Division 152 concessions and superannuation contributions

Given the number of changes to the small business concessions since their introduction back in 1997, it is understandable that many clients and their advisers lose track of the exact way in which the provisions work.

Last week, we were reminded when assisting another adviser about one critical aspect of the rules, namely that in many instances it is possible for taxpayers to delay a decision on whether to roll a capital gain over into a new asset, pay the tax, or make a contribution into superannuation for at least two years after the date of sale.  Indeed in many cases the deferral opportunity is closer to three years.

Obviously (as with most aspects of the small business concessions), care needs to be taken to ensure this planning opportunity is in fact available, however assuming the basic conditions are otherwise satisfied, the additional two to three year window is one that we are seeing regularly accessed.

Until next week. 

Image credit: Ken Teegardin cc

Gift and loan back arrangements - some frequently asked questions

Recent posts have looked at various aspects of the 'gift and loan back' strategy (see http://mwbmcr.blogspot.com.ar/2014/03/leading-gift-and-loan-back-case.html and http://mwbmcr.blogspot.com/2014/04/subdivision-ea-giftloan-back.html) 

While there are a myriad of potential issues that always need to be considered, some of the key aspects include:

1. care should always be taken to ensure that the trust which will make the secured loan does not itself conduct risky activities (for example, run a business). 
2. while the arrangement can be entered into without registering a mortgage, if this step is not taken, the trust that has made the loan will simply be an unsecured creditor. 
3. the impact of the arrangement in relation to potentially accessing the small business tax concessions should always be carefully considered, because while a family home will generally be excluded from the $6 million test, a secured loan will generally be included if the trust is an affiliate or ‘connected entity’ under the Tax Act (which will typically be the case). 
4. to the extent that a third party financier already has a mortgage over the property, they will generally require a deed of priority securing their lendings (to whatever level they may be from time to time) as a first priority before the trust's second mortgage. 
5. As flagged in previous posts (http://mwbmcr.blogspot.com/2013/10/one-remedy-where-trust-distributions.html) if no real property is available for registering security over, personal property can be used via the Personal Property Security Register. 

Until next week.

Image credit: Alexander Henning Drachmann via Flickr

What are the main advantages and disadvantages of using a partnership of discretionary trusts for a professional practice?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘What are the main advantages and disadvantages of using a partnership of discretionary trusts for a professional practice?’ at the following link - http://youtu.be/AzNQv_QLMd4

As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –

I'll start with the advantages and there are many.  Probably the biggest one is the access to the small business concessions moving forward.  Again as we've touched on in other parts of today’s program, the ability for a partnership of trusts for each individual partner to gain access to the small business concessions is one that just simply cannot be ignored. 

Obviously, discretionary trusts are the vehicle of choice by and large for most small to medium sized businesses these days.  So the ability to combine both the small business concession access with individual autonomy and flexibility on income tax planning is very attractive. 

The other issue I guess with a partnership of discretionary trusts is that it's relatively simple to explain and understand.  This point is often in the eye of the beholder and we'll talk in a moment about some of the disadvantages and how this same advantage can in fact be a disadvantage, particularly in larger practices.  This issue can often be managed by making sure that the one company is trustee for all trusts in the group, and also perhaps acting as a nominee to the outside world, so that as far as clients are concerned, they are in fact only dealing with one entity, being the corporate trustee of a number of different trusts. 

I guess the final point to make however in relation to the advantages is that the ability to limit liability to the actual interest in the practice is solely dependent on the actual trust making sure that it only owns one asset, being it’s interest in the partnership.  So in other words, the attraction of perhaps having different assets inside that one structure very much diminishes the ability to limit liability in relation to issues that might arise. 

The disadvantages are probably not dissimilar to the advantages, just looking at things from the other side of the fence obviously.  I touched on in the advantages that the ability to have a number of partners in partnership via the trust structure can be an advantage.  Obviously, it can be a disadvantage as well, and particularly as partnerships get bigger, the concept of having countless discretionary trusts involved can administratively be quite prohibitive.  Now   argument would be that as long as you have the same corporate trustee across the group, that can be attractive. 

This of itself creates further issues, particularly from a control perspective, because you then need to have the individual trusts looking very carefully at issues such as the appointorship, to make sure that if there is disharmony within the partnership that there's an exit mechanism, via the trusts, for each of the individual partners. 

Conceptually also, while the attraction of the small business concessions is very strong, you are not getting away from the stamp duty costs.  So in other words, if an individual trust decides to dispose of its partnership interest, it will still very much be exposed to all of the normal stamp duty costs at an ad valorem rate, on the full unencumbered value of interest in the partnership. 

The last point, and this is in direct contrast to what the situation is for companies, is that you do not really have a corporate model.  So all of the normal advantages that you associate with incorporation, such as employee share arrangements, become very difficult indeed to achieve, because you've got this disparate structure of a number of different trusts involved in relation to the partnership.

Until next week.

Company owned insurance policies for business succession

We recently had an adviser seeking more detailed comments about company owned business succession insurance policies.

In particular, feedback was requested about the specific reservations with insurance policies for business succession being owned by a company. In summary, and with thanks to co View Legal director Tara Lucke, we provided the following reasons:

1   while capital gains tax (CGT) should not be payable on receipt of life insurance proceeds, it will be payable on any total and permanent disablement or trauma proceeds that are paid to a company. In contrast, no CGT should be payable on receipt of the insurance proceeds where the policies are self owned;

2   there can also be significant practical difficulties in extracting insurance proceeds from a company to the appropriate recipient. This is particularly important when the main purpose of the policy is for an equity payment, as opposed to debt cover. Again, where the policy is self owned, the exiting principal or their estate will receive the proceeds directly and none of these practical issues will arise, as long as an appropriate agreement is implemented;

3   where insurance proceeds need to be accessed by the exiting principal (or their estate) this is generally only achievable via a share buy-back or dividend. A dividend will likely be tax inefficient and generally a buy back will also have an inefficient tax outcome for the following reasons:

(a) the consideration will be split between an assessable capital gain and a dividend, which restricts access to the full benefit of the CGT 50% discount and small business CGT concessions;

(b) while a company may be able to pay the proceeds to the exiting shareholder/s as a partially or fully franked dividend, this will use franking credits that would otherwise have been available for distributing profits; and

(c) the surviving owner/s will own 100% of a company after a share buy-back, however their cost base in the shares will not have increased;

4   insurance proceeds will be under the control of the remaining director/s of a company, in contrast with a self owned or superannuation owned policy where the estate directly receives the benefit of the proceeds; and

5   finally, the legal documentation required for company ownership is comparatively complex to all other policy ownership approaches.

Until next week.

Valuations for the small business CGT concessions

There have been a number of court decisions in recent times focused on the way in which valuations are conducted for the purposes of satisfying (what is currently) the ‘$6M net asset test’ for the small business capital gains tax concessions.

The Tax Office has recently released a Decision Impact Statement following one of the cases from last year (for a full copy of the statement, please email me).

In the statement the Tax Office has confirmed that its publication ‘market valuation for tax purposes’ provides the guidance that it believes should be followed in order to establish a market value for tax purposes.

In particular, the Tax Office states that it believes market value should be determined with reference to the ‘highest and best use’ of each asset being assessed.

While generally the sale price of an asset will be its market value, the Tax Office believes that each situation must be considered on a case by case basis to determine the most appropriate methodology for determining market value.

Often this will lead to reference to the long standing concept of ‘what a desirous buyer would have paid as a fair price to a willing vendor who was not necessarily desirous (or over anxious) to sell’.

Until next week.