by the Commissioner to provide practical guidance on these matters.
So what are the practical implications?
In the first instance, fears that the Commissioner was to apply a retrospective lens to his interpretation and apply his view to old arrangements has, broadly, not been applied. Where there is an UPE that has not been treated as a loan and it was in existence before 16th December 2009, there will be no Division 7A loan.
On a go forward basis, the rules will now be different and are applicable to distributions made to companies from trusts for the 30 June 2010 financial year. An example is the best way to understand the new rules.
John is the Trustee of the Smith Family Trust. Smith Pty Ltd is a beneficiary of the Smith Family Trust and John exercises his discretion as Trustee to distribute $10,000 of income to the company for the year ended 30 June 2010.
The distribution is shown in the accounts of the trust as an UPE to Smith Pty Ltd. This amount remains unpaid by the trust to the company as at 30 June 2011. What are the implications?
For tax purposes, the UPE comes into existence on 30 June 2010. As the loan has not been repaid by 30 June 2011, the UPE amounts to a loan to the Smith Family Trust from Smith Pty Ltd. Therefore Smith Pty Ltd must either:
- put in place a complying loan agreement under Division 7A (repayment of the loan with interest over a 7 or 25 year period); or
- the Smith Family Trust must repay the full amount before the lodgement day for the Smith Pty Ltd 2011 income tax return.
Whilst this provides some timing leeway for Trustees making distributions to companies, these arrangements will no doubt be heavily scrutinised and it will mean that ultimately either the monies will need to be paid, in a relatively short period of time, to the company or making distributions to companies will become less favourable due the both the risk and cost of documenting the loans made.
We strongly suggest that if you have made distributions in the past or are considering making a distribution to a company from a trust in this financial year, talk to your advisor at Ruddicks.
Reportable Employer Superannuation Contributions and What You Need to Do
Something we believe that might have slipped under the radar of a number of business clients is the new Reportable Employer Superannuation Contributions (RESCs) rules.
By way of background, the Federal Government made a number of significant changes to the various income tests which are used to means test a range of tax and non-tax concessions or obligations. The definition of income was expanded to include a number of new income concepts and components including adjusted fringe benefits total, net investment losses and reportable superannuation contributions.
The effect is that these adjustments are made to taxable income to determine if you and your family are eligible for a number of benefits or obligations including:
- superannuation co-contribution
- family tax benefits
- baby bonus
- child support
The tax concessions and obligations affected by these new income tests include:
- Tax offsets including Dependent Tax Offset, Senior Australians Tax offset, Pensioner Tax offset, Mature Age Worker Tax offset and Spouse Superannuation Tax Offset, 25% Entrepreneur’s tax offset, the ability to claim business losses under the non-commercial loss rules and the upfront $1000 discount reduction for employee share scheme shares and options
- Claiming deductions for personal superannuation contributions under the 10% rule
- Medicare Levy Surcharge
- Higher Education Loan Program (HELP) and Student Financial Supplement Scheme (SFSS) repayments
RESCs is the most important new income concept as it will affect salary packaging arrangements (see article later in this newsletter) involving employer superannuation contributions from 1 July 2009.
So what is this new regime and what do you need to do?
An individual’s RESCs for an income year is the amount contributed to a superannuation fund on behalf of an individual during an income year by their employer (or an associate) which that individual has, or would reasonably be expected to have had, the capacity to influence either the size of the contribution or the way it is contributed to the fund so that their assessable income from the employer is reduced.
In effect, this means that salary sacrificed and other additional contributions over and above the Superannuation Guarantee amount (currently 9% of ordinary time earnings) will be subject to the disclosure requirements of the new rules. RESCs do not include superannuation guarantee contributions, contributions under an industrial award, contributions from your employee’s after tax income and additional contributions made for administrative reasons where the employee has no capacity to influence the amounts or the decision.
An employer who makes RESCs on behalf of an employee will need to disclose the total amount on the employee’s payment summary for the year at a new label for RESCs. In addition, the employer will be required to provide details of RESCs made on behalf of employees for an income year as part of the annual withholding report provided to the ATO by no later than 14th August.
What if you are not registered for Pay As You Go Withholding?
Where you are both the owner and the employee in a trust or company that has made concessional contributions to super on your behalf, you will be required to issue a payment summary to yourself showing these details.
In the past if you have not paid yourself a salary or an allowance, you have not been required to register for Pay As You Go Withholding tax, nor has it been necessary to issue yourself with a group certificate. Under the new rules, you will now need to register and complete a payment summary for yourself with the relevant disclosure for the superannuation contributions made into your fund.
This information, in turn, is required to be disclosed in your personal income tax return at a new label especially for RESCs. In addition, where your spouse has RESCs for the 2010 income year, these amounts may need to be recorded at the spouse or de facto details section of the return form.
If you are uncertain about your obligations, please contact your advisor in our office at your earliest convenience to determine what you need to do.
Salary Packaging Arrangements - Should You Review Them Now?
Many existing salary packaging arrangements involve additional super contributions (see earlier article regarding Reportable Employer Superannuation contributions). These arrangements may well have been put in place prior to the imposition of the new caps applicable from 1 July 2009.
Salary packaging into superannuation has traditionally been the most popular and tax effective form of salary packaging. More specifically, employees have used this mechanism to obtain a tax benefit whereby rather than being taxed at your marginal rate of tax, up to 46.5%, your concessional super contributions would be taxed at only 15%.
