Top Tax & Accounting Q&As - July 2016
by Knowledge Shop Editor, on 27/07/16 14:43
This month's top tax & accounting Q&As live from the Knowledge Shop Help Desk:
- Distributing trust income to an (almost) former spouse
- Applying the small business CGT concessions when a SMSF is involved
- ATO requirements for different types of trusts
- GST issues for a property development project
- Applying the simplified depreciation rules to PSI entities
1. Distributing trust income to an (almost) former spouse
My client is a family trust. The husband is the test individual. The husband and wife have now separated (occurred April 2015 - which has seen agreed settlements take place) but are as yet "divorced".
Can the family trust make a distribution of income to the wife in 2016 without incurring family trust distribution tax?
1. The first step is to review the trust deed to confirm whether the wife would still be an eligible beneficiary of the trust following their separation. If so, then it should still be possible for the trustee to distribute income to the wife.
2. If the trust deed would allow the distribution to be made, the next step is to consider whether this would trigger family trust distribution tax (FTDT). This is because if the trust has made a family trust election (FTE), any distributions outside the family group would trigger penalty tax at the trust level.
Section 272-95 confirms that the spouse of the test individual is a member of the family group. However, even if the individuals are no longer treated as spouses, section 272-90 confirms that someone who was a spouse of the test individual or another member of the test individual’s family before a breakdown in the marriage or relationship is still treated as a member of the family for the purposes of the FTDT rules (although they would generally be treated as an 'outsider' under the income injection test).
2. Applying the small business CGT concessions when a SMSF is involved
We have a unit trust that owns a commercial property.
The property is used 100% by a related party discretionary trust which is a small business entity and has been paying rent for the whole time the unit trust has owned the property.
100% of the profit of the discretionary trust is distributed to the son.
100% of the units of the unit trust are owned by a SMSF.
Father and Son are the members of the SMSF.
The unit trust has sold the commercial property. Can it access the Active Asset Test?
It would not generally be possible to apply the small business CGT concessions in this case. The problem is trying to establish that the discretionary trust is a connected entity or affiliate of the unit trust.
In order for the small business CGT concessions to apply the asset in question needs to pass the active asset test. This generally requires that the asset has been used in a business conducted by the taxpayer (i.e. the unit trust), a connected entity, or affiliate for a specified period of time.
Assuming the unit trust does not carry on a business in its own right then the key issue here is trying to establish that the discretionary trust which has used the property is a connected entity or affiliate of the unit trust.
Firstly, a trust cannot be an affiliate of another entity. Refer to section 328-130 ITAA 1997.
It is then necessary to determine whether the discretionary trust could be a connected entity of the unit trust. In order to be treated as a connected entity, at least one of the following would need to be met:
- The discretionary trust (and/or its affiliates) must control the unit trust;
- The unit trust (and/or its affiliates) must control the discretionary trust; or
- Both trusts are under common control.
The problem here is that the unit trust is wholly owned by the SMSF. TD 2006/68 confirms that the members and trustee of a complying super fund do not control the fund for the purpose of the grouping rules. As a result, the father and son should not be treated as controlling the fund or the unit trust. This means that it would not appear to be possible to show that the unit trust and discretionary trust are connected entities.
3. ATO requirements for different types of trusts
Is a discretionary family trust considered to be the same as the Discretionary Investment Trust, Discretionary Service Management Trust, and Discretionary Trading Trust in terms of the ATO requirements to have the trustee resolution signed and prepared by 30 June?
This principle really applies to all types of trusts.
In order to ensure that income derived by a trust during a particular income year is taxed in the hands of the beneficiaries rather than the trustee (at penalty rates) then it is necessary to ensure that the beneficiaries are presently entitled to all the distributable income of the trust by the end of the year. In some cases the trust deed will actually require action to be taken before 30 June.
This means that unless the trust deed contains provisions or clauses that would automatically appoint the income to beneficiaries at year-end, the trustee will generally need to take some action to ensure that this occurs, regardless of the type of trust.
When it comes to documenting the trustee's decision, this will also depend on the trust deed. If the trust deed requires a written resolution or determination to be made by 30 June then you would need to ensure that this happens. However, if there is no specific requirement for a written record to be in place by 30 June then the ATO has indicated that records created after 30 June can potentially be accepted as evidence of resolutions that have been made by that date (e.g. formal minutes prepared after year end to document decisions made in a meeting in June). The earlier this is done the better.
We generally recommend that something is documented in writing by 30 June at the latest to be safe.
Refer to the ATO guide on trustee resolutions which deals with this issue.
4. GST issues for a property development project
My client has a trust holding land on trust which she wants to subdivide into new residential units under a joint venture with a related party project management company which she also controls. The client has done a few residential unit developments as an enterprise previously.
Does the trust holding this particular parcel of land have to register and pay GST on sale of the land or do the parties involve have to register a joint venture entity and still pay GST on sale of the units. I suspect they have to register a new entity for GST.
1. The first step would be to determine whether the trust and the company should be treated as partners in a partnership. This will depend on the nature of the arrangement between them. In very broad terms, entities would generally be treated as partners for GST and income tax purposes if the arrangement involves the sharing of proceeds or profits. On the other hand, an arrangement would generally be treated as a joint venture if the parties were agreeing to share output (e.g. subdivide land into smaller lots, with each party taking ownership of a certain number of those lots).
GSTR 2004/2 provides detailed guidance on this.
2. If the parties are not partners in a partnership and the trust acquired the land with the intention of undertaking development activities and then selling the new units at a profit then it is very likely that:
- The sales would be taxed on revenue account;
- The sale proceeds would need to be included in the current and projected GST turnover of the trust, meaning that the trust would need to register for GST if its turnover is at least $75,000;
- The sale of new residential premises by the trust would generally be subject to GST if the trust is registered or required to be registered for GST.
The trust might be able to apply the margin scheme to reduce the GST liability on sale.
3. There are some special rules within the GST system which allow entities to form a GST joint venture for GST purposes. This can potentially simplify the GST treatment for the parties, including where the parties are dealing with each other.
It is not compulsory to form a GST joint venture; this is something that can be chosen by the parties if they meet the relevant conditions. The ATO application form sets out the main conditions that need to be met to form a GST joint venture.
Did you know the answer? The Property & Development Tax webinar series covers the fundamentals to advanced property development issues to help you minimise risks and maximise the tax concessions.
5. Applying the simplified depreciation rules to PSI entities
My client is a personal services income consulting business.
Can they follow the small business depreciation rules, i.e. can they have a general pool for depreciation?
Section 328-235 ITAA 1997 confirms that the small SBE depreciation rules can apply even if the PSI tests are failed.
This means that as long as the company carries on a business under general principles and has aggregated annual turnover of less than $2m then it should be able to apply the SBE depreciation rules to its depreciating assets (subject to some specific exceptions) even if it happens to fail the PSI tests. This would allow it to apply the SBE pooling rules and the immediate deduction rules if the assets cost less than the relevant threshold (i.e. currently $20,000).
The main exception to this is the rule which limits deductions to only one car per individual earning PSI if the PSI tests are failed. Also, some assets cannot fall within the SBE depreciation rules, such as assets that are mainly used to derive rental income (except for short term hire businesses).