For many business owners, tax time is fraught with complexity and additional time spent searching for documents to give to the accountant.

But what if we have not prepared our records for the company in the movement of cash out of the company accounts? Will there be deemed dividends that bites us on the backside giving rise to large tax assessments payable when we least expect it.

Below is a short summary of some key points regarding internal loans and Division 7A ITAA 1936.

The practice of using dividends to make minimum yearly repayments on Division 7A loans, or to fully repay loans, has been common since the introduction of Division 7A of Part III of the ITAA 1936 (Div. 7A) on 4 December 1997. Division 7A is intended to prevent the tax-free use of company profits by shareholders and their associates. For tax purposes declared dividends can still be franked so the dividend strategy is commonly used to prevent unfranked dividends arising.

A journal entry cannot create or constitute a transaction in its own right, it can only record a transaction that has already occurred. If the records are not carefully maintained at the right time there is serious risk the ATO will overturn the entry and further tax will become payable. The intention of a taxpayer is irrelevant.

The law is very black and white, and the courts do not accept ‘backdated’ documentation.

You must be extremely careful when it comes to complying with rules governing the payment of a dividend by journal entry, to ensure on a complying Div. 7A loan.

What are the rules?

Under s. 109 E of the ITAA 1936, an unfranked “deemed dividend” arises to a shareholder (or associate of a shareholder) of a private company if they fail to make a minimum yearly payment by 30 June each year for a complying Div. 7A loan. Preferably a cash payment is made to the company, but often the company’s profits are used to pay a dividend by journal instead to demonstrate this obligation owed by the shareholder or associate.

Can there be a set off between parties to the loans?

A journal can only constitute a payment where the principle of “mutual set-off” applies. This requires two parties who mutually owe each other an obligation recording an agreement to set-off their respective debts due against each other. The liabilities are either fully or partly discharged and this allows the actual movement of cash to become unnecessary. The ATO provides guidance, in context of FBT in the miscellaneous tax ruling MT 2050.

The journal entry will only be effective if the shareholder’s obligation to the company to make the minimum yearly payment is set-off against an obligation owed by the company to the shareholder to pay the dividend. This dividend strategy is not available where the money is owed by an associate of a shareholder.

If the company owes no obligation to the shareholder — because no dividend was validly declared by 30 June to create the company’s indebtedness to the shareholder — the payment of the minimum yearly repayment by journal is ineffective.

Corporations Act 2001

What else do we need to worry about in record keeping for this journal entry?

The circumstances in which a dividend may be paid by a company are set out in section 254 T of the Corporations Act 2001 (Cth) and are also restricted by the company’s formal constitution. (which really should be signed by the Directors). The decision to declare and pay a dividend is recorded in a minute of meeting or a signed resolution (this must be filed in the corporate register within one month of the meeting or decision (see section 251 A of the Corporations Act).

Assuming the dividend is declared on 30 June (and not any earlier), the directors’ minute or resolution needs to be filed in the corporate register by 31 July following the end of the income year in which the dividend is declared.

What does the tax law say?

A company that makes a distribution which is able to be franked for tax purposes is required to give the shareholder a “distribution statement” (see section 202-75 of the ITAA 1997).

The distribution statement must be provided no later than:

• if the company is a public company — the day on which the distribution is paid;
• if the company is a private company — before the end of four months after the end of the income year in which the distribution is made, or a later time allowed by the Commissioner.

As Div. 7A applies only to private companies, the company must give a distribution statement to the shareholder within four months of year end, that is, by 31 October in that year.

What really happens in practice in the real world?

Consider the implications for doing anything that is contrary to the provisions in the tax law as breaches may carry significant penalties. Perhaps the amount of the dividend is unknown on 30 June, so the document can’t be prepared by that date. However, the dividend being set-off against the minimum yearly repayment is in respect of a loan made in a previous income year, so the amount of the minimum yearly repayment will be known in advance.

Since the High Court decision in Commissioner of Taxation v Bamford; Bamford v Commissioner of Taxation [2010] HCA 10,   making trustee resolutions by 30 June has become critical. The declaration of dividends is just as important in terms of record keeping.