From 1 July 2009 the amount of concessional contributions that can be made in respect of an individual will generally be capped at $25,000 per person from all sources. Transitional measures are available where individuals aged 50 or more on the last day of the income year will be able to avail themselves to a maximum limit of $50,000 up to 30 June 2012. As indicated in our May client newsletter, it is proposed that this latter measure be extended for those individuals who are over 50 but who have less than $500,000 in their superannuation fund.
The amounts that count towards these annual limits include:
- Salary sacrifice contributions; and
- Superannuation Guarantee Charge amounts (generally 9%) from ALL employers.
Why should you be reviewing this now?
If you exceed these caps, prohibitive rules apply whereby tax is paid at 46.5%, made up of 15% contributions tax and 31.5% excess concessional contributions tax. Furthermore, the excess is applied in reducing the amount available to you for your non-concessional caps.
Should you have made a non-concessional contribution to your super fund from, for example, a property sale outside of super, to the amount of the cap available and the excess from your concessional cap is added to it, you will exceed the cap and be taxed another 46.5% on the excess. This means you will have paid 93% tax!! Ouch!!
It is therefore in your best interests to confirm that your contributions for the year are below the caps and seek to rectify this if you can prior to the 30 June 2010. There may still be time – just!!
Year End Super Tax Tip 1 - Have You Taken Your Minimum Payment From Your Super Fund
This article is applicable to those clients who are currently taking a pension from their super fund or might have commenced a new pension this year. It is a requirement that a minimum payment be made from a superannuation pension at least annually. Minimum amounts are determined by age and the value of the account balance at 1 July each year. The rule is designed so that retirees draw down on their super savings over their retirement and recognises the substantial tax concessions available. These are lost where you do not make the minimum required payment. There is no maximum cap if you are drawing down on an account based pension but there is a 10% upper cap where you are in receipt of a Transition to Retirement Income Stream (TRIS).
During February 2009 and in response to the market downturn, the Government provided relief for retirees by reducing the amount of minimum payments to 50% of the current minimum and then extended the measure to apply to the 30 June 2010 year as well. There has been no announcement as to whether this will be extended for any further period of time.
To assist you in making sure you have made the correct minimum payment, see the table below:
Age as at 1 July
Percentage of account balance at 1 July 2009 (ie 2009/10 year)
Percentage of account balance from 1 July 2010 (ie 2010/11 year)
95 or more
It should be noted that these payment percentages apply to account based pensions and TRIS’s. The factors are different where you have an allocated pension or annuity or a defined benefit pension.
Year End Super Tax Tip 2 - PAYG Withholding Obligations for Super Funds Paying Money to Their Members
If you have withdrawn money from your self managed super fund during the year and you are under 60 years of age, then beware of the need to make tax payments on those withdrawals.
When a super benefit is paid from a superannuation fund, the benefit will include both tax-free and taxable components calculated in the same proportion that these components represent in the total value of your interest in the super fund.
This is best calculated by our advisor here or your financial advisor. Your age and the composition of the payment between the tax free or taxable components will determine the amount of tax payable, if any.
The practical implication – If you have made a withdrawal from your self managed super fund and you are not yet 60 years of age – speak to your advisor about the need to remit tax on the amount withdrawn and perhaps the need to register for Pay as You Go Withholding in your super fund!!
Beware!! Are You on the Tax Office Watch List?
Work expenses are always on the Australian Taxation Office (ATO) watch list. As in previous years it has singled out occupations with a pattern of large and/or rising claims, returns that do not the fit the pattern for a particular occupation and claims that are outside of what the ATO considers the norm.
This year truck drivers, sales and marketing managers, sales representatives and electricians have been singled out as being of interest.
The most common mistakes made by people working in these occupations include:
- Insufficient documentation to support motor vehicle and travel expenses;
- Incorrect claims for living away from home allowances;
- Motor vehicle expenses being claimed on the basis of carrying bulky equipment;
- Home office, mobile phones and internet expenses.
The ATO now have advanced data matching activities which are focused on income but which do extend to deductions as well. For example, the ATO can match registration details for cars to those individuals claiming deductions for motor vehicle expenses.
In addition, the ATO has been benchmarking both individuals and businesses to compare claims made across an industry or occupation groups.
Year End Tax Tip - Share Losses
Have you made a capital gain this year on your share sales? If you have, then well done!!
Have you considered selling some of those stocks that are chronic underperformers to crystallise any loss? These losses can be offset against gains so it is worth talking to your stock broker or financial advisor about quitting these to offset those gains before the end of the financial year.
In addition, do you, like the rest of us, now have a small drawer of shares that are probably worthless and you are waiting for the slow grind of the liquidator to advise that you are getting nothing!! Dare we mention, ABC Learning or even FEA! If you are, then you can try and crystallise your losses so that they can be offset against your gains.
How to do this? There are a couple of options. If you use a share broker they may be able to trade the shares for you or have a service that will do that for shares that have been ASX delisted or are about to be. Alternatively, if your broker can’t help you, speak to your advisor at Ruddicks about alternative services that are available.
Year End Tax Tip - Are You a Small Business Entity? If So What Can You Do By Way of Year End Tax Planning?
Firstly, you qualify as a small business if you are an individual, partnership, company or trust that carries on a business for all or part of the income year and has less than $2 million of aggregated turnover.
There are a couple of concessions available to small business entities that may assist you as follows:
- Simplified depreciation rules mean that you can generally pool your assets to make depreciation calculations easier and in addition claim an outright deduction for most assets where the GST exclusive cost of those assets is less than $1000. For example, a small computer such as the iPad would fit the criteria where its use is for business purposes.
- There is also an immediate deduction for prepaid expenses where the payment covers a period of 12 months or less that ends in the next income year. For example, prepaying interest on a loan, payment of your insurance premiums in advance and so on.