Asset Protection

Sole Trader

  • No asset protection – potentially liable to the full extent of the business and private assets owned by the individual

Partnership

  • No asset protection – each partner is jointly and severally liable even if the partner had no knowledge or and was not responsible for the debt

Company

  • High level of asset protection where the objective of the client is to quarantine risk to the company. Creditors can have access to the companies assets but not to the assets of the shareholders.
  • Where the company has traded insolvent or where a Director Penalty Notice is enforced in respect of unpaid employee entitlements then the directors can be personally liable. Personal guarantees reduce the level of asset protection offered by the company.
  • A company structure does not offer asset protection where the shareholder is exposed to risk outside the company. Eg where a shareholder is at risk of becoming bankrupt due to activities outside the company. The level of asset protection can be increased if the shares are held by a discretionary trust.

Discretionary trust

  • A discretionary trust with a corporate trustee provides effective asset protection. It is important that the corporate trustee only acts in its capacity as trustee of the trust and does not carry on a business or own assets.
  • Creditors generally have recourse against the corporate trustee in the first instance and then against the assets of the trust. Creditors generally have no claim against trust beneficiaries.
  • The effectiveness of a discretionary trust to protect trust assets from a third party attack has been diluted in recent times, particularly in the context of divorce.

Unit Trust

  • A unit trust with a corporate trustee that does not carry on a business, nor hold assets, other than in capacity as trustee of the trust, provides a similar asset protection to a company.

SMSF

  • An interest of a bankrupt in a super fund, is generally speaking, a protected asset under S.116(2)(d)(iii) of the Bankruptcy Act 1966.
  • A super fund will not protect assets in the event the fund member divorces.

Withdrawing money from your company – Div 7a – Importance of Tax Planning Accountants Beenleigh

Posted on by admin

Division 7A of the Income tax Assessment Act (ITAA36)

It is common knowledge that where a private company makes a loan to a shareholder or their associate a potential deemed dividend issue arises under Division 7A.  The shareholder has until the due date of lodgement of the tax return to repay the loan in full or enter into a loan agreement.
If a loan agreement is entered into, the taxpayer has until the end of the first year after the year the loan was made to make a repayment.
The minimum yearly repayment is calculated on the balance of the loan using the benchmark interest rate and the term of the loan.  However, where the loan has a payment made prior to lodgement day then the interest is pro rata’d.  In addition, the payment made before the lodgement date does not count towards the minimum yearly repayment

Example

Reducing loan balance for pre-lodgment day payment.
On 15 august 2009, Viking Pty Ltd made a $100,000 loan to Annie, a shareholder in the company. The loan was made pursuant to a loan agreement that satisfied the requirements of S.109N Annie had made no repayments as of 30 June 2010.
However, she repays $25,000 on the 15 December 2010 which is prior to the company’s lodgment day of 1 March 2011.
What is the closing balance of Annie’s loan as at 30th June 2010?
Because S.109E(3) allows the $25,000 to be taken into account, the closing balance of the loan as at 30June 2010 is not the $100,000 she originally borrowed but $75,000 (ie, $100,000 – $25,000)
What is the MYR that Annie must make by 30th June 2011
Based on the closing balance of the loan and the other variables contained in the formula in S.109E(6) the MYR is $14,1111. However, if the MYR were based on $100,000 it would be $18,815. Note that the benchmark interest rate for 2011 is 7.4% p.a.

Example

Correctly calculating interest in year two of the loan 

Valerie is a shareholder in Aromas Pty Ltd the company’s lodgement day for the 2010 tax return is 1st March 2011. The following loan transactions occur.

Date                       Transaction                DR                    CR                     Balance

1st Aug 2009          Loan To Valerie           $50,000                                           $50,000

1st Sep 2010          Repayment                                         $10,000                  $40,000

1st June 2011        Repayment                                           $5,000                   $35,000

30th June 2011      Interest                         $3,055                                          $38,055

What amount if the MYR for 2011 based on?

$40,000. The $10,000 repayment on 1 September 2010 is counted as it was made before ‘lodgment day’ the MYR is $7,526.

