September 2021 Newsletter

September 2021 Newsletter 4256 2832 Website Admin

In this issue:

  • How to treat work-related travel and living away from home costs;
  • SMSFs and property development – emerging risks;
  • Claiming GST credits for employee reimbursements;
  • Buying a new house before selling the old one;
  • Trust distributions to non-residents;
  • and ‘Stapling super’ – reducing multiple accounts for employees.
  • Please contact us for clarification, or further advice, regarding any of the topics covered in this newsletter.

Need to knows’ for September

Legislation has been amended that makes NSW and Victorian government grant programs eligible for treatment as non-assessable, non-exempt income (NANE). This has important tax consequences as it means the amount is not only exempt and not assessable, but also not required to be used to reduce any existing tax losses of the taxpayer (unlike exempt income per se) – in a nutshell, it has a totally neutral effect on a taxpayer’s tax situation.

In a somewhat significant decision, the AAT has allowed a taxpayer’s objection against an adverse private ruling and found that he was carrying on “a business of renting properties” in relation to several rental properties he owned (and which he later transferred to his SMSF). Nevertheless, it’s unusual for a taxpayer to be found to be carrying on a business in relation to such activities, and the ATO (and courts) set a very high bar in order to be able to say that person is carrying on such a business.

In SMSF news, the ATO has released their final ruling (LCR 2021/2) on how a loss, outgoing or expense of a superannuation fund can cause a fund’s income to be taxed at ‘non-arm’s length income’ (i.e. taxed at 45%) where a superannuation fund and another party are not dealing at arm’s length. The ATO has also released a draft ruling (TR 2010/1DC) which proposes that any non-arm’s length income dealings are not considered superannuation contributions on the same transaction.

Please contact us for clarification, or further advice, regarding any of the topics covered in this newsletter.

August 2021 Newsletter

August 2021 Newsletter 4256 2832 Website Admin

In this issue:

  • With reforms to superannuation – including for SMSFs – on the horizon, our leading article covers what’s coming, including more accountability for funds and flexibility for super holders.
  • We’ve got two articles to help you understand how trusts work: ‘Trust distributions’ goes through the different roles involved in a trust, while ‘Trust losses’ explains what constitutes a family in the context of a family trust election.
  • If you’re one of Australia’s two-million-plus rental property investors, our article on capital works deductions is a must-read, and if you’re among the 90% of Aussies who participate in a rewards program, our final article clarifies some of the rules that apply to your points collection.

Please contact us for clarification, or further advice, regarding any of the topics covered in this newsletter.

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Trusts 101: What are they, and how do they work?

Trusts 101: What are they, and how do they work? Lanteri Partners

One of the big motivations for considering using a trust is to protect assets. Property and other assets can be moved into a trust for protection from creditors, to maintain an estate until a beneficiary becomes old enough to have legal possession, or isolate valuable assets from a trading company that may be more exposed to litigation, for example.

Trusts, if set up in the right way, can help you legally minimise some tax liabilities. But it is a tricky area, and the taxman is always on the lookout to close perceived loopholes or an over-enthusiastic stretching of the scope for reducing tax. Specialised advice will go a long way.

The word used to name these types of arrangements – “trust” – is appropriate. A trust is a structure that separates control and legal ownership from beneficial ownership; so that at least one person and/or company agrees to hold and manage assets or property in a way that will benefit someone else (the beneficiary). A trust therefore is a formal structure for an obligation, where “beneficiaries” place their trust (in the sense of “confidence”) in the controller or holder of assets (called the “trustee”; again appropriate, as the receiver of their trust) to manage those assets for their eventual benefit.

You could almost liken a trust to a private jet. The jet is put under the control of a pilot, who is also the owner (the trustee) to fly the jet while carrying the passengers (beneficiaries) to a destination (when the trust ends, or is “vested”) where the cargo or luggage (assets and property) is unloaded and given to the passengers again. During the flight, the luggage and cargo is maintained in the best condition possible and the passengers may occasionally be offered food and drinks if the ticket contract allows it (the beneficiaries may be paid distributions from the trust). The pilot may also off-load some cargo at stopovers along the way.

Separate control from beneficial ownership

The structure of a trust allows a business or asset to be put into the hands of a third party (trustee) who is given legal control and has a duty to operate that business or manage these assets to benefit someone else (beneficiaries). This is known as a “fiduciary duty”.

There are various types of trusts. You can have a fixed trust, discretionary trust, hybrid trust, unit trust and many more, each with unique characteristics. A deceased estate is also a trust, being property and assets that are held and managed by the executor (the trustee) for those who will inherit them.

Trusts can exist even without explicit intention by the parties to create a trust – it is the existence of the necessary relationship (like the deceased estate example) that forms a trust, not formalities. Having said that, modern trusts are generally governed by written trust deeds that spell out how it is set up and the rules for its maintenance, the rights and obligations of all parties, and also how income from the trust’s assets is “distributed”.

Distributions and tax

A trust calculates its annual taxable income under the usual tax laws and then the trustee distributes and/or retains the income. Income that is distributed to beneficiaries will be treated as though the beneficiaries earned it directly and will be taxable at their own marginal rates. On the flip side, the trustee has to pay tax (on behalf of the trust) on any taxable income that is not distributed. Undistributed income is taxed at the top rate (including Medicare levy) of 47%. There are some cases where the trustee pays tax on behalf of a beneficiary, such as a child or a foreign resident.

When the trustee decides whether and how much to distribute to each beneficiary, the trustee should take into account each beneficiary’s financial, taxation and personal circumstances and distribute income in the way that best serves everyone. Of course, the trustee is restricted by the terms of the trust deed.

“Ownership” conundrums

Another spur for trust use may occur if means or asset tests for government benefits are likely to figure in your financial future. Trusts can help here with the re-allocation of legal ownership without completely letting go of enjoying the benefits of the asset.

The other side of asset protection is a consideration for inheritance. If a prime asset is “owned” by a trust, like for instance a house with pristine beach front, and the trust deed is specific in terms of selling and/or maintaining the beach house, future generations of the family will be able to enjoy the same asset and not have it sold off by some initial inheriting spendthrift relative.

There are many more variations not covered here, and much more regulation and considerations than can be covered in this newsletter. The area of trusts is a complex one, and anyone considering setting up their own trust is well advised to seek expert advice.