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So far Rob Warnock has created 10 blog entries.

ATO Attack on Rental Property Expense Claims

We have recently helped a number of taxpayers who have had their rental property deduction claims queried, and often disallowed, by the ATO.

The property is usually in a ‘holiday town’ and is advertised as being available for rent all year but is also occasionally used by the taxpayer and their family to stay in. The taxpayer’s use is usually only a couple of weeks each year.

The ATO argues that the taxpayer is only allowed to claim deductions for interest etc. up to an amount equal to the actual income derived. So if the property is actually only rented out for 6 weeks and derives rent of $3,000 then the ATO says the taxpayer is only allowed to claim deductions of $3,000. This is despite the fact that the property was available for rent for 50 weeks of the year (the taxpayer staying in it the other two weeks).

The ATO argues that the property was not genuinely available for rent even though it has been advertised on the internet and listed with a real estate agent. The ATO tends to rely on very old Board of Review and Administrative Appeals Tribunal cases that have different facts to support its view. But other, more recent cases, indicate that provided the property is available for rent (e.g. listed with a real estate agent for rental) then the expenses incurred can be claimed for that period as well as for the period the property was actually rented out.

We believe the ATO is taking too harsher stance in these circumstances. The cases the ATO relies on arose in the pre-internet era. We reject the ATO’s view that advertising a property on the internet is not sufficient for the property to be genuinely available for rent. Hopefully there will be a test case in the near future.

 

If you or your clients need help in challenging the ATO’s disallowance of expenses, or in responding to the ATO’s position paper, please contact Rob Warnock or Patrick Cussen on 1300 267 529.

 

Below is a link to the ATO’s website page ‘Focus on holiday home rentals’

https://www.ato.gov.au/media-centre/focus-on-holiday-home-rentals/

 

By |June 6th, 2018|Uncategorised|0 Comments

Changes to Small Business CGT Concessions

A bill containing changes to the Small Business CGT Concessions (‘SBC’) has now been introduced into Parliament. It is Treasury Laws Amendment (Tax Integrity and Other Measures) Bill 2018 (Cth) (‘the Bill’). According to the Bill, when passed, the changes will apply in relation to CGT events happening on or after 1 July 2017. That is, the changes are retrospective.

The first thing to note is that the changes only apply where the asset being sold, or in respect of which the CGT event happens, is a share in a company or an interest in a trust (e.g. a unit in a unit trust). If the CGT event happens in relation to some other type of asset the changes do not apply.

The changes were introduced to stop taxpayers accessing the SBC in certain unintended circumstances. Below you will find examples demonstrating the operation of these changes.

 

Example 1:

Bob owns 20% of the shares in Bigit Pty Ltd, a private company that develops and sells special IT systems to banks. The company’s market value is $50,000,000 and so Bob’s shares are worth $10,000,000. Bob does not work in Bigit Pty Ltd, he simply invested in it when a few friends started it up and has seen his investment grow. If Bob sells his shares he will make a very large capital gain. He would not be entitled to the SBC as he would not be able to satisfy the basic conditions.

 

Example 2:

Bob is an accountant employed at a mid-sized accounting firm. Bob decides he wants to run his own practice and, so, buys a small accounting practice which has an annual turnover of $300,000. 8 months later Bob sells his shares in Bigit Pty Ltd and makes a $10,000,000 capital gain. Under the current rules Bob can now apply the SBC to this gain. Bob is a small business entity under section 152-10(1)(c)(i) of the Income Tax Assessment Act 1997 (Cth) (‘the ITA Act’). The shares satisfy the active asset test because at all times the 80% test in section 152-40(3) of the ITA Act was satisfied. Bob is a CGT concession stakeholder in Bigit Pty Ltd and so the additional basic condition in section 152-10(2) of the ITA Act is satisfied.

 

Under the changes in the Bill, section 152-10(2) of the ITA Act is being replaced so that where shares or units are sold additional conditions must be satisfied before the taxpayer can access the SBC. In addition to the current requirements the following applies:

  • a modified active asset test must be satisfied;
  • if the taxpayer does not satisfy the maximum net asset value test then the taxpayer must be carrying on a business just before the CGT event; and
  • the object entity (i.e. the company or unit trust in which the taxpayer owns shares or units) must also satisfy a modified MNAV test or small business entity test.

Thus, in the above example, as Bigit Pty Ltd is not a small business entity and cannot satisfy the MNAV test, Bob will not be eligible to apply the SBC to the gain made on the sale of his shares.

 

Unfortunately the changes will deny some taxpayers from applying the SBC in circumstances in which arguably they should be allowed to apply them. For example, where a shareholder owns 25% of the shares in a company that has a net value of $10,000,000 and a turnover of $3,000,000, and that shareholder wishes to sell their shares.

