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So far Patrick Cussen has created 6 blog entries.

Acquiring Interests in Property Worth More than $750,000? Get a Tax Clearance Certificate

Last year the Government introduced the Foreign Resident Capital Gains Tax Withholding measures.

These measures were framed so that from 1 July 2016, a person acquiring interests in:

  • Land, or
  • Interests in a company or trust that owns land,

valued at $2 million or more from a non-resident needed to pay tax equal to 10% of the value of the land or the interests in the company or trust to the ATO.

In the Budget on 9 May 2017, the Government changed the rules to reduce the threshold at which tax would need to be withheld from $2,000,000 to $750,000. The Government also increased the rate of withholding to 12.5%.

The Government announced that these changes will come into effect on 1 July 2017.

The Government has introduced the Treasury Laws Amendment (Foreign Resident Capital Gains Withholding Payments) Bill 2017 (Bill) to give effect to these changes. The Bill has been referred to a Senate committee that is due to report by 13 June 2017.

The practical effect of the changes is that if someone is acquiring:

  • Land, or
  • Interests in a company or trust that owns land,

valued at $750,000 or more after 30 June 2017, the transferor will need to obtain a tax clearance certificate from the ATO to provide to the transferee at settlement.

Unless there is such a certificate, the purchaser will need to withhold 12.5% of the value of the property or interest in the company or trust and remit it to the ATO.

Given the much smaller threshold amount, the number of transactions affected has expanded enormously. On 20 April 2017, the ABC reported that the median house price in Melbourne in the first quarter of 2017 was $826,000. Therefore, these measures will apply to more than 50% of house sales in Melbourne.

It is important to remember that these rules apply when a person acquires interests in a company or trust that owns real property. As no transfer of land is prepared in these cases, the purchaser’s obligations to pay tax to the ATO unless there is a tax clearance certificate may be overlooked.

These rules also can apply even if no consideration changes hands (for example, if there is a transfer between related parties).

If a purchaser fails to withhold the amount from a payment to the vendor, the purchaser may end up paying the full purchase price to the vendor and then find they also must pay an amount equal to 12.5% of the value of the property to the ATO. The purchaser then would need to try and recover that amount from the vendor (and may have difficulty doing that).

If you require advice on these changes please contact Patrick Cussen.

By |June 9th, 2017|Uncategorised|0 Comments

Shareholder Agreements – Who Needs Them?

The answer is: “Any private company with more than one shareholder”.

Suppose you are a minority shareholder in a company and the company is being run in a way that does not take account of your interests.
Or suppose you and another person are equal shareholders in a company but the other shareholder is not contributing as much as you are.

What do you do?

You refer to the Shareholders Agreement of course. But wait – you haven’t got one. That was something you always intended to deal with but you never got around to it. You wouldn’t get into a car you knew had faulty steering and no brakes. Investing in a private company without a well-drafted shareholders’ agreement is like getting into an unroadworthy car. You may reach your destination of financial success. But you are taking a real risk. You may end up having a very unpleasant and costly experience. We often are consulted after the event by a shareholder in a private company seeking help to resolve a problem with the management of the company. Similar issues arise for a business conducted as a partnership or joint venture or through a unit trust. So often people go into business with friends or family, but the relationship breaks down because they are unable to resolve a dispute. A properly drafted agreement may prevent issues arising as the existence of the agreement often encourages the parties to act fairly. Even if the agreement does not stop an issue arising, it provides a means of resolving a dispute and protecting your interests. Without a suitable agreement, the options can end up being very expensive or very unfair. For a relatively modest sum outlaid at the start of a business venture, people may save themselves from large losses and enormous disappointment and stress.

Contact Patrick Cussen or Nicole Wilson if you are a shareholder in a private company and wish to discuss the creation of a shareholders’ agreement or you have a problem and you need a creative solution.

By |March 8th, 2017|Uncategorised|0 Comments

Have you got a 7-year itch?  

Restructuring trusts with capital demands

The distributions of trust income that must be made in June this year will be the 7th distribution since the ATO changed its interpretation of Division 7A and its application to distributions by trusts to companies.  It is an opportune time to consider whether using a trust to hold assets is always the best approach.

