We believe tax effective asset accumulation requires the expertise of appropriately experienced and qualified tax accountants, lawyers and financial and investment advisers.
Our written financial and investment advice can make use of and refer to the advice of the lawyer and tax accountant to provide comprehensive advice that you can rely on.
We can coordinate the advice required with either you lawyer and tax accountant or with Ascendia Lawyers and Ascendia Accountants as required.
Establishing A Tax Effective Investment Plan
What Are The Main Issues To Consider?
- Life Cycle of Executive or Business Person earning capacity, Business, Assets, Entities
- Existing Business Structures
- Asset Protection & Bankruptcy Laws
- Funding Requirements of The Business, Business Income and Competitive Risks Over Time
What Are Some of The Common Pitfalls?
- Changing Assets as Requirements Change
- Crossing T's and Dotting I's - having the right advice, and the right paperwork at the right time
- Managing In A Succession
Are There Specific Issues for Different Types of Business People / Executives?
Greater care is required when purchasing assets where purchasers are:
- Medical Professionals
- Trades Businesses
Tax Effective Approaches
It is common in family businesses as time goes on for the controllers to increase the cash and income available for purchase of investment assets, such as:
- Tenanted investment properties
- Commercial properties used in the business,
- Superannuation portfolio's,
- Primary production land (operating farms) etc.
It is very important to obtain professional advice to consider whether the asset can be held in such a was as to not be exposed to claimants and creditors of the business.
It is also obviously very important that there be professional advice obtained, prior to purchasing such assets, to consider the tax effectiveness of the purchase, in respect of its impact on the busnesses overall tax expenses:
- At the time of the asset purchase
- During the life of the asset
- On the assets disposal.
To accumulate assets tax effectively you simply need to legally minimise tax and defer tax, generally.
You also need to invest your capital in assets that accumulate in value faster than the rate of inflation - otherwise you are not accumulating assets at all - you are merely preserving in a storage facility the value of your current assets.
If you minimise income tax there is more to service asset purchases, if you minimise capital gains tax there is more to re-invest.
If you obtain maximum benefits of tax credits there is less tax expense to pay the ATO from your income, cash and asset base, allowing your asset base to grow more quickly.
What are the main techniques you can use to minimise and defer tax?
- Income splitting and Income for Family Members
- Ensure all Losses are Utilised
- Ensure all tax concessions are accessed
- Reduce tax cost of entry and exit of business owners
- Ensure deductibility of all available expenses including financing costs
- Reduce the tax cost of winding up entities used for business.
However the availability of these approaches to your accumulation of assets will vary depending on wide range of matters.
Also you want to make sure that your advisers are up to speed with this evolving legal and tax environment so that you ahve the right approach for you.
Tax Effective Techniques > Handle Carefully
Income Distributions by Trusts (Income Splitting Compliance)
Due to Bamford Case (FCT v Bamford  HCA 10 there more are limited opportunities for Family Discretionary Trusts to stream income than there were previously.
There are also more compliance requirements now too - to ensure you can distribute income to beneficiaries tax effectively and "income split". The case has resulted in new provisions being inserted into the ITAA1997 being S115-C and 207 - B ITAA97 and the ITAA36 being Division 6E.
Basically you now must make resolutions prior to 30 June of the year in question, and you can only stream capital gains and franked dividends (and only in proportion to the income). The ATO has a "Resolutions Checklist" which clarifies what distributions can be streamed to different beneficiaries. The ATO has indicated it will challenge other streaming arrangements.
Another consideraton in this regard is to check that the Trust Deed confers on the trustee the power to distribute income or capital at the trustees absolute discretion, and there is nothing further in the deed or trsut law in the relevant jurusdiction that further prohibits that power.
Who Can Income Split?
There are many issues to consider in determining whether you can income split. Obviously using Family Trust to derive income is part of this, but this is barely the start of it.
Many types of businesses are not permitted to income split. Income derived mainly from the personal efforts of an individual (called Personal Services Income or PSI) may not be able to be split or retained by a company at the flat corporate tax rate regardless of the business entity used.
There are some exceptions that we can advise you on - to assist you to access the income splitting opportunities. For instance, where an individual or entity is receiving PSI and they are operating a business that meets certain business tests - the ATO allows income splitting to occur. It is very important to meet these tests!
What Are Some Of The Issues With Carry Forward Losses?
Tax losses of Companies and Trusts cannot be used by shareholders, beneficiaries or other related entities (unless the entity is part of a consolidated Group - another issue for discussion).
Losses remain within the specific entity until able to be offset by income or capital gains (depending on the loss type) in future periods.
Partnership losses however is able to use losses at the partner level and this can allow more utilisaiton of losses across a group (subject to more detailed considerations).
Continuity Of Company Ownership / Same Business: A major area to be careful of is that S165-10 will prevent a company from using prior losses if there has been a change in the majority ownership of the company, although if the company meets a "same business" test it may be able to still use these losses.
Continuity of Control of Trust: Schedule 2F of ITAA36 requires certain tests to be met before a trust can utilise prior year losses too. The issues are whether there has been a change in control of the trust or income has been injected into the trust to minimise tax. So you cant just use your friends tax loss trust! You also don't want to go changing trsut control without considering this (and many other aspects).
Tax Effective Business Exit or Restructure
We recommend you consider how you have structured your business many years in advance of any sale of the business even being considered.
