The recent ATO crackdown on trusts will no doubt have some business owners questioning the merit of this structure for business or investment purposes.

Trust distributions have been under the ATO microscope in recent years. The latest ATO crackdown was in February 2022, when it updated its guidance around trust distributions made to adult children, corporate beneficiaries and entities carrying losses. The ATO chiefly targets arrangements under section 100A of the Tax Act, specifically where trust distributions are made to a low-rate tax beneficiary.

However, the real benefit of the distribution is transferred or paid to another beneficiary, usually with a higher tax rate. The ATO’s Taxpayer Alert (TA 2022/1) illustrates how section 100A can apply to the common scenario where a parent benefits from a trust distribution to their adult children.

Despite this new ATO interpretation, the choice of a trust as a business or investment structure still has many benefits, as follows.

• Asset protection – limited liability is possible if a corporate trustee is appointed. Usually, when a person owes money and cannot meet the repayment requirements, the creditor can access the person’s assets to recoup the debt payable. However, the beneficiary assets cannot be accessed if a trust is in place.

• 50% CGT discount – A family trust receives a 50% discount on capital gains tax for profits from selling assets the trust has held for more than 12 months. This contrasts with a company structure. Companies cannot access the 50% discount.

• Tax planning – Income in the family trust not distributed by year-end is taxed at the highest income tax rate. However, any trust income distributed to the beneficiaries is taxed at the income tax rate of the beneficiary who receives the distribution. The way to get around the ATO’s section 100A crackdown is to ensure the distributed money goes to the nominated beneficiary and is enjoyed by the beneficiary rather than another taxpayer.

• Carry-forward losses – A trust does not distribute losses to beneficiaries. This means the beneficiaries will not be called upon to contribute money to the trust to meet any loss. Instead, losses from each year can be carried forward to the following year, subject to certain conditions being met.

Gifting to employees

Some employers, especially at Christmas or birthdays, give small gifts to their employees or associates such as spouses. These gifts typically take the form of bottles of wine, movie tickets and gift vouchers. The tax treatment of these gifts, from an employer standpoint, depends upon a range of factors, including:

• To whom the gifts are provided (e.g., employees or clients?)
• Whether the gifts constitute entertainment
• The dollar value of the gifts, and
• The frequency with which they are provided.

Use the following steps as a guide.

1. Does the gift constitute entertainment?

• If the answer is yes, go to 2.
• If the answer is no, go to 3.

Gifts that constitute entertainment include tickets to the movies/plays/theatre, restaurant meals, holiday airline tickets, admission tickets to amusement parks etc. Gifts that do not constitute entertainment include Christmas hampers, bottles of alcohol, gift vouchers, perfume, flowers, pen sets etc. 

    2. Does it cost less than $300 (GST-inclusive) and is provided infrequently?

• If the answer is yes, no FBT, deduction, or GST credit.
• If the answer is no, FBT applies, is deductible and can claim any GST.

1. Does it cost less than $300 (GST-inclusive) and is provided infrequently?

• If yes, no FBT deduction can be claimed, as can any GST credits.
• If the answer is no, FBT applies, and a deduction can be claimed, as can any GST credits.

From a tax standpoint, it’s best to buy employees and their associate’s non-entertainment gifts that cost less than $300. That way, no FBT is payable, yet a deduction and GST credits can be claimed. Alternatively, you can put the tax burden back on the employee and pay them a cash bonus, in which case the amount will be assessed and deductible to the employer.

SMSFs and higher interest rates

SMSF trustees with limited recourse borrowing arrangements (LRBAs) now feel the impact of ten interest rate rises since May 2022 in one hit, from July 2023. SMSF trustees relying on the ATO’s safe harbour terms to ensure that an LRBA remains always at arm’s length will face an increase in monthly interest and principal repayments from 1 July 2023.

The arm’s length annual interest rate for 2023/24, as determined under the ATO’s safe harbour terms, is based on the published rate for the month of May 2023 of the Reserve Bank of Australia’s Indicator Lending Rate for banks providing standard variable housing loans for investors.

Following the ATO’s safe harbour, where an LRBA is funding the purchase of real property, the relevant interest rate for 2023/24 will increase to 8.85%. This is an increase of 3.5% from the former rate of 5.35%. Where the LRBA funds the purchase of listed shares or listed units in a unit trust, safe harbour requires an additional margin of 2%, meaning the relevant interest rate for 2023/24 has increased to 10.85%. This will make SMSF cash flow more important than ever.

Conversely, higher interest rates result in super funds pilling more money into cash and bonds as they look for low-risk investments. Funds have been increasing their exposure to cash and cash products from 18% of their savings pools last year to 22% this year, a new report shows.[1]

Their exposure to the share market through direct investment dropped by 5% simultaneously as they funnelled their money into less volatile assets such as term deposits. A reminder, though, that such a change in strategy must be consistent with the overall SMSF investment strategy and may or may not be in the best interests of younger members whose circumstances may call for a higher-risk, bolder investment strategy.

