Dealing with UPE’s by 30 June
Which deeds may need amending by 30 June?
"One of two questions every accountant is asking - right now"
This article:
- examines the four broad types of distributable income mechanisms commonly found within deeds;
- explains how to identify and classify the distributable income mechanisms within a deed;
- identifies circumstances in which each of the four distributable income mechanisms are suitable or circumstances in which they are unsuitable;
- observes that the accountant must have a thorough understanding of the deed’s distributable income mechanisms, the characteristics of trust receipts and the client before considering an amendment to the client’s deed;
- concludes that if an amendment to a deed is desirable that outcome is more likely to reflect the need for a capacity to stream franked dividends and or capital gains than to be justified by the requirements of the accountant’s practice.
The question on every accountant’s mind:
What do I do about trust deeds before 30 June?
Firstly, ensure you have a copy of the deed.
Benchmarking Rejected
Last week a number of the Commissioner’s benchmarks were withdrawn. The reason given was technical issues. All of us suspect the reason offered amounts to “spin”. Too many clients have made similar comments for the Commissioner to be comfortable denying that there is a problem. Client comments have the same common theme:
- too many ATO officers lack understanding of what benchmarks represent;
- not enough ATO officers involved in benchmark audits have adequate training in the use of benchmarks and lack any understanding of their obligations under the Taxpayer's Charter;
- on occasions ATO officers have deceived agents with requests to include a client in a survey but then proceeded to undertake audit activity;
- on at least one occasion an ATO officer, having agreed to a meeting with the client and his agent, at 0830 attended the client’s business at 0805 and had left by 0825 having interviewed the client without the agent being present;
- some ATO officers involved in benchmark audits act in a manner reminiscent of Inspector Cyril Blake from the British Comedy “On the Buses”.
- Gen Y can use Google or Wikipedia for a description of the Inspector's character
On 3 March 2011 the Commissioner delivered a speech at the TIA National Convention in Brisbane (Better information, better service, better support) which he made a number of observations:
- most businesses are within benchmark and generally we have no reason to be dissatisfied with their compliance;
- 46,000 businesses are outside the industry benchmarks;
- 1700 tax agents, or about 5% of tax agents deal with 50% of those outside the industry benchmark.
Maybe the Commissioner should advise his staff that those figures mean the vast majority of tax agents and their clients are doing it correctly. Currently too many tax office staff commence benchmark reviews in an accusatory manner. Satisfaction ratings of 4.2 on a scale of 5 are meaningless given the dissatisfaction on this issue. Why not poll those agents who are not servicing those who fall outside the benchmarks but have had a benchmark review?
Trust Income
Treasury finally released its consultation paper on the future taxation of trust income and left a 14 day consultation period. We have prepared and lodged a submission – seeking simplicity. Our submission reflects the feedback from our clients – make it easy for us. View a copy of our submission here.
Application of s.109RB(1) – honest & reasonable Div 7A mistake
What are the requirements to be satisfied before the Commissioner is empowered to make a decision to:
- disregard the operation of Division 7A?
- allow the dividend taken to have been paid under Division 7A to be franked
Was the accountant engaging in legal practice?
Was the $99,000 deductible as interest expense or was it capital expenditure?
Judge tells ATO that it’s position was not open to it under the law
- Would proposed amendments to a trust deed have the tax consequences contended by the applicant?
- Did any entitlement of a unitholder arise during the same tax year as the income was derived?
- Did the trustee have a discretion to appropriate an amount from particular accounts following end of financial year?
- Was any amount paid on redemption of a unit in excess of the subscription amount:
- part of the income of the trust estate?
- a ‘share’ or ‘proportion’ of the income of the trust ?
- a capital gain to be taken into the calculation of the net income of a beneficiary?
- an amount in respect of which a redeeming unitholder was ‘presently entitled’ on redemption of a unit?
- an amount that forms part of the assessable income of a continuing unitholder?
- Is part of net income which has not been distributed during tax year equal to the share of the distributable income to which the continuing unitholder is entitled?
- Does a unitholder receive a gain upon redemption on the occurrence of a CGT Event C2? Does the interposition of a custodian prevent the responsible entity from being a beneficiary?
- Did the constitution of a managed investment fund empower the trustee to characterise as income that which may not otherwise be so characterized?
- Was the trust a fixed trust? Did each beneficiary have a fixed entitlement?
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Transfers of trust property lose duty exemption under section 56
Was a transfer of land from a discretionary trust to an SMSF exempt from duty under the Duties Act 2006 by virtue of section 56?
Can a person who is no more than the object of a discretionary power of appointment be regarded as a 'beneficiary' for the purposes of section 56?
Federal Court tells Commissioner he misconceives the situation as ATO loses a Div 7A case
Is the imposition of income tax, as at the end of an income year, a 'present legal obligation' for the purposes of calculating the distributable surplus of a company under s109Y(2)?
The Commissioner challenged the Tribunal's conclusion on both of these matters.
Cup Eve announcement! Financial planners exempt from TAS until 1 July 2011
The Government announcement new regulations (the Tax Agent Services Amendment Regulations 2010 (No. 1)) that clarify the coverage of the national tax agent services regime.
Draft Tax Agent regulations exclude financial planners from need to register
Assistant Treasurer released for public consultation the exposure draft of the Tax Agent Services Amendment Regulations 2010, that will, when enacted, exclude certain groups from the operation of the tax agent services regime.
When will the Commissioner consider an unpaid UPE to be a loan?
When will the Commissioner consider an unpaid present entitlement to be a loan by a corporate beneficiary to the trust?
