DP LOEWY & CO

October 2009 Tax Update

Welcome to the October 2009 tax update, in this issue we will discuss:

• Bamford’s Case
• Super payments for contractors
• Non-commercial loans
• New stamp duty rules
• Unit trusts and super funds
• Special income and super funds

Bamford's Case

There has been a recent tax case relating to trust distributions. Trusts are used for asset protection and to minimize tax. The main point to come from this case is that the Courts have endorsed the importance of the Trust Deed, maintaining that the terms of the
Deed are paramount in determining the distributable income of a Trust. It takes precedence over any general law trust principles or accounting principles.

This case may go to the High Court but this has not yet been confirmed. Where a Trust Deed does not define trust income or uses an accounting definition only, the terms of the Deed should be reviewed to ensure they accord with prudent taxation and accounting practices. Please contact us if you would like assistance in this matter and we will keep you update if this case reaches the High Court as this is an important issue to many clients. Otherwise separate streaming of capital gains and income will not be allowed in distributions
 

Super Payments for Contractors

All businesses must pay super to their employees but one area some businesses may overlook is that they must pay super for their contractors. It is important to read the information below to determine whether superannuation must be paid for the contractors because the ATO is increasing its audit activity in this area and there are significant penalties for unpaid super.

If you pay your contractors under a contract that is wholly or principally for labour, you have to pay super contributions for them. This is even if the contractor quotes an Australian business number (ABN). These contractors are considered your employees for Superannuation guarantee purposes.

Generally, a contract is principally for labour if more than half of the value of the contract is for the person’s labour, which may include:

• physical labour
• mental effort, or
• artistic effort

The following two situations are examples of when the contract is not for labour:

If you make a contract with a company, trust or a partnership, or
If the person you have the contract with is free to hire other people to perform
the work, even if the person ends up performing the work themselves.

The main point to remember is that you may have to pay super for some of your contractors and it must be paid by the 28th day following the end of each quarter to avoid significant penalties.

Non-Commercial Loans

Following the budget there will be measures to prevent private companies from making “payments” to shareholders using company assets such as providing access to holiday homes, cars and other property. These items are then used by shareholders at less than market value and are effectively tax-free distributions which the Government wants to stop by ensuring that shareholders pay market rent for the use of these assets.

The exceptions to this rule are:

If the property is owned by the company and it is used by the shareholders or by another entity owned by the shareholders in conducting a business, there is no requirement to pay any rent at all.

Where a business property owned by a company which is occupied by the shareholders of the private company as their main residence, there is no requirement to pay any rent at all.
 

New Stamp Duty Rules

Before 1 July 2009 when shares were bought in a private company or units bought in a private unit trust, these entities would be considered to be land-rich if 60% or more of its total assets comprised land or interests in land in all places, and $2 million worth of it or more, needed to be in NSW.

Under the new system, if the entity holds land worth $2 million or more in NSW, duty will be payable at the top rate of 5.5% and not 60 cents per $100, it is irrelevant what proportion of the value in the entity is land. The top rate of stamp duty is charged on the unencumbered value of NSW land and plant and equipment. However, stamp duty is not charged for stock on hand.

The new rules may substantially increase the costs in purchasing shares in a company or units in a unit trust because stamp duty is a capital cost. We will be able to assist you with any issues that you may have when acquiring a new business

 

Unit Trusts and Super Funds

No more than 5% of an SMSF’s assets can be held as in-house assets. In ruling SMSFR 2009/4 considers the meaning of “in-house asset” where a super fund is presently entitled to income from a unit trust but does not receive the distribution in cash and reinvests it in the unit trust, there may be a breach of the in-house asset rules where the unpaid distributions constitute a loan or investment. This occurs where the parties enter an arrangement under which the SMSF trustee holds off enforcing the fund’s entitlement to payment of the distributed income.

The unpaid trust distributions amount to a loan to the related party where the circumstances of the non-payment follow from an arrangement for the provision of credit or financial accommodation. The circumstances may include a loan agreement, or any consensual agreement for the provision of credit.

The main important point to remember is that all income must be distributed from the unit trust and should not be reinvested where a super fund is a unit holder in order to avoid breaching in-house asset rules. It is imperative to ensure that there is sufficient cash in the super fund to payout any distributions required.

Special Income and Super Funds

It is important to remember that where an SMSF purchases an asset on terms other than arm’s length terms, the income derived from the asset by the super fund will be taxed at 45%. This eliminates the tax advantages in using an SMSF. Therefore, all investments made by an SMSF must be made on an arm’s length basis to avoid these problems. An arm’s length basis is to ensure all transactions are carried out on commercial terms.

We hope you have enjoyed this article and found it informative and useful. Please contact us if you would like further explanation on any topics discussed in this article.
 

Disclaimer - The material contained in this newsletter does not constitute advice. DPL is not responsible for any action taken in reliance on any information contained in this newsletter. Anyone reading the newsletter should not act upon material contained in this newsletter without appropriate consultation.