Has Valerie made the MYR?

YES. Both the $10,000 and $5,000 repayments made by Valerie during the 2011 year are taken into account. As the total payment of $15,000 exceeds $7,526 the MYR is covered.

What is the closing balance of the loan for the 2011 year?

To work this out it is necessary to calculate the interest charge for the year. Note, interest does not begin to accrue until 1st July 2010. The benchmark interest rate is 7.4% p.a which is 0.020273973% per day.

When do the new dividend rules apply from?

The rewritten s.254T applies to all dividends declared on or after 28th June 2010, it will not apply to dividends declared before this time but paid on or after 8th June 2010.

Posted in Asset Protection

To be a director or not

To be a Director or Not to Be ? That is the Question – by Will Hawney – Queensland Administration Services

It was not that long ago that being a Director of a Corporation had many more benefits (not the least being additional tax benefit) than just being in a Partnership or operating as a Sole Trader.

These benefits are becoming dramatically reduced specifically with respect to protection offered to directors.

Impractical though it is, Corporations law dictates that a director must know EVERYTHING that is happening with his or her company in real time despite the qualifications the director may have. An example of this would be: You and a friend or spouse decide to open a mechanical business in an area you deem needs that service.

You however, may and your partner may be qualified mechanics but have no knowledge of the operation of a business. Realising this you employ managers and staff that profess to have the business accumen required, but they are not directors.

Their workmanship is not to the standard they said and the books are a mess and the bills have not been paid.

Next you know, you are receiving summonses in the mail and the Tax man is after you.

The problem is under law, you are fully responsible for the operation of the business even though you did nothing wrong other than you failed to be superman and know everything about everything, you stand to loose all you have worked for.

With the number of ATO audits on the rise it is important that you keep your receipts.  The ATO motto is no receipt no deduction.  Under the Australian tax system of self assessment you are responsible for working out how much you can claim on your tax return.  In order to prepare an accurate tax return and support the claims you make, you need to keep careful records.  As accountants we prefer you do not give us a shoebox of receipts each year, instead give a typed summary (That way there is no guessing your handwriting) of your income and expenses.  This keeps your tax agent fees down.
Posted in Asset Protection

Cardinal rules to keep you out of trouble with the ATO

  1. Never ‘back-date’ documents
  2. Only claim what you know is a genuine tax deduction
  3. Declare all of your income
  4. Don’t estimate your deductions, and always double-check figures and numbers before you submit your tax return
  5. File your tax return on time in order to avoid penalties
What to do when you’re being audited
  • Don’t freak out. You are innocent until proven guilty
  • If you have done the wrong thing then fess up to the ATO straight away and limit the damage
  • Keep your receipts and have them all in order and ready for the tax office
  • Make sure you have a depreciation schedule from a quantity surveyor if you are claiming depreciation for rental properties
  • Have a 13-week log book for car deductions
  • Seek professional advice from a tax lawyer/accountant who has experience in dealing with ATO tax audits
  • Get everything prepared in advance – bank statements, records, invoices and receipts
  • Be honest, and explain anything relevant in as timely a fashion as possible
  • Don’t sign anything until you fully understand the document, and agree with the conclusions that it has come to
  • If necessary, seek a payment plan or a retraction of penalties

