Funny Stuff Income Tax

Adam, Eve and Family Trust Elections

In ATOID 2014/3 the Commissioner states that the individual specified in the Family Trust Election must be alive at the time the trustee of the trust makes the election.


He comes to this conclusion after finding the term “individual” is not defined and takes a very loose analysis of the various dictionary definitions. So why is the Commissioner so desperate to conclude the name on a family trust election is a LIVING person???

If you take the biblical view of the world we are all descendant of one man and one women. So if the person on the election could be deceased at the time of the election we should all put Adam or Eve down. Then the family group would cover all of humanity and every entity humanity has ever controlled. The trust loss rules would disappear immediately and distributions could be made to anyone without worrying about Family Trusts Distribution Tax.

I would love to challenge the Commissioners position on whether the person has to be “living” and then whether we are all descendants of “Adam” or “Eve”…

Income Tax Planning Stuff

Injecting income into loss trusts – everyone should be doing it

There is this fear of having losses in discretionary trusts – specifically how do you get them out… The answer is easy. You just inject income into the trust. But what about the income injection test I hear you scream…

First what is the income injection test? It is a test that states that if an outsider injects income into a trust with losses and they only did it as the trust has losses and they will get some benefit in injecting the income, the losses can’t be offset against the injected income.

But who is an “outsider”? If the trust has a family trust election over it then outsiders are anyone NOT covered by the FTE. So if uncle Bob has a business he can just inject his income into the trust and you can give Bob whatever benefit you like… No problems at all.

As long as someone in your “family” is making money then you can get to the losses…

Income Tax Legislation

Net Medical Expense Offset Gone… kind of

The Government has released some draft legislation and explanatory materials to phase-out the net medical expenses tax offset ( I love the way they call it a phase out when the vast majority of people lost all eligibility on 1 July 2013. SO this is their idea of a phase out…


First, “From the 2013-14 income year until the end of the 2018-19 income year taxpayers can only claim the NMETO for medical expenses that both meet the current definition and eligibility requirements and relate to disability aids, attendant care or aged care.” the reason for 2018/19 is that the National Disability Insurance scheme will be fully operational. NOT LIKELY. Julia Gillard still claims she started this scheme, a scheme which will cost between $8-14 billion a year in todays terms when fully operational but she could only find $1 billion over 4 years in her last budget. Yes it would be wonderful to have but to achieve it we only need to halve or defence spend every year, or tax everyone on the gains on their houses… Never going to happen.

Second, and the one you care more about is that “For the 2013-14 income year and 2014-15 income year, taxpayers will be eligible to claim the full range of medical expenses (as defined currently) but only if they have received an amount of the NMETO in the previous income year (or in both 2012-13 and 2013-14 in respect to claims in the 2014-15 income year).” So when you prepare my 2012/13 return in May next year, even if I can only get to $2,121 of unreimbursed medical expenses, saving me a mere 20 cents in tax, make sure I make the claim for the net medical expense tax offset, as who knows what my unreimbursed expenses might be in the 2013/14 year.

Income Tax Rulings

Another problem with marriage breakdowns

When a family court order as a part of a marriage breakdown requires assets held in a family company to be transferred there is no CGT payable due to the 126A rollover.

BUT if the receiving spouse is a shareholder the Commissioner says it is a dividend and taxed under section 44 of the ITAA36. And even if the spouse is not a shareholder but is an associate of a shareholder it is a Division 7A loan.

So you are looking at 46.5% tax and no cash to pay it… But why not frank it I hear you say… Try this…

My ex-wife comes into your office and says she received substantial assets out of our family company as a part of a marriage settlement under a family court order. You explain this is a deemed dividend but you can reduce the tax payable by 30% by franking the dividend.

HOW DO YOU FRANK THE DIVIDEND? You call me up and ask me, as the director of the family company, to agree to frank the dividend… Agree to give up franking credits to my ex wife who left me for some McDreamy doctor – Not likely.

So the answer is either don’t get divorced or don’t have assets transferred out of the family company under a family court order.

Funny Stuff Income Tax Legislation

One year of carry back losses…

If you are completing a company tax return for the year ended 30 June 2013, you may have made your first ever claim for the refundable tax offset that the carry back loss rules created. Enjoy claiming this offset while you can, as the 2012/13 year will be the last year it is available. This offset will be repealed from 1 July 2013 and so it will not be available for the 2013/14 year. So stick it up on your wall so you can remember the fun you had in making that one claim.

Income Tax Tax Policy

Another ridiculous tax policy… supported by every side

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When there is change in government you hope they can dump all the stupid ideas of the previous government. But with the new government still needing to find savings stupid ideas seem not so stupid.