What must be done by June 30?
The questions on the lips of most tax agents are the following:
- what do we need to do by 30 June?
- do we need to get trust deeds amended?
- will our existing unpaid present entitlements to corporate beneficiaries become loans?
- can we keep using bucket companies?
Improvements to RBA’s and Interest on Overpayments
The Government will rewrite the tax law's running balance account provisions to provide the flexibility to manage tax debts and entitlements more efficiently and in a way that is more useful for taxpayers.
Commonwealth Budget 2010-11
The Commonwealth Budget for the financial year 2010-11 was released on 11 May 2010. Key features include:
- Raising the effective tax-free threshold
- 50% discount on up to $1,000 of interest income
- Standard deduction
- Resource Super Profits Tax from 1 July 2012
- Company tax rate cuts
- Instant asset write off for small businesses
- Increasing the super guarantee
- Changes to contributions tax
Australia's Future Tax System Review
The Government released the Australia's Future Tax System Review (the Henry Review) on Sunday 2 May 2010. The Review is available to download on the Treasury website. The Government's initial response is available on the Future Tax website.
Overhaul of Financial Advice
The Government announced reforms to financial advice designed to tackle conflicts of interest that have threatened the quality of financial advice that has been provided to Australian investors, and the mis-selling of financial products that culminated in high profile corporate collapses such as Storm Financial, Opes Prime, and Westpoint.
Minister says Financial Planners do offer what amounts to tax advice
Following consultation with the community and industry across Australia, the Assistant Treasurer, Senator Nick Sherry, has announced further details of the coverage of the tax agent services regime to:
- in-house" advisors;
- custodians; and
- holders of Australian Financial Services licenses (AFSL) providing financial planning services.
High Court in Bamford approves proportionate approach and the primacy of the trust deed in determining income of the trust estate
What is the issue?
What construction is to be given to:
- the expression "that share" in s 97(1) in circumstances where the entitlement of beneficiaries is not to fixed proportions of the income of the trust estate but, as to some beneficiaries, to specific amounts and, as to another beneficiary, to the residue?
- the phrase "that share" in par (a)(i) of s 97(1), which links the preceding identification of present entitlement to "a share" of the income of the trust estate to the defined expression "the net income of the trust estate"?
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The ATO on the impact of UPE's and their treatment
What is the issue?
The draft Ruling identifies when the Commissioner will take a corporate beneficiary with a UPE as having made a loan to a trust.
When is stolen money a deduction?
What is the issue?
Was the money, that the taxpayer transferred to Hong Kong and which was misappropriated, the money that was included in the Taxpayer’s assessable income?
Agreements for management rights of accommodation need reconsideration
What is the issue?
Were any of four categories of supplies, made in relation to the operation of accommodation, taxable supplies:
- South Steyne’s supply of 83 Hotel rooms to the Management entity by way of a lease (the “Grant Category”)?
- South Steyne’s sale of the 83 Hotel rooms to MBI (the “Sale Category”)?
- The sale of the Hotel Rooms to MBI subject to the continuation of the leases of those rooms to the Management entity (the “Continuation Category”)?
- The Management entity’s supply of accommodation in Hotel room 403 to Emily Young as a guest (the “Accommodation Category”).
Special leave in Bamford – Harmony in the High Court
What is the issue?
Special Leave Application granted.
Were the outgoings in relation to a course of study productive of income?
What is the issue?
Were the outgoings incurred in relation to a course of study:
- incurred at a point too soon?
- productive of income?
Capital Allowances: tax break - asset not part of a set
Issue
Are the computer and printer that are used together in the taxpayer's business 'a set of assets' for the purpose of subparagraph 41-10(4)(b)(i) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Capital Allowances: tax break - expenditure in respect of the construction
Issue
Is the capital expenditure incurred by the taxpayer after it has committed to the construction of its assets 'expenditure in respect of the construction' of the assets for the purposes of subsection 41-25(3A) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Legislation to facilitate transition to the New Tax Agent Services Regime passed by Parliament
The Tax Agent Services (Transitional Provisions and Consequential Amendments) Bill contains the provisions that will facilitate a transition from the old to the new regime.
New National Tax Practitioners Board announced
The national board will replace the existing state-based boards from 2010. The board members are Mr Dale Boucher PSM (Chair), Mr Matthew Addison, Ms Cynthia Coleman, Professor Gordon Cooper AM, Mr Roger Cotton, Mr Chris Doogan AM, Mr Michael Evans, Mr George Fox, Ms Miriam Holmes, Professor Dale Pinto & Mr Russell Smith.
The ATO approach to distributions of trust income after Bamford
What is the issue?
What approach will the ATO take to certain trust issues involving Division 6 pending resolution of the Bamford litigation?
The Assistant Treasurer, Senator Nick Sherry, released the post-consultation details of the 2009-10 Budget measure to tighten the non-commercial loan rules.
Exposure Draft Tax Agent Services Regulations Released
The Exposure Draft Regulations and explanatory material outline in detail what will be required from tax agents under the new regime.
Is a partnership an entity for the purposes of the small business CGT concessions?
What is the issue?
Is a partnership an ‘entity’ within the meaning of that term as used in s 152-15(a)(ii) (as it operated during the 2003 year of income?
Interest deductibility on capitalising hybrid or discretionary trusts?
What is the issue?
Is interest on a loan fully deductible under section 8-1 if the borrower settles the on trust to benefit the borrower and others?
Was the SMSF able to retain its status after in house asset breaches?
What is the issue?
Was the SMSF able to retain its status as a regulated after in house asset breaches?
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