16 serious mistakes that would trigger an ATO audit

  1. Estimating rather than getting the actual figures
  2. Claiming a deduction for interest on the private portion of the loan. The interest expense must be apportioned between the ‘deductible’ and the ‘private’ portion of the total borrowings.
  3. When depreciating assets, new assets acquired for less than $1,000 during the year are allocated as ‘low cost assets’ to the pool but the decline in value for these assets in the first year is at a rate of 18.75%, or half the pool rate. Halving the rate recognises that assets may be allocated to the pool throughout the income year and eliminates the need to make separate calculations for each asset based on the date it was allocated to the pool. For subsequent years they are depreciated at the normal pool rate of 37.5%.
  4. Claiming initial repairs or capital improvements as immediate deductions. Initial repairs to rectify damage, defects or deterioration that existed at the time of purchasing a property is generally capital and not deductible, even if you carried out these repairs to make the property suitable for renting. However, it may be claimed as capital works deductions over 40 years.
  5. Not showing dividends from dividend reinvestment plans in your tax return
  6. Claiming a deduction for the cost of travel when the main purpose of the trip is to have a holiday and the inspection of the property is incidental to that
  7. Not having receipts to justify the deductions you are claiming, and you cannot justify the connection between the expense and deriving the income (eg, it was for a private purpose).
  8. Omitting overseas income – taxpayers are subject to tax on their world-wide income and the ATO has agreements with over 42 countries with data-sharing.
  9. Claiming deductions for a rental property that is not genuinely available for rent, ie, a holiday house
  10. Incorrectly claiming deductions for a property that is only available for rent for part of a year
  11. Incorrectly claiming deductions for a rental property when it has been used by relatives or friends free of charge for the part of the year. A deduction is not allowable for the periods involving that free occupancy.
  12. Incorrectly claiming for the cost of land in a claim for capital works. Only the original cost of construction is included in the calculation and the cost of the land forms part of the cost base when calculating a capital gain or loss.
  13. Incorrectly claiming deductions on depreciating assets that are only eligible for a capital works deduction
  14. Incorrectly claiming a deduction for conveyancing costs when they should form part of the cost for capital gains tax purposes
  15. Incorrectly claiming all deductible borrowing expenses greater than $100 in the first year they are incurred instead of spreading over five years or over the term of the loan, whichever is less
  16. Not splitting the income and expenses in line with their legal interest in a property where purchased by a husband and wife as co-owners
Posted in Asset Protection, Bookkeeping, Capital Gains Tax, Tax

Asset Protection

The key asset for most people is the family home.    Asset protection is for anyone at high risk,  not just high wealth individuals.

So who is an “at risk individual”?
  • Anyone who has their own business no matter whether you trade as a sole trader or another entity
  • Anyone with a investment property
  • Anyone working in a high risk of being sued industry
  • Essentially if you need to have landlord insurance, or professional or public indemnity insurance then you are most likely at risk.  The main reason for being at risk is due to under insurance.
Transfer of family home to spouse or trust
The typical asset protection solution for individual at risk is to move the family home into the spouse who is not at risk, or move it into a family trust.
The main issue concerned with moving the family home into the family trust is that it loses its CGT exemption for Primary place of residence.
Generally the transfer of property to a spouse will be exempt for Capital Gains Tax purposes and may also qualify for stamp duty exemption.  (You should check with your solicitor on this).
Gift and loan back strategy
Another strategy used which is not 100% asset protection but offers some protection, is the gifting of the equity in the property to the family trust.  The trust then takes a second registered mortgage over the property (assuming the bank has a first registered mortgage).  This strategy involves stamp duty, financier consent, Capital gains tax and has top up issues (that is, as the equity increases, you need to top up the amount gifted to the trust)
IMPORTANT NOTE – When considering transfer of a property, if you declare bankruptcy within 4.5 years of the transfer, the administrator of your bankruptcy can claw back the property.
WARNING – As part of your estate planning you should consider that if something happens to the spouse of the at risk individual, the will may set out that the property transfers back to the at risk person – thus undoing the careful plans you have made.
It is vital to talk through your plans with a solicitor to ensure that the asset protection and estate planning techniques you put in place are suited to your needs.
Keeping your tax compliance up to date
When considering asset protection it is important to note that if you have not lodged your tax return for many years and would have tax to pay if you did, then you can be deemed as being bankrupt from as early as the last tax return you did lodge.  This would allow an administrator of your bankruptcy to claw back any transactions such as gifting of money or transfer of property that may have occurred since the date of the last tax return lodged to present.
Posted in Asset Protection

Taxation of a SMSF (Self Managed Super Fund ) by Sharon Plant

Taxation within a SMSF

One of the basic principles of superannuation is that it is a low taxation vehicle. The Government gives these tax concessions in return for your SMSF complying with the super laws, which restrict when you can access these funds.

