This month's top accountants Q&As live from the Knowledge Shop Help Desk:
- Navigating the small business CGT concessions for small business entities
- Managing a trust with an accounting profit and a tax loss
- Timing of distributions from a discretionary trust
- The mechanics of the Div 293 tax on high income earners
- Claiming overseas accommodation expenses while travelling for work
1. Navigating the small business CGT concessions for small business entities
I have a company client that is an insurance broker. The company has been operating for the past 4 ½ years. The owners of the company (1 ordinary share each) are both employed by the company. Both directors/employees are aged 64 and 65 years. The company qualifies as a small business as the turnover is less than the $2 million threshold.
Recently, the company agreed to sell the business (and not the shares) of the company. The value is only the goodwill of the business the company has built up over that period. Part of the arrangement for the sale of the business is that the employed broker of the company remains an employee of the new business owner for a period of 3 years. The other director/employee will retire from the broking business.
My understanding is that the company can access the small business CGT concessions as they are classified as a small business entity due to the turnover being less than $2 million. As the sale of the business is a retirement strategy, they want to access the superannuation benefit limit of $500,000 each.
Therefore, my understanding is that the company needs to pay the capital proceeds to their superannuation fund, or as they are older than 55, they are entitled to the proceeds in their own right. These payments must be paid within a 2 year period of receiving the proceeds. Would you please confirm my thoughts.
A 2 year payment rule applies under the small business 15 year exemption, but the timing rules are different under the small business retirement exemption. This is explained below.
If the company is selling its business and a capital gain will arise in relation to the goodwill then the small business CGT concessions should be available if the company is classified as a small business entity (i.e. carries on a business with aggregated annual turnover of less than $2m) and the asset(s) in question pass the active asset test. Goodwill would generally pass the active asset test.
If the basic conditions are met then the 50% active asset reduction is automatically available to the company. However, the company can choose not to apply the 50% active asset reduction in order to maximise the amount of the capital gain that is exempt under the retirement exemption.
In order for the company to apply the retirement exemption there are a number of conditions that need to be met. These are summarised below:
- The company passes the basic conditions for the small business CGT concessions;
- The company passes the significant individual test (this should be met if there are only two shareholders who each own 1 ordinary share each);
- The company makes a written choice to apply the exemption in relation to one or more CGT concession stakeholders;
- The exempt amount for each individual does not cause them to exceed their $500,000 lifetime limit under the exemption; and
- The exempt amount is paid to the CGT concession stakeholders within 7 days of the later of the company receiving the proceeds from the CGT event or the company making the choice to apply the exemption.
If any of the CGT concession stakeholders are under 55 when the choice to apply the exemption is made then the payments need to be made by the company directly to a complying super fund or RSA on their behalf. This does not appear to be relevant in your client’s case so the payments should be made directly to the individuals within the time period mentioned above.
The other option here would be for the company to choose to apply the small business rollover relief in the year of the CGT event. If the company does not acquire any replacement active assets within 2 years then the capital gain would be crystallised and the company could then apply the retirement exemption (subject to meeting the conditions above).
You might also like to refer to the Knowledge Shop member website which contains a number of practical materials to assist you to work through the small business CGT concessions, including a pro forma election for the retirement exemption.
2. Managing a trust with an accounting profit and a tax loss
As we know that the trust cannot distribute tax loss, what will happen if the trust has both an accounting profit and a tax loss?
Can the trust still distribute the accounting profit in the accounts whilst not distribute the tax loss in the income tax return?
Firstly, regardless of whether the trust has an accounting profit you will need to determine whether the trust has a positive amount of distributable income as per the trust deed. The definition of income may be something that is quite different to the 'normal' accounting profit of the trust.
For example, the trust deed might state that the income of the trust is the same as the net taxable income of the trust as calculated under section 95 ITAA 1936. If so, and the trust has a tax loss for the year, then this would generally mean that there is no income available for distribution. The trustee could potentially make a capital distribution if this is allowed by the trust deed.
If the trust has a positive amount of distributable income then the trustee would generally be able to appoint that income to the beneficiaries of the trust for that year. This would make the beneficiaries presently entitled to that income (i.e. the trust would owe an amount to the beneficiaries and this should reflected in the balance sheet of the trust. If the taxable income of the trust is nil then the distribution to the beneficiaries should generally be tax-free although this could be different if:
- The trust was a unit trust (CGT event E4 could be triggered); or
- The trust is a foreign trust in which case section 99B would need to be considered as well.
As you have mentioned, any tax losses made by the trust would remain in the trust and should be carried forward to the next income year.
3. Timing of distributions from a discretionary trust
I have a discretionary trust that distributed 2014-15 profits to a related company. The distribution consisted sole of fully franked dividends. Can you confirm by what date the distribution must be cashflowed to the company.