R&D reminder

The ATO has reminded companies wishing to claim a tax offset for their R&D (research and development) activities. The reminder was issued regarding the ATO’s success in the Federal Court decision TDS Biz Pty Ltd v FCT.[2] By way of background, the research and development tax incentive (R&DTI) helps companies innovate and grow by offsetting some of the costs of eligible R&D.

The incentive aims to boost competitiveness and improve productivity across the Australian economy by:

• Encouraging the industry to conduct R&D that may not otherwise have been conducted.
• Improving the incentive for smaller firms to undertake R&D.
• Providing businesses with more predictable, less complex support.

The eligibility to claim the tax offsets will depend on whether the business:

• is an R&D entity.
• incurred notional deductions of at least $20,000 on eligible R&D activities.

The business is not eligible for an R&D tax offset if it is either:

• an individual
• a corporate limited partnership
• an exempt entity (where your entire income is exempt from income tax)
• a trust (except a public trading trust with a corporate trustee).

For income years commencing on or after 1 July 2021, entities engaged in R&D may be entitled to:

• A refundable tax offset equal to the entity’s company tax rate plus an 18.5% premium for eligible entities with an aggregated turnover of less than $20 million annually, provided income tax-exempt entities do not control them.
• A non-refundable tax offset for all other eligible entities equal to the entity’s company tax rate plus a two-tiered premium determined on the notional R&D expenditure as a proportion of total expenditure for the income year. The new rates are the company tax rate plus
• 8.5% for R&D expenditure up to 2% of total expenditure.
• 16.5% for R&D expenditure above 2% of total expenditure.

Turning back to the case above, the ATO successfully contended that the taxpayer conducted significant R&D activities outside Australia by purchasing components designed, developed and fabricated overseas without an Advance Overseas Finding from the Department of Industry, Science and Resources.

The ATO states that while companies can claim an offset for R&D expenditure incurred by them on R&D activities conducted overseas, there is a requirement to hold an Advance Overseas Finding for those activities.

Super withdrawal options

For individuals who have retired and met a condition of release or who have turned 65 and are still working, you can receive your superannuation as a super income stream, a lump sum, or a combination of both. This third option is widely utilised by those who have not paid out their house. For example – a lump sum is withdrawn to pay off the remainder of the mortgage, and the balance is used to commence a super income stream.

1. Lump sum

If your super fund allows it, you may be able to withdraw some or all your super in a single payment. This payment is called a lump sum. You may be able to withdraw your super in several lump sums. However, if you ask your provider to make regular payments from your super, it may be classed as an income stream.

The downside to lump sums from a tax perspective is that once you take a lump sum out of your super, it is no longer considered to be super and thus no longer enjoys the superannuation tax concessions (15% on earnings and capital gains and tax-free if you convert your super into an income stream). If you invest the lump sum outside of super, earnings on those investments are not taxed as super and may need to be declared in your tax return. Further, if you are over 60, super money you access from super will generally be tax-free, but if you’re under 60, you might have to pay tax on your lump sum.

2. Super income stream

You receive a super income stream as a series of regular payments from your super provider (paid at least annually). The payments must be made over an identifiable period and meet the minimum annual payments for super income streams.

The payments do not need to be at the same interval, and the amount paid may also vary. However, a single payment does not qualify as a super income stream. For example, your super payment will not qualify as an income stream if you received a single payment in 2023 but no payments in 2022 and 2024. Super income streams are a popular investment choice for retirees because they help you manage your income and spending. Super income streams are sometimes called pensions or annuities.

One of the most common income streams is an account-based income stream, which is made up of money you have accumulated in super, allowing you to draw a regular income once you retire. An account-based income stream includes market-linked pensions that started on or after 1 July 2017.

Your provider or SMSF typically continues to invest the money in your super account and adds investment returns to your account. Your account balance fluctuates with market performance. Each year you can withdraw as much as you like through your account-based super income stream (unless you’re receiving a transition to retirement income stream).

You must withdraw a minimum amount each year – based on your age and account balance. There may be income tax implications if your provider does not pay you the minimum amount each year. You can continue to receive your super income stream until there is no money in your account. How long your super income stream lasts depends on how much you take out each year and what investment returns you receive. There is a limit on the amount you can transfer into the retirement phase, known as the transfer balance cap. The chief advantage of this type of withdrawal is that earnings on the remainder of your account inside of superannuation are taxed concessionally.

Tax Time – Unexpected first-time debts

For the first time, many Australians are finding themselves in a position where they are being told they owe the ATO money after completing their tax return this year. A significant number of taxpayers in this position are those that are still paying off their HECS/HELP debts – many of them young Australians. Following are some myths and facts about why this may be the case.

Fact or Myth?

When PAYGW is deducted from salaries and wages to take account of HELP liabilities, the withheld amount is not applied against the HELP debt until after the end of the income year, when the tax return is lodged. This means that indexation is applied to the debt without considering any PAYGW withheld during the year.

Fact or myth?

This is a myth.

Indexation only affects the loan balance. It does not affect the amount of the year-end tax liability.

