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Budget Announcements: Super contributions from a small business standpoint.

Super contributions from a small business standpoint.

Scott Morrison’s budget has been received with mixed reactions, but what effect does it have on small business and super?

The small business capital gains concessions in Division 152 of the Income Tax Assessment Act 1997 can be a fruitful tool for those involved in small business that are looking to add a little spice to their super. Whilst these concessions can be a real boon when properly utilized, there is no comment so far on whether their effectiveness will be impeached by Morrison’s new, slightly stingier, super rules.

A key aspect of the budget was the introduction of a lifetime non-concessional contributions cap of $500,000. The lifetime cap takes into account all non-concessional contributions made on or after 1 July 2007, and will commence at 7:30pm on 3 May 2016. The purpose of this cap, according to the ‘Tax and Super’ Budget overview is to:

“Limit the extent to which the superannuation system can be used for tax minimisation and estate planning. Less than 1% of superannuation fund members have made contributions above this cap since 2007.”

It is important to note that contributions made before commencement cannot result in an excess. However, excess contributions made after commencement will need to be removed or be subject to penalty tax. The cap will be indexed to average weekly ordinary time earnings and is estimated to have a gain to revenue or $550 million over the forward estimates period.

Other relevant Budgetary Measures:

From 1 July 2017 a $1.6 million superannuation transfer balance cap on the total amount of superannuation that an individual can transfer into retirement phase accounts will be introduced.
Will require those with combines incomes and superannuation contributions greater than $250,000 to pay 30% tax on their concessional contributions, up from 15%.
From 1 July 2017, the superannuation concessional contributions cap will be lowered to $25,000 per annum.
The government will also introduce catch-up concessional superannuation spending by allowing unused concessional caps to be carried forward on a rolling basis for up to 5 years for those account balances of $500,000 or less. This will allow those with lower contributions, interrupted work patterns or irregular paying capacity to make ‘catch-up’ payments to boost their superannuation savings.
From 2016-17, the unincorporated small business tax discount will be available to businesses with an annual turnover of less than $5 million, up from the current threshold of $2 million, and will be increased to 8%.

Do the new budgetary measures alter the effectiveness of div 152 and small business CGT concessions?

S 292.90 (1) ITAA 1997 states that your non-concessional contributions for a financial year are the sum of:

(a) each contribution under subsection (2)

Subsection (2): a contribution is covered under this subsection if:

(c) it is not any of the following:

(iii) a contribution covered under s 292-100 (certain CGT payments), to the extent that it does not exceed your CGT cap amount when it is made.

Therefore, if the small business CGT concessions are included in section 292.100, they are not covered as a non-concessional contribution, as per the rules of 292.90.

S 292.100 (1) states that a contribution is covered under this subsection if:

(b) the requirement under subsection (2) is met

Subsection (2)(a) the requirement of this subsection is met if the contribution is equal to all or part of the *capital proceeds from a * CGT event for which you can disregard and * capital gain under s152 (or would be able to do so, assuming that a capital gain arose from the event.)

As such it is clear that div 152 small business CGT concessions are not included in the definition of a non concessional contribution, and as such it seems unlikely that they will be included in the $500,000 cap.

There is nothing to suggest that the definition for non concessional contributions will be changed to include div 152 small business capital gain exceptions. We think that these SBC continue to present themselves as a valuable method for those hoping to continue to invest in their super.

Posted in: Tax & ATO News Australia at 18 May 16

ATO targets discretionary trust partnerships

On 22 November 2013 the ATO released Taxpayer Alert TA 2013/3 “Purported alienation of income through discretionary trust partners”. The ATO is targeting, in particular, accountancy, legal, and other professional practices that operate as partnerships of discretionary trusts. This ATO alert flags an attack by the ATO on basic business structures under the guise of tax avoidance.

The ATO are looking for income splitting schemes where income of individuals attributable to their professional services is alienated to a trust. Of course, there are a number of hurdles to jump before the law can effectively attribute income distributed by a partnered discretionary trust to just one individual.

Firstly, individuals in a professional practice do not generate personal services income, but rather the practice generates the income. Secondly, even where there are individuals generating personal services income, the partnership will be a personal services business where a number of individuals are generating personal services income from a number of unrelated clients. This effectively prevents the partnership’s income being attributed to individuals.

If all else fails, the ATO have raised the possibility of applying Part IVA. Presumably, the Part IVA argument would be that if not for the partnership being made up of discretionary trusts, then more income would be attributable to what would otherwise be individual partners who would individually be liable to pay more tax, and, as such, the structure is a tax avoidance scheme.

The example provided in the alert compares the tax paid by three individual partners who each derived $500,000 in income from the partnership to a scenario where three partnered discretionary trusts distribute to two beneficiaries amounts of $50,000, to four beneficiaries amounts of $80,000, to another $450,000, one trust receives $350,000 but has at least an equal amount in losses, and an unidentified amount is distributed to a non-lodging corporate beneficiary. The resulting tax collected in both scenarios is then compared showing that overall more tax can be collected where three individual partners pay tax on $500,000 compared to where seven beneficiaries pay tax on lesser amounts, one beneficiary doesn’t lodge, one trust has losses, and the net profit or loss of the other two trusts remains a mystery.

With reference to the ATO’s example, it is not, as suggested by the ATO, a given that less tax is collected in the latter scenario. And then to confidently say that the arrangement is a tax avoidance scheme would require showing that the arrangement makes no sense other than to split income through trusts that would otherwise clearly be attributable to an individual or individuals, thereby reducing individual tax, while the tax consequences to the trusts and other beneficiaries pale in significance.

In theory, the ATO could take the same approach to corporate structures under Part IVA.

The other issue for the ATO is the capital gains tax consequences of an individual partner assigning his or her interest to a trust. The ATO is concerned that little, if any, CGT will be collected if individual partners are eligible to claim CGT concessions on the assignment of their partnership interest.

The ATO advises that it will look at partnered discretionary trusts in the 2013/14 and later years.

Posted in: Tax & ATO News Australia at 26 November 13