Here is a current list of hot tax topics. If you require assistance from a Sydney Tax Advisor please contact us:
a) Division 7A
It appears the Government will implement the Tax Boards review of Div 7A, which could possibly mean that all Div 7A loans will now be fixed over a 10 year period. The calculation of interest will also change. In addition there will likely be a self correcting mechanism to fix Div 7A. Currently the only option is a 109RB application which can be probkematic given it is at the Commissioners discretion to exercise.
b) Small Business Concessions
As announced in last years Budget the Government has introduced legislation that closes a loophole that allows certain taxpayers to access the small business concessions by establishing a ‘small’ business in the same year as selling shares in a company, therefore enabling them to pass the turnover test.
The sledge hammer to crack a nut approach appears problematic in the first draft as the it now limits the availability of the concession to a range of taxpayers including those that were doing the right thing. My concern is not so much the effective application date (i.e. 1 July 2017) but the fact that if entities have an active asset reserve from prior period sales of small businesses, it may be problematic extracting the reserve on liquidation given the company will unlikely be carrying on business (which is a requirement at the time of sale/cancellation of shares). Generally shares are cancelled after 3 months of lodging ASIC Form 523, hence it would be a tough argument that the company is carrying on business, even under the ATO current draft ruling. At this stage its a wait and see approach.
c) Tax Rates and Franking a Dividend
You know there are problems with the tax system when its difficult to answer this basic question. Old rules, current rules proposed rules, hypothetical positions, overlaying this year threshold on last years for franking, base rate entity passive income, what a joke! The current debacle over the corporate tax rate is a mess. The ATO need to finalise their current approach to something that is workable. Clients expect us to be able to answer this basic question without being charged considerable time to determine the level of tax and franking.
d) 100A Reimbursement Agreements
I suspect this section will get more airtime as the ATO tackle taxpayers and distributions from trusts. For those not familiar with 100A of the 1936 ITAA (you should be!), it works like this.
Mum and Dad establish the Family Trust. During the year the trust generates $40,000 of income. As mum and dad are working, the income is distributed to the adult kids that currently study at uni. The trustee pays out the distribution (as there is concern having a large asset of the kids build up in the trust which could be open for the picking for defacto’s etc). The trustee transfers the cash either to the kids (then onto mum and dad) or simply transfer the cash direct to Mum and Dad. Seen this before?
Well 100A applies and taxes the trustee at top marginal tax rates. Generally, the only reason the funds went to the kids was due to their low tax rate. Sure, the ATO have a carve out for ‘family arrangements’ however it is questionable whether this falls within a ‘family arrangement’. A recent AAT case pretty much replicated the above facts and 100A was applied.
Worst of all, as 100A is an anti-avoidance provision there is no point sticking your head in the sand and thinking the 4 year period of amendment will save you. As 100A applies the period of amendment is open – indefinitely! You have been warned.
Note, the above is the opinion of the writer only and should not be construed as taxation advice. If you need the services of a Sydney tax advisor please call 02 8264-0755.