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December 2012 News Letter

 

 Wishing you and your family a safe and prosperous Holiday Season

I would like to encourage you all with this quote:

"Australian Business has a lot to learn from the best Australian Farmers, who have relentlessly innovated and adopted technology in order to stay ahead in a highly competitive and sometimes corrupted international market. The farmers of today are unrecognisable compared with farmers of 20 to 30 years ago." Paul Higgins (Futurist) - Business View Magazine - summer 2011.

Please Note: Our office will be closed from 5pm Friday 21st Dec 2012 and will reopen from 8:30am Monday 7th Jan 2013. We will also be closed on Friday 14th Dec from 3pm for the staff Christmas party.

ATO urges caution with SMSF property investments

The ATO has warned trustees of self-managed superannuation funds (SMSF's) to be cautious when investing in property.

The ATO is concerned that people are using their SMSF's to invest in property without fully understanding their obligations under the law, or that some people are seeking to take advantage of certain type of arrangements.

The ATO is primarily concerned with arrangements where:

  • an SMSF invests in a related unit trust by acquiring units in the trust, and the unit trust acquires property, but the arrangement breaches the superannuation compliance rules in some way, such as where the property is subjected to a mortage, or is acquired from or rented to a related party, when it would otherwise be prohibited; and

 

  • an SMSF enters into a Limited Recourse Borrowing Arrangement (LRBA) to acquire an asset, and the arrangement does not comply with the strict conditions that must be met for SMSF's that borrow.

In particular, these borrowings must generally be used to acquire a single asset (that the fund is not otherwise prohibited from acquiring; e.g., SMSF's are prohibited from acquiring resendential property from a related party), and the asset acquired cannot be held by a seperate holding trustee (or 'custodian'), solely for the benefit of the SMSF.

The ATO has also stated that:

  • the trustee of the holding trust must be in existence, and the holding trust must be established, by the time the contract to acquire the asset is signed; and

 

  • the SMSF cannot borrow to acquire a vacant block of land and then use the same borrowing to construct a house on the land.

According to the ATO: "The fine details are important and trustees need to be sure that property is the right investment for their SMSF and that the arrangement is legal." " Some of these arrangements, if structured incorrectly, cannot simply be restructured or rectified. The only option may be to unwind the arrangement which could involve forced sale of assets at an inconvenient time. This could be very expensive for the fund with potential stamp duty and tax consequences."

SMSF's that do not comply with the superannuation laws may also become 'non-complying' for tax purposes and if the SMSF or the unit trust needs to dispose of the relevant property, they may incur a CGT liability, or the SMSF (and any other unit holders) may be required to include a capital gain in their assessable income if they need to redeem their units in the unit trust.

In addition, the ATO states that where arrangements are deliberately entered into to get around the law, the fund's trustees may be disqualified, face civil penalities or even face criminal charges.

 Payment for electricity generated from solar panels

More and more homeowners are installing solar panel systems in their homes. In some cases, the solar panel system may produce more electricity than they consume. If this is the case, the homeowner can often sell the excess electricity back to their electricity company, which will be released into the electricity grid.

This obviously begs the question: will the payments they receive from the electricity company be included in their assessable income?

The ATO has basically confirmed that, in typical situations where payments are received from electricity retailers by homeowners for the power generated by their solar panels that is exported to the grid, the payments would generally not be be classed as assessable income, as they would be private or domestic in nature. This conclusion takes into the amount of equipment used to generate the electricity, the current pricing structure, and the fact the hoeowner produces the electricity for domestic purposes only.

In addition, since the payments are not assessable income and are private or domestic in nature, a homeowner in the above situation would not be able to claim a deduction for the costs associated with the solar system, such as interest and depreciation.

Note however, that if the characteristics of the activity change (including the motivation for undertaking that activity, how the activity is undertaken and whether there is a real prospect of profit from the activity), the receipts or credits from the activity may become assessable income.

Trust resettlements and CGT

The ATO has effectively confirmed that a trust deed can be varied without the trust being 'resettled' and causing CGT problems.

More specifically, they state that there should be no CGT consequences if the trustees validly exercises a power contained within the trust deed to change the terms of the trust (or the deed is varied with the approval of a relevant court), unless:

  •  the change causes the existing trust to terminate and a new trust to arise for trust law purposes; or

 

  • the effect of the change leads to a particular trust asset being subject to seperate rights and obligations, giving rise to the conclusion that the relevant asset has been settled on terms of a different trust.

 Changes to director obligations

Editor: The ATO has reminded com[pany directors of recent changes to the law affecting their personal liability for certain company obligations.

On 29th June 2012, changes were made to the tax law to reduce the scope for companies to engage in fraudulent 'phoenix activity' or to escape liabilities and payments of employee entitlements.

The changes:

  • extend the director penalty regime and the estimates regime to apply to unpaid superannuation guarantee charge (SGC);

 

  • ensure that directors cannot avoid director penalities by placing their company into administration or liquidation when PAYG withholding or SCG remains unpaid and unreported 3 months after the due date;

 

  • in some instances, make directors and their associates liable to 'PAYG withholding non-compliance tax' - which effectively reduces directors ' PAYG credit entitlements where the company has failed to pay amounts witheld to the ATO.

 

Please note: many of the comments in this publication are general in nature and anyone intending to apply this information to practical circumstances should seek professional advice to independently verify their interpretation and the information's applicability to their particular circumstances.

 

 

 

 

 

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