The following is a overview of the basics of the taxation within a SMSF, assuming that the fund is a complying superannuation fund.

Taxable income

The trustees of a complying SMSF are liable to pay tax (from the assets of the SMSF) on the taxable income of the fund for each year of income. The taxable income of a SMSF is calculated as:

Total assessable investment income + concessional contributions + taxable capital gains – allowable deductions.

This taxable income is taxed at the concessional rate of 15%.
However, the are some special rules for:

– capital gains
– special income

And a further reduction of tax payable by way of any rebates such as imputation credits.

Capital gains tax:

A capital gain arising from the disposal of an asset of the SMSF will form part of the fund’s taxable income and will be subject to tax at 15%. However there are some further concessions:

  • – Where the fund has held the asset for more than 12 months, the fund will receive a discount of one-third of the capital gain (effectively reducing the capital gains tax to 10%). This is known as the CGT discount method. For example, if the fund makes a $10,000 capital gain on the disposal of an asset and the discount method applies, only $6,666.66 would be counted as taxable income.

  • – Where the fund acquired the asset prior to 21 September 1999 and has held it longer than 12 months, the fund has the choice of using either the above discount method or the frozen indexation method (frozen at 30 September 1999) to calculate the capital gain. If the fund acquired the asset on or before 30 June 1988, the asset is deemed to have been acquired by the fund on 30 June 1988.

  • Special income:

  • Special income of a SMSF is taxed at the highest marginal tax rate i.e. 45%. It includes:

  • – Dividends received directly or indirectly from a private company, unless the Commissioner is of the opinion that it would be unreasonable having regard to a number of factors.

  • – Distributions from a trust, where the SMSF as beneficiary had no fixed entitlement (i.e. discretionary trust distributions)

  • – Any other income of the fund where the parties were not dealing with each other at arm’s length, or the income derived is greater than that which could be expected if the parties had been dealing with each other at arm’s length (i.e. excessive unit trust distributions).

  • Concessional (Taxable) contributions

  • Concessional contributions (or formerly known as Taxable contributions) are those contributions generally made up of Employer contributions, and those personal contributions where the member has claimed a tax deduction. Contrary to popular belief, these contributions actually make up part of the fund’s taxable income.

  • Use of imputation credits

  • Once the 15% tax rate has been applied to the taxable income of the fund, the use of imputation credits may be able to reduce, or even eliminate the actual tax payable.

  • Member goes into the pension phase:

  • Upon retirement (or other condition of release), members of your SMSF will commence a private pension from the fund. From a tax perspective, any income and capital gains generated from what is known as “segregated pension assets” of the fund is subject to zero tax within the fund. That’s right, zero. In this case, any imputation credits received can be used to reduce the tax payable by other members of the fund who are in the accumulation phase. This allows incredible flexibility. If there are no “accumulation” members, then these imputation credits can be received by the SMSF as a refund from the ATO.

    Once a lump sum or pension payment is made to a member, the lump sum or income stream itself is tax free in the hands of the member if they are over the age of 60, however there may be some tax payable if you are less than 60.

Plant and Associates Pty Ltd

Accountants Beenleigh, Accountants Nerang

www.plantandassociates.com.au

1300783394

Posted in Accountant, Asset Protection, Super, Tax

SMSF – Self Managed Super Funds – by Sharon Plant

Structuring your fund

For your fund to be an SMSF it must meet several requirements under the super laws.

The requirements can vary depending on whether your fund has individual trustees or a corporate trustee. Some additional rules apply to funds with only one member (see below).