When an employee has a salary sacrificed, the lower salary will reduce the PAYGW withheld. Still, the reportable fringe benefit is included in the repayment income used to determine liability to HELP repayments.

Fact or Myth?

This is a fact.

HELP repayment income is the total sum of the following amounts from a person’s income tax return for the income year:

• taxable income
• total net investment loss
• reportable fringe benefits (as reported on their payment summary)
• total net investment loss (which includes net rental losses)
• reportable super contributions (including salary sacrificed contributions); and
• any exempt foreign employment income amounts

Negative gearing amounts are added back and included in HELP repayment income. The rapid rise in interest rates will flow through to negative gearing amounts, increasing the repayment income.

Fact or Myth?

This is a fact.

However, this will only affect those engaged in negative gearing, which may not be many young Australians with a HELP debt.

The high indexation applied to HELP debts this year of 7.1% compared to prior years (3.9% in 2022 and 0.6% in 2021) has caught taxpayers off-guard. Before 2022, the rate had not exceeded 2.6% over the last ten years and was often around 2%.

Fact or Myth?

This is a myth.

Again, indexation only affects the loan balance. It does not affect the amount of the year-end tax liability.

The end of LMITO after 2021/22 is only just being realised by taxpayers now, despite two years of talking about this. The message did not get through, or the impact was not fully understood.

Fact or Myth?

This is a myth.

For employees, the PAYGW rates were increased to take the LMITO abolition into account, so yes, no refund, but there should not be tax payable due to just the LIMITO ending.

Personal Property Securities Register

What is it?

The personal property securities register (more commonly known as the PPSR) is an official government register. It’s effectively a public noticeboard of security interests in personal property that the Registrar of Personal Property Securities manages.

Security interests are most created when a secured party (such as a lender) takes an interest in the personal property of a grantor (such as a borrower) as security for a loan or other obligation. The security interest means the secured party can take the personal property (known as the collateral) if the secured obligation is not met, such as defaulting on a loan.

Personal property to which the PPSR applies is property other than land, buildings and fixtures to the ground. It includes goods, motor vehicles, planes, boats, intellectual property such as copyright/patents/designs, shares, bank accounts and debts.

The debts or other obligations secured by personal property are shown on the register (if registered). The PPSR is accessible to the public 24/7. The PPSR began on 30 January 2012, replacing many state-based registers, such as REVS and other vehicle registers and the ASIC Register of Company Charges, to form one national register.

The register assists those with a security interest over property and consumers/businesses purchasing property as follows.

Registering

When someone registers a security interest on the PPSR, they are letting the world know that they claim to have a security interest over certain personal property. Registering on the PPSR is a way to notify others if personal property such as cars, goods or company assets have security interests over them. Registering your security interest correctly on the PPSR can protect you and give you extra rights in the property it’s registered over. This is especially important if the person who gave you the interest goes insolvent. Registration also offers other protections, such as ranking you at a higher priority over other security interests.

Searching

Consumers, including businesses, can search the PPSR to see if someone has registered a security interest over personal property (which they may want to do before buying property or lending money to someone). When you search, you will receive a certificate that you can retain as proof of whether a security interest was registered during your search. If you don’t do a search and then purchase property with an existing security interest registered over it, you place yourself at risk of the goods being repossessed even though you have paid for them. Millions of searches and registrations take place on the PPSR every year.

To access the PPSR, visit www.ppsr.gov.au

Superannuation and age pension eligibility

During retirement, many people rely on a combination of their superannuation savings and their age pension to sustain them moving forward financially. Accordingly, a front-of-mind issue for individuals is at what point do the superannuation savings and payments impact your eligibility for the age pension?

While someone is underage pension age, concerning any Centrelink payment, Centrelink does not count your or your partner’s superannuation balance in the income or assets test if your fund is not paying you a superannuation pension. However, that pension is considered if your fund pays you a superannuation pension.

Once you reach age pension age, Centrelink counts your super (a) in the assets test and (b) in the income test under the deeming rules. The same rules apply to your partner and their super when they are age pension age, even if they are not receiving a Centrelink payment.

Deeming is a set of rules determining the income your financial assets create. It assumes these assets earn a set rate of income, no matter what they earn. The main types of financial assets are:

• savings accounts and term deposits
• managed investments, loans and debentures
• listed shares and securities
• some income streams
• some gifts you make.

Centrelink includes any deemed income as your income under the income test. The income test helps Centrelink determine how much income support it can pay you. Taking money out of superannuation doesn’t affect your Centrelink payments, but you may be impacted by the deeming rules (see earlier) depending on where that money is invested outside super.

Recent research into retirement confidence by Monash University found that people aged 50 and over – who take time to understand and plan their finances – are less anxious about transitioning into retirement. It found that they were more confident overall about their retirement options. Knowing how much of the age pension you could be eligible for can help you understand your finances in retirement. For many, a qualified financial adviser with superannuation and retirement planning knowledge can help you get the balance right.



[1] The Vanguard and Investments Trend annual survey of SMSFs

[2] [2023]