03 Jun 2021 This week in tax
In this week’s TaxVine, Julie Abdalla, FTI, Tax Counsel, comments on year-end tax considerations for you, your business and your clients.
Year-end considerations — Part 1
This is the first in a series of year-end articles the Tax Policy and Advocacy team will be penning over the coming weeks. Until the end of June, we will be sharing with you our insights and commentary about those issues we consider pertinent to your year-end activities and those of your business and your clients.
This week, we focus on trusts and superannuation.
Some may tire of hearing it, but it cannot be said enough — ‘read the deed’. Every deed is different, and the terms of those deeds prescribe how and when beneficiaries become entitled to any income or capital of the trust. Each trust will have different requirements and resolutions to be made prior to or by 30 June, most particularly in the case of discretionary trusts. At times, those deeds may prescribe an earlier time, or require the appointor’s consent before making a capital distribution. Anecdotally, we have heard instances of resolutions needing to be made by early June to create a valid present entitlement for the coming 30 June year end.
It would not be a year-end article without mention of Division 7A! You are all aware of the various guidance materials issued by the Australian Taxation Office (ATO) in relation to unpaid present entitlements, in particular, Taxation Ruling TR 2010/3 Income tax: Division 7A loans: trust entitlements. Practice Statement Law Administration PS LA 2010/4 provides administrative guidance in relation to TR 2010/3, including the provision of 7-year and 10-year sub-trust arrangements.
This coming 30 June will see the maturing of certain 10-year sub-trust arrangements for the first time. Practical Compliance Guideline PCG 2017/13 Division 7A – unpaid present entitlements under sub-trust arrangements maturing in the 2017, 2018, 2019 or 2020 income years has historically provided a concession to ‘repay’ a maturing sub-trust arrangement by entering into a new complying 7-year loan arrangement between the relevant company and the sub-trust. However, as at the date of writing, this PCG has not been extended to 7-year sub-trust arrangements maturing in the 2020–21 income year, nor extended to also apply to maturing 10-year sub-trust arrangements.
Absent the above extension, entities with maturing sub-trust arrangements must consider the manner in which a full principal repayment is required to be made. Should an extension eventuate, The Tax Institute will provide an update to our members.
Just a reminder also, as, surprisingly, it is an issue which continues to periodically arise, that company-to-company loans are excluded under section 109K of the Income Tax Assessment Act 1936 (ITAA 1936) only where the loan is made to that company is its own capacity. A loan made to a company as trustee of a trust is not an excluded loan.
A reminder that trustees of closely held trusts are required to withhold tax from distributions made to beneficiaries who have not provided their TFN details to the trustee before a distribution of ordinary or statutory income is made during the income year (under section 12-175 of Schedule 1 to the Taxation Administration Act 1953 (TAA)) or before they become presently entitled to a share of the income of the trust at the end of an income year (under section 12-180 of Schedule 1 to the TAA). Reporting obligations also arise.
New trusts (i.e. those settled during 2020–21) or trusts with new beneficiaries (including minor beneficiaries who turned age 18 during 2020–21 and new spouses of existing beneficiaries) should obtain the TFN details of the beneficiaries and report this information in a TFN report to the ATO by 31 July (noting that TFN reporting is a quarterly reporting obligation for TFNs provided to the trustee in a given quarter).
Also, be careful with the use of the corporate beneficiaries for the first time where the company is incorporated in late-May or June as a new TFN for the company may not be issued by the ATO until after 30 June. This will result in a withholding obligation by the trustee.
Distributions by a family trust
A reminder that if you have made a family trust election for your trust, be conscious of the distributions you make for a year. Any distribution outside of that family group will be subject to the penal family trust distribution tax. The meaning of distribution for this purpose is set out in sections 272-45 to 272-60 of Schedule 2F to the ITAA 1936 and is much broader than a conventional distribution for trust law or tax law purposes. It also includes the transfer of property and the forgiveness or waiver of a debt or other liability, and could apply to interest-free loans.
This broader meaning of distribution applies also to entities that have made an interposed entity election.
If you are looking at making personal superannuation contributions for 30 June 2021, there are a few reminders to be conscious of, including the following:
- For those aged 67–74 wanting to make a personal deductible contribution in 2020–21, you are still required to meet the work test. The work test requires you to be gainfully employed for at least 40 hours during any consecutive 30-day period of the financial year.
- Be aware of your $25,000 concessional contributions cap in order to maximise your contributions for the year.
- Don’t forget to provide a section 290-170 notice to your superannuation fund advising of your intention of claim a personal tax deduction for the contribution. A failure to provide this notice, or receive an acknowledgement of receipt of this notice from the trustee of the fund, will result in no deduction being available.
A reminder for employers that superannuation contributions are deductible only once ‘paid’. While the June 2021 quarter superannuation guarantee contribution is not technically due until 28 July, many employers look to pay their June quarter superannuation contributions before 30 June to secure a tax deduction this year. Remember, merely accruing your superannuation contributions in your financial accounts is not enough to secure a deduction. Additionally, the ATO has ruled (TR 2010/1) that the contribution must be received by the fund to have been ‘paid’, so make sure that sufficient time has been allowed for the contributions to get to the fund.
A reminder that you should also ensure that you engage with any of your employees who have entered into salary sacrifice arrangements for superannuation to avoid inadvertently exceeding their personal concessional caps for the year.
Next week, we’ll run through further useful insights for year-end planning, including some capital allowance and franking tips.
Finally, a reminder that the window is now open for you to renew your membership with us. I’m looking forward to working alongside you in the year ahead.
As always, we welcome your views and thoughts, which you can provide here.
Julie Abdalla, FTI