This month's top tax & accounting Q&As live from the Knowledge Shop Help Desk:
- 7 or 25 years? Division 7A loan terms
- CGT implications on inherited property
- GST on sale of part of a business
- Australian resident owning rental property in New Zealand
- Can a payment in lieu of notice be treated in the same way as a redundancy payment?
1. 7 or 25 years? Division 7A loan terms
If my client arranges security over a Division 7A loan today, is the 2017 year minimum repayment based on 7 or 25 years?
The default position is that a Division 7A loan agreement cannot extend beyond 7 years. However, the maximum loan term can be extended to 25 years in some cases. In order to place a loan under a 25 year loan agreement the following conditions need to be met:
- The full value of the loan from the company must be secured by a mortgage over real property that is registered in accordance with relevant State or Territory law; and
- At the time the loan is made, the market value of the property (less any higher ranking liabilities secured over the property) is at least 110% of the amount of the loan.
The rules also allow you to refinance from an existing 7 year loan to a 25 year loan without triggering the anti-avoidance rules within Division 7A that can apply to refinanced loans (section 109N and section 109R ITAA 1936). Note that you cannot simply convert a 7 year loan to a 25 year loan. The 7 year loan actually needs to be refinanced (i.e. new loan used to pay out old loan).
ATO guidance on the refinancing rules can be found here.
2. CGT implications on inherited property
My Client is a Deceased Estate. The deceased person purchased a property in 1995 and used the property as their principal place of residence for the entire period from purchase in 1995 until their passing in 2015. The property passed to the deceased estate under the will and not directly to a beneficiary (estate is to be divided between beneficiaries).
The property was sold by the trustee of the estate to an unrelated purchaser, with the contract signed later in 2015. As the property was sold via auction, the contract became unconditional at this time. The property settlement date was 5 weeks later and the purchasers negotiated to rent the property from the estate for that 5 week period until the settlement date.
1. What are the CGT implications of the above circumstance? Is the capital gain on disposal disregarded under sec 118-195?
2. What would the CGT implications be if the property was rented for the first time, after the deceased’s passing, prior to the signing of the contract for sale? In this case would section 118-192 apply or section 118-200? Am I allowed to choose which section to apply?
1. The sale of the property can potentially qualify for a full exemption under the rules in section 118-195 ITAA 1997 if:
- The property was the deceased’s main residence just before they died and was not bein
g used to produce income at that time; and
- The property is sold by the executor of the estate within 2 years of the date of death (i.e. settlement occurred within 2 years).
The fact that the property is used to derive rent between the date of death and the date of settlement should not prevent a full exemption from being available.
2. While the home first used to produce income rule in section 118-192 can apply to properties that are used to derive income after being established as a main residence, this is only applicable if a full exemption is not available on sale of the property. In this case it looks like a full exemption should be available.
3. GST on sale of part of a business
We have a client who runs three child care centres all through the one company. He is looking at selling one of the centres. If he does, would it still be considered a sale of the business as a going concern even though he is only selling one centre? The company meets all the requirements for it to be sold as a going concern. What would prevent this one centre from being sold as a going concern?
The ATO indicates that the going concern rules can apply to the sale and purchase of part of a business / enterprise, as long as the things being sold are capable of operating as an enterprise in their own right.
For example, extracted below are some comments from GSTR 2002/5 which discuss this issue:
“30. Where the enterprise identified for the purpose of subsection 38-325(2) forms part of a larger enterprise, a supply is a 'supply of a going concern' when all of the things necessary to continue the operation of that part of the enterprise as an independent enterprise are supplied.
Example 3: an enterprise within a larger enterprise 31. Stay-Puff Bakeries is a chain of retail bakeries conducted by Pufferies Pty Ltd ('Pufferies'). Pufferies sells the bakery operating in a particular suburb to Pies and Things partnership. As the suburban bakery is part of the larger enterprise being conducted by Pufferies and is operating as an independent enterprise, the aggregate of all of the things necessary to operate the suburban bakery, supplied under the arrangement, will be a 'supply of a going concern'.”
A copy of the ruling and further guidance can be found here.
This suggests that the sale of part of a larger enterprise can qualify as GST-free under the going concern rules. However, you will still need to consider whether all things necessary to the continued operation of that particular enterprise are being supplied.
4. Australian resident owning rental property in New Zealand
My client is an Australian tax resident who owns a rental property in New Zealand. Will the income (or loss) on that property be rolled into the Australian income tax return for the individual whom has title to the property? Also, will it be subject to capital gains tax on sale?
1. The key issue here will be confirming whether the client is classified as a temporary resident for tax purposes. For example, it is reasonably common for New Zealand citizens to be treated as temporary residents so it is worth checking this as it can have a significant impact on the tax treatment.
Section 995-1 ITAA 1997 defines 'temporary resident' as someone:
(a) who holds a temporary visa granted under the Migration Act 1958; and
(b) who is not an Australian resident within the meaning of the Social Security Act 1991 ; and
(c) their spouse is not an Australian resident within the meaning of the Social Security Act 1991.
The definition of temporary visa under section 30(2) of the Migration Act includes any visa that allows a person to remain in Australia during a specified period, until a specified event happens or while the holder has a specified status.
TD 2012/18 confirms that a New Zealand citizen living and working in Australia on a special category visa will be classified as a temporary resident unless:
- They have applied for and obtained a permanent residency visa or Australian citizenship; or
- Their spouse is a permanent resident or citizen of Australia.
The main exception is for the New Zealand citizens who hold a protected special category visa. In broad terms, a protected SCV holder is someone holds a SCV and who was living or residing in Australia on 26 February 2001.
Refer to TD 2012/18 that deals with this in more detail specifically in relation to New Zealand citizens.
2. Section 768-910 ITAA 1997 basically ensures that temporary residents are only taxed on Australian sourced income, except for income relating to employment or personal services that is derived while a temporary resident. This means that foreign sourced rental income should not be taxed in Australia in the hands of a temporary resident.
If the client is classified as a temporary resident then any capital gain or loss relating to land and buildings located overseas should be disregarded for Australian tax purposes because these assets would not be classified as taxable Australian property. Refer to section 768-915.
3. If the client is not classified as a temporary resident but they are treated as Australian resident then they should be subject to Australian tax on the foreign rental income as well as subject to CGT on their worldwide assets. When it comes to applying the CGT rules in this case if the property was acquired while the client was a non-resident the cost base of the foreign property should generally be based on its market value at the later of when the client became an Australian resident or when they ceased being a temporary resident.
5. Can a payment in lieu of notice be treated in the same way as a redundancy payment?
Our client worked for a business that was placed into voluntary administration and resulted in all employees being made redundant. Our client received termination pay that included 12 weeks in lieu of notice.
Is this payment in lieu of notice lump sum able to be included within the tax free bona fide redundancy amount on the PAYG summary?
This is possible, but depends on the situation.
Paragraphs 64 and 327 of TR 2009/2 confirms that a payment in lieu of notice can be treated as a genuine redundancy payment as long as such a payment would not be expected on voluntary termination (assuming all other basic conditions are met for the payment to be a genuine redundancy payment).
Refer to the ruling here and take a look of examples 1 and 12 which discuss this issue.