COLUMNIST ARTICLES

Family Trusts in the ATO Firing Line

ACCOUNTANT

By Warren Strybosch

The ATO has released a suite of new guidance products that is set to have a major change on family trust distributions and tax arrangements.

The ATO has released new draft public advice and guidance (PAG) products relating to section 100A reimbursement agreements and division 7A of the Income Tax Assessment Act 1936.

The Draft Taxation Ruling TR 2022/D1 suite is open for consultation and clarifies the ATO’s position on reimbursement agreements under section 100A, and identifies arrangements that will not attract ATO compliance resources.

Draft Taxation Determination TD

2022/D1 outlines when “financial accommodation” arises under division 7A whilst Taxpayer Alert TA 2022/1 highlights arrangements of concern from the ATO where taxpayers are using adult-child beneficiaries of family trusts to avoid tax on income.

The draft Ruling means the ATO may charge Trusts up to 47% tax where a trust distributes funds to adult children and it is found the parents are using those funds instead of the intended beneficiaries, in this case, the adult children.

It has been common practice for family trusts to be set up and income splitting to occur between spouses and other family members e.g., adult children. The ATO is aiming to stop or at least restrict this practice by using section 100A arguing that the beneficiary never used the funds and therefore was not actually entitled to the trust money that was paid to them. If this is found to be the case, then the ATO can tax the trust at the maximum rate of 47% (45% tax + 2% Medicare levy).

“The draft guidance sets out the ATO’s preliminary but considered views on the interpretation of the relevant law, as well as guidance on how the ATO will administer the ATO view as expressed in the draft products,” the ATO said.

“We have included explanations of proposed transitional arrangements to support clients to adjust their tax affairs to comply with the draft guidance once it is finalised.”

The products address the situation when certain trust distributions may attract the operation of section 100A or division 7A of part III of the Income Tax Assessment Act 1936 (ITAA 1936), according to the ATO. The guidance will be relevant to any trustee (or controller) of a closely trust that may have concerns about whether the trust anti-avoidance provision in section 100A may apply when trust income is distributed to relatively favourably taxed beneficiaries, but the benefits of that income are enjoyed by others.

It also addresses trusts that intend to, or have in the past, made a private company beneficiary presently entitled to trust income but not paid the amount on the basis that the amount is held in a sub-trust for the benefit of the private company and the arrangement avoids the application of division 7A.

“The vast majority of small businesses operating through a trust will not be affected by this public advice and guidance,” the ATO explained.

If the ATO begins to enforce section 100A, all trustees of family trusts will need to review their income-splitting strategies and how they distribute funds to beneficiaries. It will be important for trustees to have written document in place which adequately explains the justifications as to why a beneficiary is entitled to the revenue generated by the trust. This is going to be paramount for business owners who run their business through a family trust where the main business owner is the key person generate the revenue flowing through the trust and for those who have set up trusts to pass on funds to adult children.

The ATO’s further guidance in PCG 2022/ D1 specifically calls out children-parent arrangements. It is likely these types of arrangements will be targeted resulting in future penalties applying if the ATO conducts an audit. An example might be where a beneficiary has a significant difference between their entitlement to taxable ‘net income’ and their ‘trust income’ in specific year (not that uncommon) and the ATO thinks the gap is contrived to pay less tax. Again, it will be important to have carefully documented reasons as to how the adult children are using these funds for their own personal use e.g., pay board, petrol, etc.

Another area the ATO will be looking closely at is where a trust pays money to a company in a circular way between a Trustee that holds shares in a Company and then the Company is also a beneficiary that pays dividends to the Trust. The idea being the Company becomes entitled to trust money which the Trustee is really using for its benefit (and which the Trustee should instead be accumulating and paying tax at 47%). It is advisable that these arrangements cease immediately.

Family trusts have always been in the firing by the ATO and more so since Labor limited the ability of trustees to distribute funds to minors. These new developments, whilst they might add another level of complexity for trustees, does not mean trusts hold no value. They are still a good vehicle for asset protection, and when set up correctly, with the right documentation in place, can still provide a good way of distributing funds to adultchildren, and used for income-splitting purposes.

At Find Accountant, we provide SMSF tax advice. Our senior accountant is also an award-winning financial advisor. If you require SMSF advice or are considering whether or not to wind up your SMSF, then speak to Warren Strybosch at Find Accountant Pty Ltd.

Warren Strybosch

You can call them on 1300 88 38 30 or email info@findaccountant.com.au www.findaccountant.com.au

WARREN STRYBOSCH

Find Group

The founder of the Find Group of companies draws on his diverse background, which ranges from teaching, to serving in the army, to taxation and accounting, to coach and help clients live their best financial lives. A multi-award winner, Warrens’s innovative approach in business means he was a champion of virtual financial advise long before the pandemic. Warren established the Find Foundation, which owns and operates acroos Victoria.

