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…

FBT Planning Idea Tax Policy

Another go at closing salary packaged cars

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One of the arguments presented by the salary packaging companies (please note these are companies that only exist due to the combination of a tax loophole and tricky marketing – is that removing the statutory method for calculating car fringe benefits would hurt the local car manufacturers. But by 2017 there will be no local car manufactures (Toyota will go to). So can we just kill this concession. In 1986 when the statutory method was introduced 87% of new cars were made in Australia. Now it is 15% and by 2017 it will be 0%. It is time to get rid of this $1 billion a year car support anomaly.

Cases GST Planning Idea

Another Federal Court versus High Court GST battle in the making…

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Once again the Federal Court has found a new way to look at the most fundamental definition in the GST Act – a “supply”.

In the MBI Case the Federal Court found that Division 135 did not apply. Division 135 stops this idea…

I am buying your warehouse (commercial real property so GST applies) but i am going to turn it into loft apartments I am going to rent out (input taxed supply of residential premises). As such, I will not be able to claim back the GST you charge me… But what if we argue the supply you make to me is a GST free going concern. Now you don’t have to charge me GST.

Division 135 states that if I buy something as a going concern and use it making input taxed supplies, exactly like the above, an increasing adjustment arises.

In MBI the taxpayer purchased a unit in a serviced apartment as a going concern and, just like the vendor, leased it to a management company to lease it out to the public. Sounds like Division 135 will apply.

But not according to the Full Federal Court. They accepted (aka “fell for”) the taxpayer’s argument that the supply made by the vendor under the going concern was a “granting” of a lease, not the lease itself. This supply of “granting” a lease was never used by the purchaser in an input taxed way, so Division 135 did not apply.

So the supply was defined form a literal rather than a practical perspective and led to a ridiculous outcome.

But remember the Federal Court also found that there was no supply by Qantas when people did not turn up for their flight… A decision laughed off by the High Court who took a practical rather than a literal view of what is a supply.

And remember the Federal Court also found that there was no supply on a forfeited deposit in Reliance Carpets… A decision laughed off by the High Court who took a practical rather than a literal view of what is a supply.

No points for guessing what the High Court will do.

Maybe the Federal Court might one day accept it is the Federal Court and not the High Court, read the Constitution (i can’t talk as I failed Constitutional Law) and start making GST decisions that the High Court does not need to overturn. I can only hope…

Planning Stuff Rulings Super

Reserving strategies work…

In a new Taxation Determination (TD 2013/22) the Commissioner gives a green light to reserving strategies to avoid excess contributions. He states that if a fund receives contributions in year 1 but allocates it to a member in year 2, it is a concessional contribution in year 2.


So hopefully the funds deed allows for suspense accounts or unallocated contribution accounts as if it does not this is of no help.

However, given that there is no such thing as excess contribution tax from 1 july 2013 (now the excess is refunded to the taxpayer after being taxed at marginal rates) this appear to be pretty useless.

The only thought I have is if you have income to claim super deductions in year one but will not in year two you could put $50k away in year one, allocate $25k in year one (the other $25k in a suspense account) and then allocate the suspense account amount in year two. This way you get the deduction in year one for the $50k… Although the determination says nothing about deductions – this is just Ken’s Ramblings…

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…

FBT Planning Stuff Tax Policy

The post the salary packagers do not wanted you to see…

Go to any salary packager’s website and they will have a calculator. After you complete or the details the calculator will tell you how much you will save in tax by salary packaging a car. THIS NUMBER IS ABSOLUTELY RUBBISH. I don’t mean the calculation is wrong in any way at all. What I mean is that the calculator compares apples and oranges to get the tax saving.

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What these calculators do is compare the after tax outcome of leasing the car in your own name with leasing the car under a salary packaging arrangement. The tax saving is right based on this comparison. BUT NOBOBY LEASES A CAR IN THEIR OWN NAME SO THE COMPARISON IS WORTHLESS. Outside of salary packaging, almost everyone who wants a car buys it with either cash they have saved or by using the equity in their home. The interest rate on cash you already have is 0%, but lets call it 3% as you could have invested it in a very secure investment. Your home loan interest rates is about 5-6% and does not look like moving much for some time.

The implicit interest rates in leases for cars are from 8-11%.

So if you were to do a real comparison it would be comparing salary packaging a leased car with using the equity in your home. There may be a tax saving between leasing you car in your own name and salary packaging it BUT that tax saving will be reduced by the extra funding costs of the interest rate in the lease when compared to the interest rate on your home loan.

Don’t compare leasing under salary packaging with leasing in own name. Compare leasing under salary packaging with borrowing from your bank using the equity on your home loan. And I dare you to ask the packaging companies to do this calculation for you… And watch them sweat…

FBT Planning Stuff

Even crazier (and legal) salary packaging ideas

In the National Tax Liaison Group FBT Subcommittee (yes I have sat on this committee and it is full of FBT nerds…) in November 2005 the Commissioner confrimed that, as an employer can provide a benefit to an employee for their long service valued at $1,000 after 15 years, increasing by $100 every year after that, and there is no FBT payable, an employee could ask their employer to package a long service award in their 15th year worth $1,000, then another $100 in the 16th year, then another $100 in the 17th year, and so on.

Just remember the benefit truly needs to be in recognition of long service and available to all employees so have a policy in place that allows this.

FBT Planning Stuff

Crazy (but legal) salary packaging options…

An expense fringe benefit arises when an expense is reimbursed, irrespective of when the employee incurred the expense that is reimbursed. So if you forgot to salary package an expense that it would have been beneficial to salary package then just get it reimbursed today and the benefit arises.

First a silly example… For ten years you purchase the Australian Financial Review online for $770 each year ($70 GST). Why not reduce your salary by $7,000 ($700×10 year), get the $7,700 reimbursed and have the employer recover the $70 of GST for each year ($700). You just have to track down the tax invoices and you will get $700 for it…

And now the real example… A taxpayer was asked to relocate to another city for work. They sold their house in the previous location and bought a new house in the new location. The real estate agent charged $9,000 and the stamp duty was $35,000. And it all happened a couple of year ago. This year the employee salary packages $44,000 and get these costs (exempt from FBT under section 58C of the FBTAA86) reimbursed. If you are on the highest marginal rate that is a tax saving of over $21,000. Nice!

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?