Income Tax Legislation Planning Idea Planning Stuff

Newish Tax Concession For Farmers

The Government has released draft legislation that makes certain tax concessions available to farmers even better than they currently are.

In the draft legislation, the Government proposes to make the following changes to the Farm Managed Deposit scheme (and a reminder for those city slickers, the FMD scheme allows farmers to claim a tax deduction for deposits into their FMD bank account, and this means they only pay tax in the income in the year they take it out of the FMD account):

  • Increase the maximum amount that can be held in FMDs to $800,000. As many farmers are already at the $400,000 cap, this means they can take $400,000 from next years income, put it into their FMD and pay not tax on it in that year;
  • Allow primary producers experiencing severe drought conditions to withdraw an amount held in an FMD within 12 months of deposit in the income year following deposit without affecting the income tax treatment of the FMD in the earlier income year; and
  • Allow amounts held in an FMD to offset (ie. reduce the interest charged on) a loan or other debt relating to the FMD owner’s primary production business. That effectively means a farmer can decrease the interest on THEIR PRIMARY PRODUCTION BUSINESS loan (not other loans) at the cost of the meagre interest they were getting on their FMD.

This all starts on 1 July 2016 so it is worth farmers who already have a $400,000 FMD to start warehousing income so they can get the additional $400,000 deductions they can get by increasing their FMD balance to $800,000.

Also, it is worth getting ready to use the FMD as an offset from 1 July 2016.

Income Tax Rulings

How do I fix up a large UPE

I know they are not as common since December 2009, but now that we are generally paying interest on new UPEs to corporate beneficiaries (as required under TR 2010/3) these UPEs can be a real pain.

Especially if the trust that retains the cash that created the UPE is not making a lot of money and so paying the interest and/or principal can become a problem.

Well the Commissioner has an answer. In Taxation Determination TD 2015/20 the Commissioner states that generally, if the company that is owed an amount by a trust that is represented by an Unpaid Present Entitlement “forgives” the UPE so that the trust no longer has to pay the company the amount, the “forgiveness” will be a deemed dividend under Division 7A.

For the tax nerds, the Commissioner concludes that it is not a debt forgiveness as the UPE is legally not a debt but rather it is a payment – same effect but different reasoning, it is still treated as a division paid by the company to the trust.

But have a look at example 2 from the Determination…

Example 2

8. Unlucky Bob (an individual) is the trustee of Unlucky Trust, a sub-trust (within the meaning in TR 2010/3) settled in the 2011-12 income year with $1,000 of trust property to which a UPE relates. The sole beneficiary, and owner of the UPE, is XYZ Beneficiary Pty Ltd. Unlucky Bob is a shareholder of XYZ Beneficiary Pty Ltd. The subsisting UPE was not a Division 7A loan within the meaning of Taxation Ruling TR 2010/3 and was not a debt for the purposes of section 109F.

9. Unlucky Bob entered into a range of investments with the proper care and skill that a person of ordinary prudence would exercise.

10. During the 2013-14 income year, a market fall caused the value of the investments to become worthless. No amount of the loss was caused by an act or omission intentionally or negligently done, and there was no breach of trust which Unlucky Bob was required to make good to the Unlucky Trust estate.

11. XYZ Beneficiary Pty Ltd subsequently entered into a deed, by which it relinquished its entire equitable interest in the Unlucky Trust. It accounted for the released interest by making a credit entry against a ‘trust entitlement’ ledger to reflect that the interest ceased to be an asset of the company.

12. In these circumstances, the release by XYZ Beneficiary Pty Ltd confers no financial benefit upon Unlucky Bob. Accordingly, the release is not a payment within the meaning in subparagraph 109C(3)(b)(iii).

So if the trust is enough of a basket case, you can have the company forgive the UPE without Division 7A applying. Or at least some of the UPE could be written off if not all of the UPE will ever be able to be paid.

So it is possible to get the 30% tax rate in a trust and never have to given the money to the company, as long as the trust loses all of the money in bad investments.

Income Tax Rulings

Common property in blocks of units

So who owns the common property in a block of units, the strata trust or the owners. Legally it depends on the state legislation.

However, in Taxation Ruling TR 2015/3 the Commissioner simplifies this

40. Each strata title legislation is different in its description of how common property is held. Notwithstanding these differences, the Commissioner will accept, in relation to strata schemes registered under all the State and Territory Acts, that it is the proprietors, rather than the strata title body, that are entitled to the deductions under Division 40 and Division 43 of the ITAA 1997 and who are assessable on any income from common property under section 6-5 of the ITAA 1997.