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Significant Material Costs Lead To Dwelling Build Approvals Collapsing In 2022

By Warren Strybosch

With the collapse of housing construction companies like Probuild and building materials doubling in price, it is no wonder dwelling building approvals have collapsed over the last 12 months. The number of approved residential construction in Australia has plummeted, hitting its lowest figure in almost 18 months and the first decline since October last year.

We have even heard of large home building businesses offering future homeowners up to $50,000 to break their home building contracts given the significant increases in material costs. It is apparently cheaper for them to pay a large break cost than to go ahead and build the new home.

One builder stated that building materials like wood had only increased by 10 cents per metre but over the last 12 months, the price of wood has literally doubled. They stated that they would have to bear the cost of the increase if any building contracts were signed given it is illegal to pass on the increase to the consumer once a contract has already been signed.

According to the Australian Bureau of Statistics’ data on building approvals in Australia, there were a total of 12,916 total dwellings approved over the month of January, falling 27.9 per cent comparative to December and over 24 per cent compared to the same period last year.

This fall was observed almost across every state, with the decline being felt most distinctively in Victoria (-35.5 per cent), South Australia (-29.2 per cent) and NSW (-25.9 per cent).

The only state that reported monthly growth was Queensland, which saw a marginal increase of 0.5 per cent.

Driving this distinct loss in new dwellings, which is the lowest since June 2020 (12,724), was a dearth of apartments, town houses, and units, which fell 43.6 per cent month-to-month, hitting 4,007. The same category of dwelling was said to be behind the uptick of approvals reported in December.

However, housing approvals were also reported by the ABS as suffering a sudden fall, hitting 8,712 over January and marking a monthly reduction of 17.5 per cent.

This again was observed across the country, with every state reporting a diminished approval figure, with NSW reporting the smallest decline (-14 per cent) and South Australia the largest (-19.9 per cent).

Compared to January 2021, this new figure for private houses reflects a downturn of 29 per cent.

It is likely, given the large increase in building material costs, that many people will hold off building their new home or an extension, and we are likely to see further declines in new dwellings being built during 2022.

Do you get high at work?

GENERAL INSURANCE

By Craig Anderson

Many tradespeople are qualified to work at height as part of their occupation. They may use scaffold, EWP (Elevating Work Platform), rope access equipment, or even work on a high-rise rooftop with access via stairs or a lift. Regardless of how they get there, most of them will be aware of their surroundings, and will make every effort to keep themselves and those around them safe and try not to break anything in the process. Some will not have read their Public Liability Policy Wording, and will be unaware that the policy they purchased has a height limit imposed which they exceed without knowing. If they create a bodily injury to a third party or damage to third party property, and they are working above the insured height limit when the accident occurs, the policy will not respond. In other words, they become personally financially liable without the benefit of insurance that suits the activities they undertake in their business. Policies without height limitations are available. rope access technicians and height safety equipment installers are two trades that spring to mind who are constantly working at heights above those allowed for in some policies, and who require more tailored cover with fewer restrictions. Scaffolders, renderers, painters, glaziers, roofers, plant and equipment techs for example may all require cover at height, depending if they perform commercial or domestic work. For these trades, there really is no reason not to be covered properly when the solution is there waiting. For a health check of your business insurance, contact Small Business Insurance Brokers via email sales@ smallbusinessinsurancebrokers.com.au or call 0418 300 096

Any advice in this article has been prepared without taking into account your objectives, financial situation or needs. Because of that, before acting on the above advice, you should consider its appropriateness (having regard to your objectives, needs and financial situation).

Craig Anderson

If you are working at heights, and have no idea if you are really covered, the time to act is now. A review of your policy could ensure you are not exposing yourself to unnecessary financial risk.

GENERAL INSURANCE Small Business Insurance Brokers www. heightsafetyinsurancebrokers.com.au 0418 300 096

Gone up in smoke - $42m worth of illicit tobacco ceased and destroyed

By Warren Strybosch

The ATO via “Operation Greyhound”, they have uncovered a large source of illicit tobacco in Koraleigh, New South Wales. The amount covering 24 acres, was estimated to be over 250,000 kilograms in weight, and worth a staggering $42m on the open market.

The ATO undertook significant warrant activity with assistance from officers attached to the Murray River PD Rural Crime Team and the Proactive Crime Team from NSW Police Force. The ATO said that this outcome demonstrates their commitment to detecting, disrupting, and dismantling crime syndicates that grow illicit tobacco.

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