Trusts that need working capital or that have large borrowings may benefit from lower tax costs if they restructure.  

Division 7A of Part III of the Income Tax Assessment Act 1936 operates to deem certain loans and payments by private companies as dividends.

If a private company has retained profits and makes a loan to a shareholder or an associate of a shareholder, the loan is treated as a dividend unless there is a written loan agreement that has:

  • a minimum interest rate,
  • a maximum term of 7 years (25 years for some loans secured by a mortgage over real property), and
  • a minimum yearly repayment each year.

To make matters worse, a loan deemed to be a dividend under Division 7A cannot be franked.

Prior to December 2009, the practice of a trust distributing income to a corporate beneficiary had obvious attractions – essentially the trust was able to access the company tax rate of 30% on income, but retained the benefit of a more concessional basis for taxing capital gains.

In December 2009 the ATO announced a change in its interpretation of Division 7A.  From December 2009, a trustee of a trust that made a distribution of income to a company must physically distribute the income to the company or the company will be treated as making a loan to the trust of an amount equal to the amount of the distribution.  

Therefore, trusts distributing income to companies now usually put Division 7A complying loan agreements in place.  It is now fairly common to see financial statements for companies and trusts that have a “pre-December 2009” entitlement and a series of loans for each of the years after that.

If a trust distributes income to a company each year, Division 7A operates so that the trust must obtain the funds to repay these loans from a source other than the company.  Generally this means that the trust will need to obtain the funds from individual beneficiaries who have paid tax at high marginal rates of tax.  

Therefore, although the practice of a trust distributing income to a corporate beneficiary appears attractive on its face, ultimately it only operates to defer the payment of high marginal rates of tax.

By the time a trust and company have used this approach for 7 years, there generally is no further deferral available.  

Trusts that rely on distributing income to companies but retaining the income to use as working capital or to repay debt, may now be using funds that have been taxed at the top marginal rate of 49% to do so.   

If a trust owns a growing business that has an ever increasing need for working capital, this can be a major problem.  Likewise, there can be a problem if a trust must repay money borrowed to acquire an income producing asset.  It can be galling to have to fund working capital or loan principal payments from income that has been taxed at a 49% tax rate.

For such trusts there may be merit in restructuring the business or the ownership of the asset so that the working capital or loan principal amounts are funded from amounts that have been taxed at the 30% company tax rate.  

If this is an issue for you, contact Patrick Cussen or Rob Warnock to organise a time to discuss possible restructuring opportunities.

By |May 31st, 2016|Uncategorised|0 Comments

Life interests and CGT

Are you risking the small business CGT concessions?

Many people when drafting wills want to make provision for one person (usually a spouse) for the term of that person’s life.  This is frequently achieved through the creation of life interests.

Life interests can raise a host of tax problems.

The use of life interests in estates raises serious tax issues if the beneficiaries of the estate wish to wind up the estate and pay out the life interest holder.

We recently encountered a different problem with a life interest involving the operation of the small business CGT concessions.

We were asked to provide advice to the executors of an estate where the major asset of the estate was a farming property.  The deceased had made provision under his will for his wife to have a life interest with the balance of his estate to be shared equally between their children.

When the family looked to sell the property they were disappointed to hear that although the family had been actively operating the farm for over 30 years, the sale did not qualify for the small business 15-year concession or the small business retirement concession.  Because the life interest holder was entitled to 100% of the income but had no entitlement to capital, there was no “significant individual” in relation to the estate.

There are a range of ways in which this result could have been avoided.  For example, the use of a testamentary trust with broad powers to distribute income and capital combined with a personal right to occupy the farm house for as long as the widow wished to do so, would have provided the widow with protection but also should have allowed the estate to sell the farm and claim these CGT concessions.  

Although the issue for our client related to a farming property, the same issue can arise with any type of business asset if a person creates a life interest under a will.

These are issues that can easily be avoided with a more appropriate estate plan.

Bernie O’Sullivan, Rob Warnock, Patrick Cussen and Thalia Dardamanis can assist you with tax effective estate planning.

By |May 31st, 2016|Uncategorised|0 Comments