  • If your fund has individual trustees, it is an SMSF if all of the following apply:
    • it has four or fewer members
    • each member is a trustee
    • each trustee is a member
    • no member is an employee of another member, unless the members are related
    • no trustee is paid for their duties or services as a trustee.
  • If your fund has a corporate trustee, it is an SMSF if all of the following apply:
    • it has four or fewer members
    • each member of the fund is a director of the trustee company
    • each director of the corporate trustee is a member of the fund
    • no member is an employee of another member, unless the members are related
    • the corporate trustee is not paid for its services as the trustee
    • no director of the corporate trustee is paid for their duties or services as director of the corporate trustee.
  • Single member funds It is possible to set up your super fund with only one member. If your single member fund has a corporate trustee, the member must be one of the following:
    • the sole director of the corporate trustee
    • one of only two directors, that is either
      • related to the other director
      • any other person but not an employer of the member.

If you choose not to have a corporate trustee, you must have two individual trustees. One trustee must be the member and the other must be a trustee that is either:

  • a person related to the member
  • any other person but not an employer of the member.

A corporate trustee is a company incorporated under the law that acts as a trustee for the fund. If you already have a company, you may choose to use it as trustee, as long as it meets the same requirements for members and trustees.

Your choice of trustee will make a difference to the way you administer your fund and the types of benefits it can pay, so make sure it suits your circumstances.

Trustee eligibility

In most cases, all members of the fund must be trustees, so it is important to make sure all members are eligible to be a trustee.

Generally, anyone 18 years old or over and not under a legal disability (such as bankruptcy or mental incapacity) can be a trustee of an SMSF unless they are a disqualified person.

A person is disqualified if any of the following apply. They:

  • have been convicted of an offence involving dishonesty
  • have been subject to a civil penalty order under the super laws
  • are considered insolvent under administration
  • are an undischarged bankrupt
  • have been disqualified by a regulator – for example, by us or APRA.
  • A company cannot be a corporate trustee if any of the following apply:
    • the responsible officer of the company (such as a director, secretary or executive officer) is a disqualified person
    • a receiver, official manager or provisional liquidator has been appointed to the company
    • action has started to wind up the company.

You must declare that you and the other trustees or directors of the corporate trustee, are not disqualified when you register your fund with us. In certain circumstances (such as minor dishonesty offences) a disqualified person can apply to us in writing for a waiver of their disqualification status.

Minors

Members under 18 years old are under a legal disability and cannot be trustees of an SMSF. A parent or guardian of a minor who does not have a legal personal representative can act as a trustee on the minor’s behalf.

Legal personal representatives

A legal representative can be:

  • the executor of the will or the administrator of the estate of a deceased person
  • the trustee of the estate of a person under a legal disability
  • a person who holds enduring power of attorney to act on behalf of another person.

A legal personal representative can act as a trustee or director of a corporate trustee, on behalf of:

  • a deceased member, until the death benefit becomes payable
  • a member under a legal disability (mental incapacity)
  • a minor – a parent or guardian can also act as a trustee on behalf of a minor.

A legal personal representative cannot act as trustee on behalf of a disqualified person, such as an undischarged bankrupt. A legal personal representative who holds an enduring power of attorney granted by a member may be a trustee of the SMSF or a director of a corporate trustee in place of the member.

Having a resident fund

To be a complying super fund and receive tax concessions, your fund must be a resident-regulated super fund at all times during the income year. This means your fund must meet the definition of an ‘Australian superannuation fund’ for tax purposes.

If your fund is a non-complying fund, its assets (less certain contributions) and its income are taxed at the highest marginal tax rate.

Preparing an investment strategy

Before you start making investments, you must prepare an investment strategy. An investment strategy sets out how you plan to achieve the fund’s investment objectives. It provides you and the other trustees with a framework for making investment decisions to increase member benefits for their retirement.

 

A licensed financial adviser can help you prepare an investment strategy, but you and the other trustees are responsible for managing the fund’s investments.

There is no prescribed format for the investment strategy, but it must reflect the purpose and circumstances of the fund and its members and must be reviewed regularly to make sure it is still appropriate.

When preparing your investment strategy, consider the following:

  • diversification (investing in a range of assets and asset classes)
  • the risk and likely return from investments to maximise member returns, including insurance requirements
  • the liquidity of fund’s assets (how easily they can be converted to cash to meet fund expenses)
  • the fund’s ability to pay benefits when members retire and other costs the fund incurs
  • whether the fund should hold insurance cover for members
  • your members’ needs and circumstances.

