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Updated Discretionary Trust Deed

As most tax advisors know when dealing with a trust the terms of the trust deed are critical.

That is why at BOS Lawyers our trust deeds are regularly updated to take into account changes to the law as well as changes to how revenue authorities and judges interpret the law.

For example, our discretionary trust deed excludes foreign persons from being beneficiaries to avoid unexpected stamp duty or land tax. This deals with recent changes to both the Duties Act and the Land Tax Act. Of course foreign beneficiaries can be included if required.

It is important to consider the issue before the trust is established to ensure the terms of the deed reflect what is wanted.

Our discretionary trust deed also provides for:

  • the trustee to have wide discretion in determining the income of the trust;
  • full streaming of different classes of income and capital gains; and
  • the addition and removal of beneficiaries in a way that will not involve the creation of a new trust.

Please contact Rob Warnock or Patrick Cussen on 1300 267 529 for any queries regarding trusts.

By |July 31st, 2019|News|0 Comments

Business restructuring and share buy-backs

When a shareholder in a company wishes to leave, and the remaining shareholders are happy for this to occur, basically there are two ways the separation can occur:

  • The remaining shareholders can purchase the shares from the departing shareholder; or
  • The company can buy back its shares.

The tax implications for the company, the departing shareholder and the remaining shareholders from these two approaches are very different.

 

Transfer of shares

With a transfer of shares, there is a CGT event for the departing shareholder, and the remaining shareholders must find funds for the purchase.

With the general CGT discount, the effective tax rate for the departing shareholder on the CGT event should not exceed 23.5%.

The major issue in this approach is how the remaining shareholders fund the acquisition.  Ultimately the remaining shareholders will need to fund the acquisition from after-tax funds.

If the shareholders are on the top marginal rate of tax, they will need to generate income of $1.89 to pay each $1 of purchase price.

If the company has retained profits, the remaining shareholders may wish to use the company’s funds for the acquisition of the shares.  After taking account of the imputation credits, a shareholder on the top marginal rate of tax will need $1.37 of dividends to pay each $1 of purchase price.

Where there is a transfer of shares, effectively there is double taxation – tax on a capital gain for the departing shareholder that reflects the departing shareholder’s proportionate share of the retained profits and tax on a dividend received by the remaining shareholders on the distribution of those retained profits.

 

Share buy-back

If the company undertakes a buy-back of shares there will be a CGT event and a deemed dividend for the departing shareholder, and the company will use its funds to undertake the buy-back.

On a share buy-back, that part of the proceeds that does not represent a return of share capital of the company is deemed to be a dividend that can be franked.

If the departing shareholder receives funds by way of share buy-back, the effective tax rate for the departing shareholder should not exceed 26.9%.

The company should need just $1 of its retained profits to fund each $1 of share buy-back proceeds.

 

Other considerations

The rules relating to share buy-backs in the Corporations Act are very prescriptive.  It is important that the share buy-back is carried out in accordance with those rules.

We have acted for a number of clients who have undertaken restructures of companies using share buy-backs.  Please call Patrick Cussen or Rob Warnock to discuss the tax implications of such restructures and Patrick Cussen to discuss the procedures to implement share buy-backs.

By |July 31st, 2019|News|0 Comments

Victorian State Budget – Extra taxes relating to land

The 2019 – 2020 Victorian Sate Budget was handed down on Monday 27 May 2019. It contained some tax ‘nasties’ for land owners. Below is a summary of these additional taxes.

  1. The land transfer duty surcharge on foreign purchasers of residential property will be increased from 7% to 8% for contracts entered into on or after 1 July 2019. Given the broad definition of ‘foreign trust’ great care must be taken when the purchaser of property is a discretionary trust. The terms of the trust deed may need to be amended before the property is purchased to ensure the duty surcharge does not apply.
  2. The land tax absentee owner surcharge will be increased form 1.5% to 2% from the 2020 land tax year.
  3. From 1 July 2019 the duty exemption applying to qualifying transactions of corporate reconstructions will be replaced with a duty rate of 10% of the duty otherwise payable.
  4. The land tax exemption for the principal place of residence will not apply for some properties. From the 2020 land tax year, land in metropolitan Melbourne that is contiguous with a principal place of residence but on a separate title and without a separate residence will no longer be exempt from land tax. This will no doubt lead to titles being consolidated, which in itself will generate more revenue for the state government through the increase of fees payable to the State Revenue Office.

In some good news, from 1 July 2019, a duty concession will be provided to transfers of commercial and industrial properties in regional Victoria. A 10% concession will be provided to for contracts signed from 1 July 2019, increasing by 10% each year to provide a 50% discount from 1 July 2023.

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

By |July 31st, 2019|News|0 Comments

Proposed changes to duty for property developers

Following the recent State budget, the Victorian government has introduced proposed amendments to the Duties Act 2000 that are likely to have a major impact on property developers.

The State Taxation Acts Amendment Bill 2019 contains provisions that operate so that developers will be required to pay duty where they acquire an “economic entitlement” in land in Victoria valued at more than $1 million.

There currently are such provisions where a person acquires an interest of 50% or more in such land.

Under the proposed changes, a person will be assessed to duty as if the person has acquired an interest in underlying property if the person will be directly or indirectly entitled to participate in:

  • the income, rents or profits;
  • the capital growth;
  • the proceeds of sale;

related to the property.

The duty liability also arises if the person is entitled to receive any amount determined by reference to those amounts or to is entitled to acquire any entitlement to any of those amounts.

These provisions may affect you or your clients looking to engage in any arrangement involving the development of property.

Please call Patrick Cussen or Rob Warnock if you want to discuss these proposed changes.

By |July 31st, 2019|News|0 Comments