Tag: ATO

SMSF pension fund tax exemption ceases on death

A self managed superannuation fund that is paying an income stream (pension) is exempt from tax including capital gains) on the earnings from assests used to pay the pension.
The ATO has issued a draft ruling TD2001/D3 discussing its views on when a pension commences and ceases.

The draft ruling confirms that the ATO believes that a:

superannuation income stream ceases as soon as the member in receipt of the superannuation income stream dies, unless a dependent beneficiary of the deceased is automatically entitled under the superannuation fund’s deed, or the rules of the superannuation income stream, to receive an income stream on the death of the member.

THe consequences of this is that any fund investment sold at at profit to fund the payment of death benefits to the member’s benficiaries with be taxable capital gains for the fund.

This ruling will not comes as a surprise as many commentators have reached the same interpretation of the law.

One way to avoid or mininise this additional tax sting on death is for the trustees to try to avoid building up large unrealised capital gains. Where the fund invests in listed investments such as shares, the trustees could regularly sell growing shares and repurchase them at the same price. This would realise the capital gain while the fund is still tax exempt.

Service trusts – a guide to their safe use.

Many business people use a service trust to supply the use of equipment, staff, premises and administration services to their main business entity. The ATO has been stated concerns about them for decades but has only become active in the last few years.
Law Central have put together a useful guide on how to avoid coming unstuck in the even of a tax audit or liquidation. Below is a combination of their advice plus some of ours.

1: Know why you have a service trust

Let me tell you a story with a fun multiple answer quiz:

Assume you get audited. The ATO shows up at your door and water-boards you. They ask why you set up your service trust. So why did you do it?

  • I did it to save tax
  • I did it for asset protection
  • None of the above

If you choose (a) or (b), you need help from your accountant. Run, don’t walk.

Why is (a) wrong?

Repeat after me: Your service trust is not there to avoid tax. Etch this in your brain before reading any further. It helps you fight the urge to sing like a canary when the ATO gets out the crocodile shears.

But can’t I legitimately structure my affairs to save tax? You would think in a democracy that this is the case. But it isn’t. If the dominant purpose is to save tax then no. Remember, there is a fine difference between tax planning (legal) and tax avoidance (illegal).

The Part IVA general anti avoidance provision hovers over every action. If a reasonable person in your position believes the service trust exists solely for the purpose of avoiding tax – then think of a good place to hide your shank in jail.

Why is (b) wrong?

Cleverly (or so you think), you are adamant that your service trust is not there to save tax – you set it up for asset protection. And you’re a man of your word – you say the same thing in a suit in court (when the ATO is grilling you).

Later on, your business goes bust. Here lies the problem. You now can’t plead in the insolvency court that your service trust was there to save tax. The ATO transcripts where you swear your service trust is there for asset protection reasons don’t make good reading in the bankruptcy courts.

Why is (c) correct?

It is rarely wise to cite tax savings or asset protection as a reason for doing anything. If someone asks, service trusts are great to help your Business Succession Planning, Estate Planning and modern business structures – and they really are. Saving tax and asset protection are merely wonderful by-products.

2 – Set up your structures properly

The last thing you want to do is hand the ATO the ammunition to attack you. Poorly drafted or incorrectly implemented arrangements are the kiss of death.

So how do you set up a service trust?

  • Make sure the core business structure is up-to-date. Update trust deeds and the Constitution.
  • Set up the new service trust vehicle: family trust, unit trust, hybrid trust or company. You now have your service trust (or service company – quite rare). The service trust provides as many services as it can to the main business: this includes cleaning, secretarial, serviced offices, accounting, chattel leasing, property leases etc…
  • Build a Service Trust Agreement. This is the ‘glue’ between the core business and the service trust. You need this so you don’t offend our preciously delicate friends at the ATO.

3 – Charge commercial rates

Remember those naughty people we spoke about at the start who got caught. Chances are they were being greedy and charging more than commercial rates. Or were lazy and failing to make the service trust look arms length.

The mantra is:

“My service trust always acts as though it is arms length and a genuine business”

Your service trust can’t be a sham or non-commercial. Forget about “mark-ups”. A commercial business doesn’t charge “mark-ups”. It charges what the market can bear. It can only charge what the market would charge in a normal arms length transaction. Not sure of what the market will bear? Then get some quotes from other businesses in that industry. Is your service trust providing exceptional quality administrative services? Then you can charge more – but only if the market would charge this amount anyway.

Phillips case is the most telling High Court authority regarding service trusts. In a subsequent tax statement the Deputy Commissioner of Taxation stated (correctly in my view):

“There may have been widespread use of service trust arrangements which involved payments that were grossly excessive in relation to the benefit conferred by the service arrangement.”

The Deputy Commissioner is correct. Service trusts are completely valid – as long as they are on valid commercial grounds. But what are valid commercial grounds?

4: Get professional help

Invest in help from your accountant. Their knowledge is invaluable and saves you more than just money.

5: Do what your documents say

If you have an agreement that says that the service trust will provide certain services, don’t let the main business entity pay for them directly. If you treat your two businesses as though they are really just one, don’t be surprised if the Tax Office does the same.

Tax Office offers new tax file numbers to around 3,000 super funds

The Tax Office has written to 3,122 trustees of self managed super funds offering them a new tax file number (TFN) for their funds.

The funds’ existing tax file numbers were on a CD of scanned letters being sent to the Tax Office via an authorised (door to door) courier from the company contracted to print the letters. The courier received the CD but it was not delivered to the Tax Office and has gone missing.

Tax Commissioner Michael D’Ascenzo said he wanted to assure the community the Tax Office takes the privacy of their personal details very seriously.

“Nothing is more important to the community and fundamental to good tax administration than the security of taxpayer information,” Mr D’Ascenzo said.

“I am concerned that this parcel containing taxpayer information has failed to be delivered, even though the courier believes the parcel is still within their warehouse facilities.

“While there is no evidence the information has fallen into the wrong hands or been misused, I am taking the matter seriously.

“As there is a risk the information could be misused if the courier is unable to locate the CD, we are providing the relevant trustees the opportunity to ensure that there is no unauthorised use of their funds’ relevant tax records.

Tax office Media release 2008/53