Your investment strategy should be in writing so you can show your investment decisions comply with the strategy and the super laws.

  • Being a trustee of an SMSF gives you more ?exibility in investing your fund’s money. Unlike some other super funds, you can choose the investments for your fund, but you must invest according to the:
    • fund’s trust deed
    • investment strategy
    • super laws.

While the super laws do not tell you what you can and cannot invest in, they do set out certain investment restrictions you must comply with.

For example, in most cases, trustees cannot:

  • use the fund’s money to provide financial assistance to members or member’s relatives
  • acquire assets (with limited exceptions) from related parties of the fund, including
    • fund members and their associates
    • all the fund’s standard employer-sponsors and their associates
  • borrow money on the fund’s behalf (certain limited recourse borrowing arrangements are allowed)
  • lend to, invest in or lease to a related party of the fund (including related trusts) more than 5% of the fund’s total assets
  • enter into investments on the fund’s behalf that are not made or maintained on an arm’s length (commercial) basis.
Posted in Asset Protection, Property, Super

Winding up a SMSF

To wind up a SMSF you need to:

  • Refer to your SMSF Trust deed as it may contain vital information about winding up your fund.
  • Notify the ATO within 28 days
  • Deal with all the assets of the fund
  • Arrange a final audit
  • Complete your reporting responsibilities including lodging your SMSF annual return and finalising any outstanding tax liabilities.

Why would you need to wind up a SMSF

There are a number of reasons why you might need to wind up your SMSF:

  • All the members and trustees may have left the SMSF
  • All the benefits may have been paid out of the fund
  • Relationship breakdown
  • The fund may no longer meet the definition of an Australian Superannuation fund because the trustees have moved overseas permanently
  • You may have found that running an SMSF is not in your best interests
  • The trustees’ circumstances may have changed in a way that affects their capacity to effectively manage their fund.
  • There may be insufficient balance of funds in the SMSF to meet the ongoing costs of operating the SMSF.

Options available to pay out the benefits

To pay benefits to a member when you wind up your SMSF, a condition of release must be met to allow them access to their benefits. If the member does not meet a condition of release or does not want to access their benefits at the time the funds winds up, the benefits must be rolled over to another complying super fund.

Assuming a condition of release has been met, there is the option of an in specie transfer of assets to the member. This is particularly useful if the timing is not right to sell the assets in the SMSF. (This includes when a managed fund puts a stop on trading due to a financial crisis). There are various tax consequences of paying out benefits both as cash and in specie so you should always seek advice before proceeding.

Plant and Associates Pty Ltd

Accountants Beenleigh, Accountants Nerang

www.plantandassociates.com.au

1300783394

Posted in Accountant, Asset Protection, Capital Gains Tax, Deceased Estate, Property, Super Tagged with:

Do you have a SMSF and are thinking of moving overseas? by Bernie O’Sullivan and Julian Smith (Cleardocs)

Fund residency requirements generally

For an SMSF to be a ‘complying fund’ and receive concessional tax treatment, the SMSF must be an Australian resident fund. SMSFs are at risk of losing their complying status, if their members spend time working overseas. This is because the residency rules require trustees and the majority of contributing members to reside in Australia.

For a fund to remain resident, the fund has to satisfy the residency rules throughout an income year — unless an exception applies.

The trustees’ presence rule

Generally speaking, for SMSFs, the individual trustees of the fund must be the same people as the fund’s members. Similarly, if a fund has a corporate trustee, then the directors of the trustee company must be the same people as the fund’s members.

Under the residency rules, central management and control of the SMSF must be in Australia: this implies that the trustee directors or individual trustees must function in Australia. Although these are commonly called residency rules, on closer examination they actually involve a physical presence test, rather than a residency test.

The exception to the trustees’ presence rule

However, there is one exception: a trustee or director may be absent from Australia for a continuous period of up to 2 years and still not jeopardise the fund’s complying status. To start the 2 year period again, the person must return to Australia for a visit of more than 28 days.

