State Law changes and a warning issued for Family Trusts
Family Trusts may be subject to surprise tax bills due to recent changes to State laws.
There have been recent changes to legislation in New South Wales (NSW), Victoria (VIC) and Queensland (QLD) that impose a surcharge on foreigners buying residential land. This can become an issue if a trust deed has been drafted allowing the trustee to distribute income and capital to a broad number of potential beneficiaries. If a foreigner is nominated to be one of the beneficiaries, then the trust may be required to pay the new surcharge in relation to purchasing residential land in New South Wales, Victoria or Queensland. If you cannot exclude foreigners as beneficiaries you have the potential to be exposed to the tax. Although the distribution may not occur, the trust deed still allows it as an option.
How can you avoid being trapped by the surcharge?
Amending the trust deed could be a worthwhile solution, assuming the trust does not have any foreigners it is wishing to distribute to. The amendment would exclude a “foreign person” from being a beneficiary and being able to benefit from the trust. However, it is advised to work through this deed amendment process with caution so ensure that even worse tax implication don’t follow, for instance you would need to confirm the amendment does not cause the trust to be resettled.
What’s the concern with Trust Deeds?
The majority of family trusts have a large pool of potential beneficiaries and unlimited power to distribute income or capital; this is usually as a result of asset protection objectives.
This means that no one beneficiary can claim that they have a right to the assets or income of the trust, which is helpful when a creditor is looking to target assets – you don’t have a right to the assets or income of the trust until the trust agrees to distribute to you.
The State law changes and the exposure for family trusts
The below table shows the Legislative changes introduced at the end of 2016. These states enforce a surcharge on “foreign persons” who purchase and own certain types of residential land in those States (this includes units in a landholder).
|State||Foreign Surcharge Duty||Land Tax Surcharge|
|NSW||4% (21 June 2016)||0.75%|
|QLD||3% (1 Oct 2016)||n/a|
|VIC||7% (1 July 2016)||1.5%|
The surcharge is in addition to existing land taxes and stamp duty. If your trust deed does not exclude a foreign person, then it might be liable to pay the new surcharge if it holds or purchases residential land in the above States.
If you are concerned about the impact of these legislative changes on your family trust, please do not hesitate to call or email us and we can help you work through this issue.
Initiatives for Entrepreneurs
The recent introduction of new initiatives seek to free up entrepreneurs from excessive regulation, strict tax regimes, and unplanned outcomes. However, few entrepreneurs are aware of what is offered to them and risk limiting their options for growth. The following will explore what initiatives are available and the tax implications of raising capital.
Tax relief for business changing structures
It is often likely that a business will outgrow its structure as changes over time may mean that a certain business structure is not as effective as it originally would have been. Small business’ can now rollover from one business structure to another without triggering adverse consequences under the income tax system.
Under new rules that apply from 1 July 2016, if certain conditions are met and your business genuinely needs to move from one structure to another for commercial reasons, you can do this without triggering a tax bill. When assets are transferred to any business structure and the following key conditions are satisfied, small businesses have the opportunity to access complete income tax relief:
- The transaction is a genuine restructure of an ongoing business. Therefore, the concessions can’t be used for winding down or selling a business.
- Each of the parties to the transaction is a small business entity (revenue under $2m, although this might be increased to $10m) or is related to a small business entity in the year the transaction occurs. The turnover test is subject to some grouping rules.
- The business owners (the people who have ultimate economic ownership of the assets) and their share in those assets do not materially change.
- The asset being transferred is currently being used in a business carried on by the current owner or certain related parties.
- Both the original entity and the entity the business is being transferred into need to be Australian residents.
- The parties involved in the transaction must choose jointly to apply the rollover.
- None of the entities involved in the transaction are a superannuation fund or exempt entity.
Incentives for investors in innovation
It is often difficult for innovative companies to obtain funding as pre-commercialised developments carry greater risk. However, new tax laws offer incentives for investment in these early stage innovation companies (ESIC):
- Entities acquiring newly issued shares in an Australian early stage innovation company will receive a non-refundable tax offset of 20% of the value of the investment, subject to a maximum offset cap of $200,000.
- Investors can also disregard any capital gains realised on the shares if they have been held for between one and ten years.
These incentives were intended to unite start-up companies with investors that have both the capital and business experience to help develop successful innovative companies.
Potential investor that these incentives were designed for may include potential investors who are either investing directly or through a company, trust or partnership. With the high risk associated with investing in innovation companies, the amendments limit the risk exposure of investors to $50,000 per year. The rules are more relaxed for sophisticated investors.