This is also an area which is very technical and where tax can in a number of circumstances be substantial or if handled correctly, be reduced to nil.
Don't lose your CGT Small Business Rollover Relief!
You need to pay special consideration to the controller rules regarding this tax concession for small businesses. Your small business sale may attract considerable or negligable capital gains tax depending on a whole range of factors - many of which you can control.
For instance don't get cracking on making changes to your business structure only to find that they ghave been made on teh basis of incomplete information. For example there is a common misconception that thre is rollover relief specific to enable transfer of assets into a trsut. Ther eis no specific relief for transfering asets from partnerships or sole trader to transfer assets to trust. Division 152 the general Small Business Concessions should be considered instead.
Also make sure you have up to date information before making any changes to your small business - for example - Trust Cloning provisions were repealed on November 1 2008. (Previously used to transfer assets between discretionary trusts wihtout trigering Capital Gains Tax in some circumstances).
Don't lose your General Business Rollover Reliefs!
Take care when you are a large business and not eligible for small business relief provisiosn a you transfer a business into a new entity - for business succession purposes for example.
- The transfer of Trading Stock and Depreciable Assets may give rise to a tax liability. In basic terms where the termination value (using market value where not arms length) of the depreciating asset is greater than the book value this amount is included in assessable income of the transferee entity. Rollover relief may be available in limited circumstances!
- Care also needs to be taken and the stuation needs to be clearly understood in regards to transfer of Work In Progress and Debtors also - which also may give rise to a tax liability. Work In Progress in this circumstances is generally assessable income.
Depreciable Asset transfer rollover relief can be very important where a business has substantial equipment used in its business becuase of the potentially high significant market value of the equipment and potentially low book value of it resulting in a potentially large assessable income and tax liability in the transferee entity. Where a wholly owned company is used as the transferee in the restructure rollover relief is available S122-A (There are conditions).
Access To Tax Concessions
Don't Lose The Tax Benefits of Distributing to Company Beneficiaries!
Where you distribute funds to a beneficiary company, and this is not a paid amount in cash (but you get the falt 30% tax rate on these amounts), you will need to have a loan agreement or a sub-trust arrangement in place between the beneficiary company and the trust or you oare not entitled to this benefit.
It is important to ensure that your loan agreements or sub-trust agreements are correct, up to date and preared by a solicitor - to prevent the risk of the ATO deeming the distributions to company beneficiaries to have resulted in a deemed dividend to back to the trust in the one tax year, and the resulting significant increase in income tax.
You also need to have these arrangements in place by the lodgement date of the Trust or lose the entitlement to the arrangement.
Don't Lose your Franking Credits!
If your trust receives investment income, including franked dividend income, and has related deductible expenses such as interest, if these expenses exceed the income of the trust excluding the franked amount, the franking credit will be lost. The net amount is all that can be streaemed and being nil or negative franking credits cannot attach to it.
I've Got My Assets Already Owned, So Do I Need to Review My Entity Structures?
It's probably a good idea to do this if it hasnt been done for a while. I'll give you a few examples of cases where there have been problems and you can obtain some insite into the need to consider your arrangements more from an asset protection perspective.
Our job is to guide you through the process of accumulating assets, in a manner that is as tax effective, and asset protected as much as possible, and as simple as possible - with no surprises.
One of the common causes of bankruptcy is the ATO tax audit. As a result its important to get your taxes right along the way.
Its also important to have the best asset protection measures in place that you can utilise in your circumstances. Tax Effective Asset Accumulation is important but often it is overlooked that it is all pointless if you lose the assets to claimants in the last years before or after retirement.
One of the common causes of bankruptcy is the Tax Audit. We recommend you understand your business structure and provide all the information to your tax accountant and solicitor so that they can give you the right advice in the first place.
Assets Transferred to Family 13 Years Prior to Bankruptcy - The Cummins Case 2006
In the Cummins case (Trustees of the Property of John Daniel Cummins v Cummins HCA 6, the High Court of Australia held that transfers of assets made 13 years prior to Mr. Cummins becoming bankrupt were still void transfers and the property couild be taken to go towards paying out creditors.
So while Mr. Cummins accumulated significant assets in his lifetime (he was a Barrister) he lost them all when his business failed - even assets that he had transferred out of hi s name 13 years before going bankrupt.
The legal issue was that the state of mind of Mr. Cummins was relevant at the time he made the trnasfers and it was held that at the time he transferred the assets he kmnew there was a pornble in his own affairs. Even where it did not manifest as a bankruptcy for 13 years!
It goes to show that with asset protection it is best to start early and set your business arrangements up while things are goiing well.
The Family Home
You would be justified in thinking that if your spouse who is not in business owns the family home nad you have no ownership that there is no riks of your family home being taken in the event of a business failure.
The claw back rules in S.139DA and S.139EA of the Bankruptcy Act (1966) may mean that family homes owned by a spouse not in the business may still be at risk. This is becuase orders can be made by the court that a family home owned by your life partner who has no involvement in the business be vested to the bankruptcy trust (be taken), where your life partner is held to have acquired the home as a direct or indirect result of financial contributions made by the bankrupt.
In addition this can be the case where the bankrupts contributions have merely increased the life partners interest in the family home (e.g. the equity value).
How do you deal with this? There are ways to deal with it that vary in approach and efficacy depending in your circumstances.