Tag Archives: GST

The tax burden of handing over business assets to trust beneficiaries

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Business assets of GST registered entities, including business assets of a business carried on in a trust, attract significant tax concessions and advantages including:

  • income tax deductibility – generally either in the income year when they cost money: notably on purchase, or across their effective life in the case of depreciation; and
  • goods and services tax (GST) credits on GST creditable acquisitions.

It is to be expected that there are clawbacks under the taxation law when a business asset, that has attracted concessions and advantages under the taxation system in anticipation of its productive business use, is transferred to a beneficiary of a business trust that owns the asset for the beneficiary’s private use.

Trading stock taken out of a business for private use

It can be seen with business trading stock, for example, that a strictly market value disposition is taken to occur for income tax purposes when trading stock is taken for private use without regard to the money that may have changed hands. This treatment contrasts with the more flexible choice of actual cost, replacement cost and market selling value that is allowed to a business in determining trading stock on hand: section 70-45 of the Income Tax Assessment Act (ITAA) 1997.

Section 70-90 of the ITAA 1997 includes the market value of trading stock in income assessable to income tax when it is disposed of outside of the ordinary course of business. Section 70-100 can also include the market value of trading stock in the same income where the item, though not disposed of, has ceased to be trading stock.

Handing over depreciable equipment

The balancing charge or adjustment which is assessable to income tax on the disposal of an item of depreciable plant and equipment, such as a car used in the business of a trust, is determined based on its termination value. Where a business (taxpayer) stops holding the item under a non-arm’s length dealing for less than market value, then the item’s termination value is taken to be the market value of the item just before that dealing under item 6 in the table in section 40-300 of the ITAA 1997.

Where business equipment being depreciated by a trust is used privately by a beneficiary of the trust without being disposed of to the beneficiary the item will precipitate a non-deductible private use proportion of use of the equipment. When the item is eventually sold or otherwise disposed of for more than its cost, a capital gain under CGT event K7 attributable to the private use component can arise to the trustee of the trust.

Taxable GST supply without consideration

Generally a supply of property, goods or services by a business that is registered or required to be registered for GST for consideration is a taxable supply. Under section 72-5 of the A New Tax System (Goods And Services Tax) Act 1999 a supply to an associate:

  • not registered or required to be registered for GST; or
  • where the associate acquires the thing supplied otherwise than for a solely creditable purpose;

is treated as taxable supply even when there is no consideration for the supply. The value of a section 72-5 taxable supply without consideration (a price) is the GST exclusive market value of the supply: section 72-10.

Not worth the tax and accounting trouble

It can be seen from the above that taxation consistently based on market value substitution applies to non-arm’s length provision of business assets to beneficiaries of business trusts for the beneficiary’s private use.

The in specie distribution of a business asset of a GST registered trust to a trust beneficiary for no consideration, or an inadequate consideration, (price) is thus discouraged by the clawbacks. There is no apparent tax advantage to a trust in giving an asset to a beneficiary of the trust when the gift is compared to a sale of the asset. A sale raises far fewer tax compliance challenges!

How getting the business asset to the beneficiary might be done?

A less problematic way to achieve the same thing would be for the trustee to simply sell the business asset in the ordinary course of its business to the beneficiary for its market value (plus GST in the case of a sale by a GST registered business trust) and, concurrently make a capital distribution to the beneficiary to cover the price. Then the clawbacks would not need to be endured.

Preparing to change land ownership from a company to a trust

A company controlled by X owns land. X would prefer it if the land was held by a trust or in an individual name such as X or Y, X’s spouse.

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Significant capital gains tax (“CGT”) on the transfer of the land is not expected by X and Y. Is a transfer of the land to a trust or to X or Y or both worthwhile? Here are some tax implications X may want to think about:

Capital gains tax

If the land has increased in value X will want to consider CGT more closely:

If the land is not an active asset, or if the small business CGT concessions or the new small business restructure roll-over, can’t apply for some other reason, the value of the land, when disposed of, will be taken into account in determining CGT. i.e. the market value substitution rule will apply in the event of an undervalue transfer of the land.  An undervalue transfer of the land is rarely likely to be effective under tax rules.

The small business CGT concessions and the new small business restructure roll-over don’t apply if the asset is not an active asset. The land won’t be an active asset if it is mainly used by the company, and related parties of the company, to earn rent. As the land is held in a company, the 50% CGT discount is not available to the company on the transfer of the land.

Problems with a gift or an undervalue transfer

If full value is not payable to the company for the land then, without more, a transfer of the land could be treated as a dividend taxable in full to the transferee as a shareholder of the company, as a deemed dividend taxable to the transferee as an associate of the shareholders of the company, or may possibly be taxable to the company as a fringe benefit.  Further if the company has taken the approach of gift there may be difficulties establishing that the company was legally entitled to give the land away to the transferee if that is what is done. Indications of a gift might give a creditor of the company additional rights to pursue the transferee for the value of the land that belonged to the company especially if the stance of the company is that the transfer was not any sort of dividend or remuneration to X or Y.

A sale of the land by the company for full value is more defensible. The sale can be on terms rather than for cash payable on settlement. If the transferee doesn’t follow through, and pay the value in cash or on the agreed terms, then the sale for value can be treated as a sham and the consequences of undervalue transfer can then follow.

So defensible transfers of the land include:

  1. sales at full value on (genuine) terms; and
  2. distribution of the value of the land to the shareholders of the company (not in the form of cash) on the voluntary liquidation of the company.

CGT event A1 – but watch out for CGT event E2 if a transfer to a trust

Usually CGT event A1 is attracted when land is transferred from one beneficial owner to another. CGT event A1 is taken to occur at the time of (in the income year of) the disposal, that is, the time of the transfer unless the transfer is made under a contract. If the transfer occurs under a contract and CGT event A1 applies, CGT event A1 is taken to occur at the time of making of the contract.

This can be significant where a contract and settlement straddle the end of an income year, with the time of the contract bringing forward the capital gain into the earlier income year if CGT event A1 applies. If the transferee is a related trust of the vendor then CGT event E2 can apply rather than CGT event A1.  CGT event E2 though, unlike CGT event A1, does not bring forward the time of the CGT event to the time of the contract so, if CGT event E2 applies, the capital gain will be made in the later income year.

Stamp duty on a transfer

Stamp duty varies from state to state but generally applies to acquisitions of land based on the market value of the land, not the price to the transferee/purchaser. Very generally speaking it is usually charged at around 5% of the land value. The states offer limited stamp duty relief when acquisitions occur without a change in ultimate beneficial or economic ownership of the land. For instance, in New South Wales and Victoria relief exists in the form of corporate reconstruction concessions. These concessions are generally not available where the acquisition is by a trust or an individual. Thus stamp duty would need to be budgeted for by X as a further cost of transferring the land.

Goods and services tax

If the company is registered or ought to be registered for the goods and service tax and the land in used in an enterprise carried on by the company then the company may be obliged to charge 10% GST to the transferee on the transfer (taxable supply) of the land. If the transferee is also registered for GST, and will use the land in the transferee’s enterprise, then the transferee can obtain an input tax credit/refund of the GST charged to the transferee. The company and the transferee, if registered for GST, may also:

  1. be able to claim the GST going concern exemption if they take the necessary steps for the exemption; or
  2. be members of a GST group;

which would relieve the company of the obligation to charge GST to the transferee.