So make sure the owners claim these deductions going forward.

Tax Policy

Please Fairfax, think…

Once again Fairfax journalists are showing how little they know about tax.

Recently, the master of the tax mistake, Michael West, wrote about some recent tax amendments that have been blocked in the Parliament…

The second is an amendment to compel multinational companies to file, as do their Australian-listed peers, proper financial statements, and not the niggardly “Special Purpose” reports with which they disguise vital information about their tax affairs.

Michael, the Commissioner does not need or want General Purpose Accounts. He has access powers that means he can request taxpayers to send him details of every single transaction. So, if the Commissioner can see everything taxpayers do without having to look at General Purpose Accounts, why would taxpayer’s not want to produce General Purpose Account, which you claim “disguise vital information about their tax affairs”? These General Purpose Accounts are not “vital to the Commissioner in reviewing the tax affairs of these taxpayers so who is this tax information “vital” to.

Michael and his tax novices at Fairfax think this is vital, not to ensure the correct amount of tax is collected, as the Commissioner already has all the information to make this happen. It is only “vital” to Michael, as, up until now, almost everything he has claimed in his reporting of corporate taxation is wrong, and he hopes with this information he might get a bit closer to the truth.

If you think that is hard, Michael was the head reporter of the “Tax Justice Network” report that claimed there was $8 billion a year of unpaid corporate tax. When the head of tax policy at the Treasury was asked about this report and its repotting in the media, his words were measured. But if you watch it on YouTube you can see he is struggling not to laugh at the start and struggling not to show what a waste of time this is at the end. When this is the response of the most senior policy wonk in the Government in the area you know you are way off the mark.

On radio Michael has gone further. He states that not only should these companies provide ASIC with more information, but rather than having to pay ASIC to access these account,  anyone (especially lazy journalists who won’t invest time into understanding the area they are writing on) should be able to download these account for free. THERE IS NO WAY THIS WILL INCREASE THE TAX COLLECTED BY THESE COMPANIES SO WHY DOES MICHAEL WANT THESE CHANGES?

The tax law does not exist to help journalists Michael…

Income Tax

Tax Depreciation Myths

There is a field of study that shows that you cannot teach an adult anything that is contrary to their current opinion without first challenging or disproving their current opinion.

I recently had an email war with a preparer of tax depreciation schedules about what you can claim Division 43 on… either the historic construction costs or the purchase price of a subsequent buyer (yes I know it is obviously the historic construction cost – or “undeducted construction expenditure” to be precise).

He said what he thought was correct. I said what I thought was correct. He restated his opinion. I quoted legislation (section 43-70) proving my position. He restated his opinion. I quoted Taxation Rulings (TR 97/25) proving my position. He restated his opinion… and then I stopped the never ending circle and showed him not why I was right, but rather I engaged with his understanding and proved it was wrong. And it worked.

I found a quote on the ATO website where the Commissioner stated that you cannot use the purchase price for Division 43, directly contradicting his position. I then stated exactly what I had said before (look at 43-70 and TR 97/25) but now, with his previous position challenged, he would accept the merit of my argument.

So from now on, when I am trying to teach people about tax, I am going to ask myself is there a myth I have to dispel first before I explain what I really want them to know.

And here is my first attempt at writing training this way… Expose the myth, then teach the truth (wow that is getting a bit to deep)…

The Myths of Tax Depreciation Schedules

Article Super

FPA Congress Paper

I can’t be bothered carrying hundreds of copies of my paper for tomorrow’s presentation at the annual FPA Congress up to Brisbane…

So attached is the paper for delegates (and anyone else with an internet connection) to download.

Enjoy (But you have to be at the session to listen to my not very funny jokes…)

FPA November tax presentation

Income Tax Planning Idea Planning Stuff Tax Policy

And so there is another scheme to avoid Division 7A

A few weeks after 4 December 1997 I was told about my first Division 7A avoidance idea. And by mid 2008 the first amendment to Division 7A came about to undo this idea (the old section 109UB to stop trusts loaning corporate UPEs to owners).

Since then I have been asked lots of times to advise on new ways to avoid Division 7A so that shareholders can get access to income at a 30% tax rate.

And the Commissioner has just raised concerns about another idea to get the 30% tax rate.