In general, an ESIC qualifies if it is:
- At an early stage of its development; and
- Developing new or significantly improved innovations with the purpose of commercialisation to generate an economic return.
There a number of incentives also available to early stage venture capital partnerships offering:
- A limited partner in an early stage venture capital limited partnership (ESVCLP) is entitled to a non-refundable, carry-forward tax offset which is equal to up to 10% of contributions made by the partner to the ESVCLP during the year. The amount of the tax offset may be reduced if the amounts contributed by the partners are not used by the ESVCLP in certain ways.
- The maximum committed capital of an ESVCLP is increased from $100m to $200m.
- If an ESVCLP does not dispose of an investment within a certain time period, the ESVCLP will only be entitled to a partial CGT exemption.
Employee share schemes to help fast growth companies attract talent
Employee share scheme have become even more attractive recently as there has been significant changes in regards to how they are taxed.
ESS’ were originally established to allow employers to issue shares to their employees at a discount to the market value of the shares or rights. In general, when an employee receives shares or rights under an ESS they are taxed on the discount they have received. New Rules have enabled employees involved in ESS to defer the taxing point until a clear economic benefit from the shares is received.
Research and development tax incentive
The Government provides an R&D tax offset to encourage companies to conduct R&D activities that benefit Australia. The current tax-offset rates that apply to qualifying companies are:
- A 43.5% refundable tax offset for companies with an aggregated turnover of less than $20 million (unless they are controlled by tax exempt entities); and
- A 38.5% non-refundable tax offset for all other companies.
- The rate of the R&D tax offset is reduced to the company tax rate if the company’s notional R&D deductions exceed $100 million for an income year.
Imminent changes to crowdfunding
Crowdfunding is the practice of using internet based platforms and social media platforms to raise fund for business ventures or other projects. In general, the party attempting to raise the funds will connect with an intermediary to collect funds from contributors.
There are different methods in which this can be done and how the crowdfunding is raised will determine the tax treatment of any funds received:
- Donation-based – The contributor does not receive anything in return other than an acknowledgement
- Reward-based – The promoter provides something in return for the payment (e.g., goods, services, rights, discounts etc.,)
- Equity-based – The contribution is made in return for shares in a company
- Debt-based- The contribution is made in the form of a loan with the promoter making interest and principal payments
A Bill that has just passed Parliament seeks to construct a regulatory framework for crowdfunding.
Currently the Government has no viable way of protecting investors or regulating how crowdfunding is raised. This new bill attempts bring crowdfunding under the Corporations Act while attempting to avoid onerous regulatory commitments that will suppress the flow of funds. The rules will restrict how much Mum and Dad investors (retail clients) can invest in a single company in any one year to $10,000, and provide a cooling off period of 5 days. You can expect these changes to start coming into effect this year.
From a tax perspective, funds from crowdfunding are treated like any other form of income – the funds are likely to be taxable if:
- The crowdfunding relates to employment activities (e.g., raising money to fund a project that is linked to existing employment duties);
- The promoter enters into the arrangement with the intention of making a profit or gain and the project is operated in a business like way; or
- The funds are received in the ordinary course of a business.
Funds are generally not taxable if:
- They are received for a personal project where there is no intent of making a profit (e.g, the project relates to a hobby)
- They are received under an equity based crowdfunding model and therefore the funds would generally form part of the share capital of the company that is undertaking the project. Payments are made by the company to contributors then these would generally be treated as either dividends (it may be possible to attach franking credits to the dividends) or a return of share capital.
- They are received under a debt based crowdfunding model and therefore the funds would simply be treated as a loan. When payments are made by the organizer to contributors the interest component might be deductible in some circumstances.
When can I claim self-education expenses?
Typically, if you undertake study that is associated to your work you can claim the costs of that study as a tax deduction. There is also no limit to the value of the deduction you can claim. While this all sounds very promising there are issues to consider before claiming some expenses as a self-education expense.
To be deductible, the study must be connected to the income you are earning (either to maintain or improve your specific skills or knowledge), or is likely to result in increased income from existing income earning activities.
The ATO is more likely to target large self-education expenses. Individuals who have concluded post graduate study know that these expenses can add up very quickly, particularly when you add in any other expenses such as books or travel. It’s important to ensure that there is a clear connection between your current job or business activity and the expenses you are claiming before you claim them.
If you are concerned about whether or not the self-education you are intending to complete is deductible, please call or email us and we can help clarify the issue for you.