So, if a taxpayer now wishes to sell shares in a company or an interest in a trust and apply the SBC, the proposed changes must be carefully worked through to see if the new additional conditions can be satisfied.

 

Should you require assistance or advice regarding these proposed changes, please contact Rob Warnock or Patrick Cussen.

By |May 24th, 2018|Uncategorised|0 Comments

Landholder Duty and Death

Where a private company or unit trust owns real estate with a value of $1 million or more then duty may be payable when there is a change in shareholding or unit holding. If duty applies it will be chargeable at the rates applicable to land transfers.

Duty will be chargeable where the acquisition of shares or units amounts to a ‘relevant acquisition’. In general terms, where the acquirer owns 50% or more of the ordinary shares in the company after the acquisition (20% for unit trusts) then the acquisition will likely be subject to duty.

The provisions can also apply where a shareholder or unit holder dies and as a result their shares or units pass to a beneficiary. Although an exemption from duty can apply a Landholder Acquisition Statement must still be completed and lodged with the State Revenue Office within 30 days of the relevant acquisition occurring. An application for exemption from duty should also be made.

The landholder duty provisions are complex. Whenever there is a change in the shareholding of a company or unit holding of a unit trust they must be considered, including where a change occurs due to death. We can help clients lodge the correct forms and apply for an exemption from duty. If you require assistance with this please contact Rob Warnock.

By |December 13th, 2017|Uncategorised|0 Comments

ATO ruling says penalty tax may be payable on holiday homes owned by trusts

According to the recently released TD 2017/20 a family trust that owns a holiday home will be liable to pay family trust distribution tax (FTDT) at 47% where friends of the family stay in the holiday home.

 

How can this arise you may ask?

A trust may make a family trust election (FTE) for a number of different reasons including:

  • to assist it in claiming prior year losses and debt deductions;
  • to allow beneficiaries to claim franking credits on franked dividends distributed to them; and
  • to help pass the no change in underlying economic ownership requirement in the new small business restructure roll-over relief.

If a trust has made a FTE then any ‘distribution’ of income or capital to a person who is not a member of the primary individual’s family group will be subject to FTDT.

 

What constitutes a distribution?

The definition of distribution to a person is expanded in section 272-60 and includes paying or crediting money to the person, transferring property to them, allowing the person to use the trust’s property and releasing or forgiving a debt owed by the person to the trust.

Prior to issuing TD 2017/20 the ATO essentially took the view that FTDT was only payable where a distribution was made to a person who was a ‘beneficiary’ of the trust but was not a member of the primary individual’s family group. It did not, however, apply to persons who were not beneficiaries. For example, where a trust writes-off a trade debt owed by a person who is not a beneficiary of the trust – refer ATO ID 2012/12 (now withdrawn).

The ATO has now changed its view. In TD 2017/12 it says that a person who is not a beneficiary of the trust is capable of receiving a distribution for the purposes of section 272-60 and the trust losses rules.

According to the ATO where a person who is not a beneficiary receives a benefit from a transaction of the kind described in section 272-60(1) that benefit is a distribution to the extent that its amount exceeds the amount or value of any consideration given in return (refer section 272-60(2)). For example, where a family trust allows friends of the family to stay for free in a holiday house owned by the trust.

 

The business exemption

Fortunately, where the trust carries on a business and the relevant transaction occurs on arm’s length terms and is an ordinary incident of the business the ATO will infer that the amount of the benefit does not exceed the amount of consideration given in return. As a result no FTDT is payable. This would apply to benefits given to employees, gifts to suppliers as well as discounts provided to customers.

But if the trust is not carrying on a business and is just an investment trust then this is where the ATO’s change of view will catch unwary taxpayers. The ATO provides the following example in TD 2017/12.

 

Example 2 – use of holiday home, not an incident of a business

The Wonder Family Trust has made an FTE and Diana Prince is the specified individual. The trust owns a holiday home. The holiday home is used by Diana’s friends, for no consideration, for four weeks in the year.

This transaction is not on arm’s length terms nor an ordinary incident of a business being carried on by the trust. As no consideration is given in return for the use of the property, the full value of that use is a distribution within the extended meaning of ‘distributes’.

As a result the trust must pay FTDT on the value of the use which presumably will be the amount the trust would have received if Diana’s friends had paid an arm’s length rent.

 

As a result of the issue of TD 2017/12 advisors need to take extra care where a trust has made a FTE. If you believe this information may impact your clients, it would be prudent to seek advice. Please contact Rob Warnock if you require advice.

By |December 13th, 2017|Uncategorised|0 Comments