We update the ATO’s recent view of PSLA 2003/12 (regarding the trustee of testamentary trusts) – it’s good news!
We also consider ATOID 2014/3 where the ATO has confirmed that a deceased person cannot be nominated as a specified individual for making a family trust election.
In our March update, we referred to the uncertainty about the ongoing application of PSLA 2003/12 relating to the issue of whether trustees of testamentary trusts are like executors of estates for the purpose of CGT.
The good news is that on 10 April 2014, PSLA 2003/12 was updated by the ATO to confirm that they will continue the longstanding administrative practice of treating a testamentary trustee like an executor. The impact of this is that there is no CGT payable from:
The revised PSLA 2013/12 however notes that the legislation itself is not clear so, as always, you need to keep abreast of any changes to the Tax Acts. In the meantime, the tips and traps from our prior update still apply:
TIP – check whether PSLA 2013/12 still stands before distributing from a testamentary trust, or when making a decision about the use of optional testamentary trusts.
TRAP – these concessions only apply to assets owned at date of death. Assets acquired by an executor after date of death do not qualify. This can be a big issue for life interests.
Under ATOID 2014/3, the ATO has confirmed that a deceased person cannot be nominated as a specified individual for making a family trust election. For most estates, this will not be an issue because there is an exemption for making a family trust election in respect of the first 5 years under paragraph 272 100(c) of Schedule 2F to the Income Tax Assessment Act 1936.
This could be an issue however for life interests or estates with ongoing trusts beyond the 5 year period where a family trust election could be required to either access franking credits or carry forward income losses.
Life interests stand out as a possible problem as they are often used in blended families to provide an income stream for a second spouse, with the capital ultimately passing back to the children of the deceased (and step-children of the second spouse). This is an issue when you consider the impact of:
with the result potentially being either loss of franking credits on dividend income payable to surviving spouse, or family trust distributions tax on distributions of capital and income to remainder beneficiaries.
Don’t forget that in addition to this issue, life interests throw up other complexities such as the often limited access to land tax exemption for non-principal resident properties, as well as specific entitlement issues around capital gains tax where a life tenant can end up taxed on capital gains to which they do not benefit.
Advisors need to use extreme care and provide full advice to clients on the pros and cons of this style of Will.
If you require further information please feel free to contact us .
The new federal government has undertaken a wide review of many tax changes previously proposed by Labor and has confirmed that it will be proceeding with some but not others.
In the context of deceased estates, they will NOT be proceeding with some proposed changes including:
These proposals were announced by Labor in the 2011/12 and 2012/13 budgets but not legislated.
As the changes are not proceeding, we are left in the position prior to the announcements, which we summarise below.
Under a practice statement (PSLA 2003/12), the position of the ATO was that it would treat trustees of testamentary trusts like executors of estates for the purpose of CGT. This means that for assets forming part of the original estate of the deceased, there would be CGT rollover under Div 128 Income Tax Assessment Act 1997. The announcement was to legislate this position but it is now not proceeding. The big question is will the ATO still apply PSLA 2003/12?
As at the date of this newsletter, the ATO website was still referring to PSLA 2003/12 as applicable but it had not been updated since December 2013 (when the most recent announcement was made).
TIP – check whether the PSLA still stands before distributing from a testamentary trust, or when making a decision about the use of optional testamentary trusts.
TRAP – Wills that force assets into a testamentary trust (without options available) could result in extra CGT on transfer of assets to individual beneficiaries.
CGT event K3 occurs when an asset passes to a concessionally taxed entity (like a charity or non-resident). This event operates to tax the deceased just before they died, in respect of certain assets passing to some charities and non-residents. In practice, the estate pays the tax but only losses of the deceased can be used against the gain (not losses of the estate).
The proposed changes included having the CGT event occur when the asset passed to the non-resident (ie – as part of the estate administration or the operation of a testamentary trust). Had it proceeded, it would have meant that any gain triggered as a result of the transfer to a non-resident from the estate or from the testamentary trust would be able to have been offset by losses incurred post death.
This review does not appear to be proceeding so K3 operates as usual such that the deceased bears the tax (and may require amendment when the asset passes some years later).
TIP – This issue is only 1 of the tax issues relevant where you have non-resident beneficiaries. The removal or reduction of the 50% discount for non-residents has proceeded. Review Wills and seek advice as to strategies to minimise the impact of these changes.
The Labor government planned to close a “loophole” where an asset held as joint tenants with a non-resident was not caught by CGT Event K3 as it did not pass under an estate.
Again, this review does not appear to be proceeding.
If you require further information, please do not hesitate to contact us.
This is because most sale agreements provide for adjustments to be made to the sale price to take into account things like:
Employee leave entitlements can sometimes become a significant adjustment amount. One of our clients recently was running a business with leave entitlements exceeding $500,000. Because these entitlements had been earned by the employees of the business who were transferring to become employees of the purchaser, provisions should be included in the documentation making the purchaser responsible to pay those entitlements when they became due. To compensate the purchaser for this “inherited” expense, the sale price should be reduced by that amount. This is a common source of negotiation after the headline sale price has been agreed on, but it can make a significant difference to both parties.
Several issues arise when calculating employee leave entitlements which are to be adjusted between the vendor and purchaser:
Naturally all employees should be paid their salaries up to the date on which the purchaser takes ownership of the business. But frequently the employees will have accrued some annual leave which they are not yet ready to take, some long service leave (if they have been employed for more than seven years continuously with the same Victorian employer) and unused sick leave.
Calculating a fair adjustment for unused annual leave is usually relatively simple. So too, is the calculation of accrued but untaken long service leave.
But what about the transferring employee who has been working in the business for six and a half years continuously and has had a good run with their health such that they have accumulated many weeks of sick leave (personal/carer’s leave)?
If that employee were to transfer to the purchaser upon completion of the business acquisition they may then decide to leave their new employment within the next six months for a variety of reasons. If they did so, then they would have no entitlement to long service leave because they would not have reached the minimum threshold of seven years’ service. The same employee would also have no entitlement to be paid out for unused sick leave.
On the other hand the employee may go on to have a long career with the purchaser and after only six months become entitled to 30 days long service leave (subject to the terms of the Long Service Leave Act). Fair for the employee who would have been working in the business for seven years. Not so fair for the purchaser who has only had the benefit of that employee’s service for a mere six months.
Similarly, that employee might have a change of fortune and having built up many months of sick leave entitlements with the vendor, suddenly become seriously ill within weeks of transferring to the purchaser. The employee is now entitled to be paid by the purchaser for all of their time off work sick up to the limit of their accrued sick leave entitlement. Again fair for the employee who would have been working in the business for seven years. Not so fair for the purchaser.
But on Completion Date these are unknown factors and the future could evolve either way.
At Moores we think it is fair that a purchaser and a vendor should share the risk of that liability crystallising. This will lead to an adjustment to the sale price. With the advantage of hindsight one might “win” and one might “lose”. But the extent of any win or loss are moderated, a bit like a motor car insurance policy for an agreed value.
We consider that it makes sense for appropriately negotiated pro-rata allowances to be worked into the transaction between vendor and purchaser so that the risks of influenza, a heart attack, car accident etc. are fairly shared between the parties.
For more information please do not hesitate to contact us.