The risk to the SMSF by a breach of the trustees’ presence rule

The problem then, is that an overseas assignment of more than 2 years may well pose a residency problem for an SMSF — unless the assignment is broken by a return to Australia for a month or more.

The active members asset rule

Non-resident members must not have more than 50% of the total fund of active members

Member residency requirements revolve around the concept of an “active” member. Generally speaking, an active member is a member who is resident in Australia and currently contributing to the SMSF, or having contributions made by their employer to the SMSF.

Under another rule, the accumulated entitlements of non-resident active members must not exceed 50% of the entitlements of total active members — unless an exception applies.

The exception to the active members asset rule

However, there is also an exception to this rule. The amount of active member entitlements does not include those of a member:

  • who does not contribute to the fund when they are non-resident; and
  • who does not have contributions made by their employer to the fund in respect of periods of non-residency

This exception is available because the member is considered non-active.

Non-active, non-resident members still cause a problem…down the track

Even if that exception applies, a non-active, non-resident member will still present a problem to the SMSF if they are overseas for more than 2 years. This is because the SMSF will not be able to comply with the trustees’ presence rule.

Why is it important for a fund to maintain its residency status?

A fund needs to maintain its residency status. If a fund loses its residency status:

  • it will no longer be “complying”;
  • the tax rate on its income and gains increases from 15% to 45%;
  • a tax of 45% of its assets applies in the year it becomes non-complying;
  • a tax of 45% of the assets applies again if it then becomes complying again;
  • it loses the discount for certain realised capital gains;
  • it loses the exemption for income supporting current pensions;
  • it loses exemption of income flowing from life policy investments and PST unit realisations; and
  • it loses deductions for life and disability insurance premiums.

The ATO’s approach

The ATO has indicated at recent industry forums, that:

  • it has no discretion to ignore a fund’s non-compliance arising from non-resident status; and
  • it will be monitoring the residency status of SMSFs.

Funds can avoid residency problems

Planning an overseas assignment

It is crucial to seek advice on how a SMSF will be managed, before members go overseas. Although a member/trustee may plan to be away for less than 2 years, a change of plan to extend the trip may have disastrous results.

Contributions

If one or more remaining resident members have:

  • more than 50% of the fund’s assets, then this will still satisfy the 50% resident active member requirement , and contributions may continue. However, it will be important to carefully monitor the situation in case those balances change or the intentions of the remaining resident members change; or
  • less than 50% of the fund’s assets, then this will not satisfy the test. However, this problem may be avoided if during a period of non-residency, the contributions of the remaining resident members cease and no employer support is provided that is, the remaining members become non-active. However, the fund will still have to comply with the trustees’ presence rule

Trustees

It is important to seek advice about maintaining central management and control in Australia. It is not enough that the trustees may remain resident for tax purposes.

The legislation requires the trustees to be present in Australia, unless the 2 year concession applies. If a majority of the trustees/members remain in Australia or satisfy the 2 year rule, then it may be possible to put forward a case supporting Australian management and control. However, it is crucial to plan ahead and monitor to ensure that compliance is achieved.

What you should plan for

If there is any doubt about the central management and control of the fund, it would be prudent to plan for:

  • Replacing the trustees:

This could be done by converting the SMSF to a small APRA fund with a professional trustee. This approach would generally enable the fund to continue its existing investments and strategy — as long as the new trustee agrees with the existing investment strategy. However, there are increased costs to engage a professional trustee and increased regulatory fees.

  • Transferring entitlements to another fund:

Another approach is to consider winding up the fund and transferring the entitlements to a larger fund. However, the trustees would lose control over the specific assets: Also larger funds are most unlikely to accept the transfer of the member’s specific assets. This means that the SMSF’s assets may have to be converted to cash first (with duty and CGT consequences). However, one benefit is that administrative burdens and compliance concerns become a thing of the past.

These choices should be carefully considered in the context of members’ long term plans.