Can you also advise as at what date the attached imputation credits will be credits to the company's franking account. Is it 01/07/15 (considering the distribution has been declared at that time) or is it not until the distribution is cash-flowed to the company.
1. If the trustee has made the company presently entitled to trust income by the end of the 2015 income year then this could trigger Division 7A unless the distribution is paid within a certain time period or a complying sub-trust arrangement is put in place.
Based on the ATO’s comments in TR 2010/3 and PS LA 2010/4 the unpaid present entitlement (UPE) should start being treated as a loan for Division 7A purposes at some point during the 2016 income year. In order to prevent a deemed dividend from being triggered the following main options would available:
- The trust could pay the full amount to the company by the earlier of the due date and actual lodgement date of the company’s tax return for the 2016 income year; or
- The trust and company could ensure that a complying Division 7A loan agreement is in place by the earlier of the due date and actual lodgement date of the company’s tax return for the 2016 income year. If a complying Division 7A loan agreement is used then the first minimum repayment would need to be made to the company by 30 June 2017.
Section 205-15 ITAA 1997 ensure that the corporate beneficiary receives the franking credit to its franking account at the end of the income year in which the distribution flows to that company for tax purposes. In this case, if the company was made presently entitled to the income of the trust by the end of the 2015 income year then it should receive the franking credits in the 2015 income year, even if the distribution has not been made in cash. Refer to section 207-35 and section 207-50.
4. The mechanics of the Div 293 tax on high income earners
Could you please help us understand how the Division 293 tax works? For example, if someone is on a $300k salary package including super (i.e. exactly $300k) of say $20K and has no other income/benefits or losses/deductions, would it trigger any Division 293 tax?
Also, if the package increases to $305K including super of $20k and he has no other benefits/income or losses/deductions, how is the Division 293 tax calculated on that? Is it calculated on the whole amount of super i.e. $20k?
1. A tax liability is only triggered under Division 293 ITAA 1997 if the sum of the following is more than $300,000 in the relevant income year:
- The person’s income for surcharge purposes (i.e. taxable income plus reportable fringe benefits plus net investment losses but excluding reportable super contributions); and
- Low tax super contributions (i.e. concessional contributions up to the cap amount).
If the sum of these amounts is exactly $300,000 but does not exceed $300,000 then there should be no liability under Division 293.
2. If the sum of the amounts noted above exceeds $300,000 then the person has taxable contributions equal to the lower of:
- Their low tax contributions for the year; and
- The amount by which the sum of their income for surcharge purposes and low tax super contributions exceeds $300,000.
In your example, if the individual’s income for surcharge purposes (excluding reportable super contributions) is less than $300,000 but they will go over the threshold when you include their low tax super contributions, the tax liability is only calculated on the excess amount over the $300,000 threshold. That is, the tax liability should be 15% of $5,000 (i.e. the excess) rather than 15% of $20,000.
Refer to section 293-20.
5. Claiming overseas accommodation expenses while travelling for work
Our client worked overseas for 143 days during a financial year. This client received an allowance for this travel and we are taking up a deduction at the reasonable amount at the cost group rates provided by the ATO for his meals and incidentals.
Our question is can this client claim a deduction for the actual accommodation expenses paid for during this time also? And if so, does this exceed his reasonable amount on meals and incidentals meaning he would have to substantiate everything?
The total deduction will greatly exceed the allowance received, hence our hesitation.
Firstly, it will be necessary to confirm that the client was actually travelling overnight in the course of their work while they were working overseas during the year. If the client was living away from home at any stage during the year while they were working overseas then they would not be able to claim a deduction for their meals and accommodation expenses incurred during that period.
The fact that the client may have received an allowance from their employer does not determine whether they were travelling or living away from home. The key issue is whether they established a new place of work while working overseas. MT 2030 provides further guidance on this.
If the client was travelling overnight in the course of their work (rather than living away from home) then they should be able to claim a deduction for the meals and accommodation expenses incurred during this time. The general rule is that the client would only be able to claim a deduction for these expenses if they can fully substantiate the expenses under the normal substantiation rules. They may also have been required to maintain a valid travel diary depending on how long each trip was for.
The main exception to the substantiation rules is where the client has received a bona fide travel allowance in relation to the specific trips they undertook. If so, the client can rely on the Commissioner’s reasonable rates for meals and incidental expenses. However, they would still be expected to retain some records to prove that the expenses were incurred.
The fact that the deductions claimed are more than the allowance received should not necessarily matter. However, if the client does want to rely on the Commissioner’s reasonable rates for meals and incidental costs they would need to ensure the allowance they received was a bone fide allowance that could reasonably be expected to cover their costs while travelling.
The Commissioner’s reasonable rates cannot be used for overseas accommodation expenses. All overseas accommodation expenses need to be substantiated in order for a deduction to be claimed.
Refer to TR 2004/6 for further guidance.
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