Category: Tax

Tax danger in company guarantees

A potential disaster
Tom and Anna are the owners of a company that operates four very successful cafes. Three of the cafes operate from strata retail premises owned by the company. The company has been built up to this stage over 12 years by the reinvestment of virtually all profits at the expense of Tom and Anna’s personal lifestyle.

After years of living in rental accommodation Tom and Anna recently decided to purchase their own home, since they have negligible personal assets (other than their shares in the company). Their bank manager told them he would approve a loan for the required $545,000 only if the company provided a guarantee for this personal borrowing. Tom and Anna agreed to this condition when he pointed out that no stamp duty cost would be involved since the assets of the company were already charged in favour of the bank to secure the company’s small overdraft.

Tom and Anna went ahead with the purchase of their dream home.

Potential Disaster! If Tom and Anna default on the loan they will be deemed to have received an unfranked dividend of $545,000 from their company, resulting in a tax liability of $253,425. To add insult to injury, the company’s franking account balance will be reduced by $545,000, possibly resulting in a franking deficit tax liability.

Believe it or not, this is the consequence of Division 7A of the Income Tax Assessment Act 1936. Under Division 7A, a company guarantee in favour of shareholders is treated as a deemed dividend to the extent the guarantee is called upon. It does not appear possible to undo the tax mischief that can be unwittingly created by the giving of a company guarantee.

Once again, neither ignorance of the provisions nor a lack of tax avoidance motives can be used to get Tom and Anna off the hook.

This article appeared in Thomson’s inTax Magazine (August 2006);

After 500 years – Family Trusts subject to bankruptcy

Since King Henry VIII’s rule, Family Trusts have been protected from bankruptcy. The general rule is that if something is deemed to be your “property” then the bankruptcy courts can get their hands on it. Beneficiaries of a Family Trust only had a “mere expectancy” of the assets contained in the trust. Therefore, the bankruptcy courts had no power to include trust assets in a bankrupt beneficiary’s assets. However, on 20 April 2006 something terrible happened. On that day, the Federal Court held that interests in a Family Trust could constitute “property”.

The case is Australian Securities and Investment Commission (ASIC) in the matter of Richstar Enterprises Pty Ltd. It relates to Norm Carey. He was required to disclose his assets. Fair enough. But ASIC sought to have these receiver orders extended to the disclosure of property held by third parties as trustees of any trust in which Carey was a beneficiary. Extraordinary.

Now, this is the rub. The Court said that in the case of some of the nominated Family Trusts, Carey’s interests came within the definition of “property” in section 9 of the Corporations Act 2001. When can this ever be the case? The court said that this is the case where Carey effectively controlled the exercise of the trustee’s discretion to distribute. Apart from the Family Court, no court has ever taken this position before.

Obviously, not all of the interests fell into this category of “property”. Some interests in the trusts were something less than property – being mere expectancies. Quite clearly the court is correct in not extending the orders to all property held in trusts where Carey was a mere discretionary beneficiary.

Now at this stage it is just an order for Carey to talk about his assets. They haven’t been lost yet to the receivers. But it does raise the alarm bells for all clients that are in existing Family Trusts.

Thanks to Brett Davies, Law Central for this news.

Tax Office to run data–match check on fishing industry

fishing boat
The Tax Office is to request and collect information regarding about 5,000 licence holders in the fishing industry from a range of State government authorities across Australia eg NSW Fisheries, NSW Office of State Revenue, Qld Dept of Fisheries, Dept of Primary Industry (Vic). It will then data–match that information with Tax Office data to identify compliance with tax laws.