In the May 2013 Budget the Labor (one day they might learn how to spell their party’s name) stead they would introduce a withholding tax arrangement where non-residents sell certain properties and make a capital gain from 1 July 2016. So if you buy, yes buy, not sell, a commercial property or a residential premise valued at greater than $2.5 million, you need to establish if the seller is a non resident for tax. For if they are you only give them 90% of the price and send 10% to the Commissioner.

About once a month the AAT is called on to decide if a taxpayer is a resident or not. And now that job falls on property purchasers. Ridiculous.

Of course everyone says that you just put it in the contract. But this won’t work. The reason the law is being introduced is that these non residents take the money and run without paying tax. So now they just claim in the contract they are residents and tax the money and run.

And then the Commissioner come to the buyer and says where is the cash… This will only just penalise buyers…

Well done policy wonks… one day you might actually be involved in a real commercial transaction.

Income Tax Planning Stuff

Moving from cash to accruals

Since the Henderson Case it has been clear that there is only one appropriate way to return income for a year – either cash or accruals. TR 98/1 covers which one is correct for each year.

But what happens to your debtors when in year one you were correctly on cash and in year two you will correctly be on accruals? This is exactly what Henderson covered as it concluded the $170k of debtor just never got taxed. The court Correctly concluded there is nothing in the Tax Acts to pick this income up…

And this is obvious as when the old STS optional cash method was available there were specific rules to make sure debtors were picked up.

So as long as you are not forcing the change from cash to accruals to avoid tax (see Part IVA and Commercial Union) or looking to increase the debtors on 30 June to take a larger gain (Part IVA), it appear the debtors just never get taxed.


Income Tax Part IVA Planning Stuff Rulings

Part IVA and partnerships of discretionary trusts

The most annoying habit of the Commissioner is to let everyone do something for years and then to finally try to close it down. Take the Commissioner’s announcement on 16 December 2009 that an unpaid present entitlement from a trust to a corporate beneficiary is a loan to which Division 7A applies. So 12 years of saying every trust should have a corporate beneficiary and 12 years of auditing these structures saying nothing is overturned overnight… Well it is about to happen again I fear…

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Thirty years ago, every accounting and legal partnership was a partnership of individuals. But this has changed to the point where the most common structure today is a partnership of discretionary trust rather than individuals. Actually these partnerships of discretionary trusts are becoming old hat as everyone moves to a company where the shareholders are discretionary trusts.

But in Taxpayer Alert TA 2013/3, the Commissioner raises concerns about the restructure from a partnership of individuals to a partnership of discretionary trusts. He does his norm “sham” argument but it is obvious he thinks these restructures may be schemes to which Part IVA might apply. The Commissioner states that professional practices may operate as a partnership of discretionary trusts, but may not be used for the to avoid tax obligation through income splitting.

This is only a Taxpayer Alert. And the Commissioner is very clear he is only considering tax benefits arising in the 2013/14 and later income years. So if you undertook a restructure like this before 1 July 2013 it appears it is safe.

But it starts to look like December 2009…

Income Tax Part IVA Planning Stuff

Part IVA applies to small businesses

I don’t get that so many small business advisors think Part IVA can not apply to their clients. Yes it does not happen often but if it does your business is on the line. And here is where it is most likely to apply…

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You just read my post below and want to inject income into a loss trust. So a professional working though a company that has multiple clients, business premises, works for results and employs a second staff member (a PSB 100% sure) decides to inject income into a loss trust. To do this the company makes the trust its manager and pays the trust a management fee. This management fee would have been paid out to the professional otherwise as a salary but now it goes into the trust to use up the losses.

The Commissioner has made it clear that alienating personal services income, even if you managed to avoid the PSI rules as your are a personal services business, can still be subject to Part IVA (see NAT8028 factsheet). Sending the personal service income to a trust with losses so that no tax is payable is more likely to be subject to Part IVA than just leaving it in the company to be taxed at 30% as this fact sheet states. The scheme has one extra step (not leaving it in the company but paying to the trust as a management fee) and the tax benefit is larger (not paying 30% tax on the income but paying no tax on it at all.

If you advice ignores that the Commissioner has already got a position on Part IVA and personal services income in entities, you are not giving good advice.

I should mention that my former boss at KPMG, Chris Jordan, is more likely to go after the big end of town rather than the small end… but is that an excuse for bad advice?

Article Income Tax

Solar panels and tax – How many people have this wrong???

0010IP_Blue_Journal_Aug (Mansell)

By the way, after writing this article I found that I had been placed on the world’s largest “climate denial” database. Now I new thought a tax article could make me politically incorrect?