In Taxpayer Alert TA 2015/4 the Commissioner states that setting up a partnership where a substantial amount of the partnership interests are held by companies, and the partnership loans these amounts to the owners, will not be effective at getting the 30% tax rate for the high income owners.

The Commissioner states that if you drop in one of these partnerships between the business in a company and the shareholders, this still might be a financial accomodation and Division 7A will still apply. If the income comes from the trust to these new partnerships the commissioner states it could be a reimbursement agreement under section 100A. And of course, the Commissioner threatens the general anti avoidance rule in Part IVA. And when the current Commissioner makes this threat he means it.

Have a look at the diagram in the Taxpayer Alert if you want a good summary of the arrangement the Commissioner is concerned about.

My general comments on Division 7A avoidance ideas that give a 30% tax rate to income for high income individuals… A 19% tax saving is big – big enough to easily justify getting a private ruling from the Commissioner. So why IN EVERY CASE I HAVE BEEN ASKED TO LOOK AT has the person who developed the idea not want my client to get a private ruling from the Commissioner? Some have wanted confidentiality agreement so that my client cannot disclose the idea to the Commissioner. I wonder why???

But the battle continues until the highest marginal tax rate gets closer to the company tax rate…

Budget Income Tax Planning Idea Planning Stuff Tax Policy

More Wow!

I was thinking about yesterday’s post and I have a strange thought.

If I have a CGT asset owned by a company I am not going to get the CGT discount. But if I use the rollover from yesterday’s post to move the CGT asset to a trust and sell it the next day I get the discount on the whole gain (the 12 month rule includes the time the company owned the asset under the new rollover).

Now I need to decide if a potential second stamp duty is more than half the tax on the capital gain…

Budget Income Tax Legislation Planning Idea Planning Stuff

Wow! I mean wow!!! Like wow!!!

In the May budget the government promised a new rollover for small businesses that allowed them to change their structure without (federal) tax effects.

The Treasury has released a draft of this rollover and it is amazing.

Listen to this… You can roll small business assets into a new structure if ultimate economic ownership of the assets do not change and for discretionary trusts…

“every individual who, just before or just after the transfer took effect, had ultimate economic ownership of the asset was a member of the family group of that family trust.”

So from 1 July 2016 you will be able to change a small business structure to a discretionary trust if the individual owners of the old structure, looking through the structure, are covered by a family trust election over the new discretionary trust.


This rollover will cover depreciable assets, trading stock, CGT assets and othe revenue assets. It does this by deeming the new entity to have purchased the assets from the current structure at its tax value (cost base, written down value…) rather than market value.

This is only draft legislation At the moment but if this gets up we will be able to change small business structures to a discretionary trust after the business has proven itself to be successful WITHOUT crystalising any capital gains tax! Of course the discretionary trust will have the same cost base for the assets as the previous structure did.

This would mean you could transfer to other structures if you wanted to (other than super funds).

Want an example:

Victoria and Chris are husband and wife and are the only shareholders in Puppy Co the premises, a vehicle, cash, accounts receivable, and goodwill. Victoria and Chris wish to transfer the premises from Puppy Co to a recently settled discretionary trust, the Fluffy Trust, which will lease the premises to Puppy Co. Victoria and Chris, and their family members, are the only objects of the Fluffy Trust, which has made a family trust election. Puppy Co is a small business entity that satisfies the maximum net asset value test, and the premises are an asset of the business carried on by Puppy Co. The Fluffy Trust is not a small business entity in the income year, but it is connected with Puppy Co, and the premises satisfy the test in subsection 152-10(1A). For the purpose of the roll-over, there has not been a change in the ultimate economic ownership of the premises by the transfer of the asset from Puppy Co to the Fluffy Trust. Therefore, assuming that the other requirements are also met, the roll-over would be available in respect of the transfer. The premises are a CGT asset of Puppy Co, which it acquired on 1 July 2002 for $300,000. The current market value of the premises is $600,000. Under the roll-over, Puppy Co is taken to have disposed of the premises for the roll-over cost, and the Fluffy Trust is taken to have acquired the premises for the roll-over cost. This is the amount necessary so that Puppy Co makes neither a capital gain nor a capital loss from the transfer of the premises. Therefore the roll-over cost is $300,000. Following the transfer of the premises from Puppy Co to the Fluffy Trust, the value of Puppy Co has been reduced by the market value of the premises, namely $600,000. The cost base of each of Victoria and Chris’s shares in Puppy Co is reduced by $6,000 to reflect the transfer of value from the trust.