Plant and Associates Pty Ltd

www.plantandassociates.com.au

1300783394

admin@plantandassociates.com.au

Posted in Accountant, Asset Protection, Super, Tax

What happens to your assets if your beneficiary goes bankrupt? – Bryan Mitchell

Using a Testamentary Discretionary Trust Bankruptcy is a very real possibility for anyone in business, even as fears about a slowdown in China, the over-heated property market and fluctations in the stock market abound. While many canny business people structure their current circumstances to avoid losing assets in the event of bankruptcy, very few have given thought to what might happen if one of their adult children goes bankrupt. What happens to your assets, if left to a bankrupt child in your will?

Those assets are lost to your child’s creditors.

But there is a way of planning for this possibility.

A testamentary discretionary trust is a type of trust created under a will, comes into existence only upon the administration of the deceased estate and has four elements: the trustee(s), the assets, the beneficiaries and the discretion.

One of major advantages of using a testamentary discretionary trust is for asset protection. There are three examples assets can be protected.

Bankruptcy

Consider this scenario: you have retired after a lifetime of work, and you have your home, your super, and some investments. You’d like to pass on these assets for your son’s benefit and the benefit of his children.
Your son is a successful businessman, but the GFC hit him hard. He lost revenue and staff, and now the banks are closing in, threatening to sell off his assets to repay their debts. If you were to die, and your will passes your assets directly to your son, your assets could be used to satisfy your son’s creditors.
Section 116 of the Bankruptcy Act 1966 says that when someone becomes bankrupt, all property vests to the trustee in bankruptcy.
But S116 (2)(a) adds that this does not extend to property held in trust for another person.

A better approach is to use a testamentary discretionary trust to be created to come into effect upon your death. The trust will own the assets rather than passing directly into the name of your son. Making your son a beneficiary of the trust means that he can obtain the benefits of the assets held in trust without the risk of owning the assets outright.
If Sam goes bankrupt, the creditors can’t place a claim on the assets in the testamentary discretionary trust.

This part of the law is extremely complex. Simply creating a testamentary discretionary trust will not solve the problem. The trust must be structured in a certain way, and tailored to meet the client’s specific circumstances. If the trust is properly structured and carefully planned, none of the beneficiaries has an absolute entitlement to capital or income, and for a trustee in bankruptcy to say otherwise would then impact on the rights of other potential beneficiaries.

High-Risk Professions

Because a testamentary discretionary trust is the legal owner of the assets, rather than a person, it is highly attractive to beneficiaries who are at risk of being sued, such as solicitors, doctors, company directors and business owners. Any legal action against them personally cannot take the assets of the trust, which protects the assets for future generations. It is common for such professionals to take care not to own assets in their own names throughout their career, but what about the people they might receive an inheritance from?

Alan is a financial planner in a partnership of four. A regular audit discovered that one of his partners has been conducting business dishonestly, investing funds on behalf of clients that the clients did not authorise. A group of clients launches legal action against the partnership for damages.  Fortunately Alan owned very little in his name, preferring to keep assets well out of his (and his creditor’s) legal reach. However, when his father died in the same year, his strategy fell apart. His father had made no provisions in his will to take into account Alan’s risk of being sued. The assets were inherited in Alan’s name, and used immediately to satisfy his creditors. Rather than his father’s assets being used for his family’s benefit, they were lost.

A testamentary discretionary trust established by his father would have avoided this scenario. The assets would have been owned by the trust and the creditors would not have been able to touch them. This is a what-if scenario rarely considered by someone who doesn’t know succession law thoroughly.

Spendthrift

Finally, a testamentary discretionary trust can be used to protect assets where a family member has a vulnerability. Inheriting a chunk of assets or money is not always in the best interests of a beneficiary, and a trust can distribute income or capital with discretion not available under a normal will.

An example would be for a child with a gambling problem. Rather than receiving his share of the estate in one big transaction, a trust can distribute an income stream or small capital distributions so that the gambler can’t lose the assets. In this way, assets can be protected from his compulsion for the benefit of his children or other family members.

Bryan Mitchell is an Accredited Specialist in Succession Law (Qld).

Posted in Asset Protection