All business owners should know their position within reasonable accuracy leading up to the 30 June deadline. Ask you accountant now whether declarations, resolutions or mutual set off should be recorded in writing, by Deed or signed and by what date, to ensure that the rules are complied with. Give us a call on 07 3839 7555 if we can assist with Div. 7 A Loans or Deed of Offset of loans between entities or email me at Tony.Crilly@perspectivelaw.com

Most people of heard of a Family Discretionary Trust or an Estate Trust known as a Testamentary Trust. But what of the obligations of the people appointed to manage the trust? Can there be risks of a claim if you fail to get it right? Indeed there are risks in failing to act on qualified advice in a reasonable time and acting prudently taking account of the people the trust was set up for in the first place.

A trustee is a person formally appointed usually by a Deed to manage property on behalf of a class of people called the “beneficiaries”.  This role comes with obligations and duties that the trustee owes to the beneficiaries.  The fundamental duty of a trustee is to adhere to the terms of the trust deed and they must act in the beneficiaries’ best interests at all times.  The key duties that a trustee owes are as follows:

1. Duty to preserve

Trustees hold trust property on behalf of the beneficiaries.  The property must be in their name as trustee so that it is in their control.  In cases of multiple trustees, the title of the property needs to be held in all names. 

The trustees have a duty to preserve that property.  Assets need to be adequately insured otherwise the trustee may be responsible for the replacement value of the property if it is stolen or damaged.  If monies are lent there needs to be adequate security.  Any debts should be paid promptly.  Assets should be maintained and repaired as needed.

Assets should be invested to preserve capital and earn income.

2. Duty to invest

Trustees have a duty to maximise the trust property, including investing the trust fund.  The trustee must exercise reasonable care and diligence and act the way an ordinary prudent businessperson would when managing their own affairs.

The trust deed itself will usually authorise a range of investments, otherwise, the authorised investments are governed by statute.  When considering the possible investments a trustee should consider:

• The purpose of the trust;

• The risks associated with certain investments;

• The benefits of diversification;

• Securing the best income return while ensuring the capital is maintained;

• The needs of the beneficiaries.

3. Duty to account and provide information

Trustees have a duty to keep proper accounts.  The accounts should show the incoming and outgoing funds and be supported by receipts, invoices and any other documentation.  The accounts need to be up-to-date and accurate and any errors corrected as soon as they are found.  Generally trustees engage an agent to prepare the accounts and tax returns for the trust.

Beneficiaries have a right to request a copy of the accounts and they must be provided.  The trustee is entitled to be reimbursed for the reasonable costs of producing those accounts.  The trustees are also obliged to provide beneficiaries with full details of the trust fund, including particulars of the investment.

However, trustees are not obligated to provide their reasoning when they exercise discretion.  They do not need to provide minutes or any other notes.

4. Duty to act impartially

Trustees must act in the beneficiaries’ best interests, including present and future beneficiaries.  The interests of the beneficiaries must be balanced impartially when the trustee distributes income and capital.  A trustee cannot favour the interests of one beneficiary over the others.  When exercising their powers, a trustee must ensure that they act in good faith.

5. Duty to act personally

A trustee must act personally and cannot have someone make the decision for them, however, the trustee is able to obtain assistance, such as employing an accountant.  The trustee needs to be cautious of beneficiaries dictating how they are to exercise their decision to ensure they are making the decisions personally.     

There are circumstances where statute authorises the trustee to appoint a delegate, such as if they are incapacitated or absent from the jurisdiction.

6. Duty of undivided loyalty

The trustee has a duty of undivided loyalty to the beneficiaries.  They must avoid conflicts between the interests of the beneficiaries and their own interests.  If a conflict does arise then it is important that the beneficiaries are immediately informed.  The beneficiaries can give informed consent to the conflict if they agree to.

Trustees also cannot profit from the trust and cannot deal with trust property for their own benefit.  A trustee is able to receive remuneration for their role if allowed by the trust deed, as ordered by the Court or with the agreement of the beneficiaries.

7. Duty to act jointly

If there is more than one trustee appointed they must act unanimously unless otherwise stated in the trust deed.  This can cause difficulties where the trustees cannot agree.  Clauses should be inserted into the trust deed or the Will to minimise this risk arising, such as:

• Stating that decisions can be made by way of majority;

• Appointing an ‘umpire’ who can make a decision that is binding on all trustees or allowing one trustee to be able to make the decision;

• Dispute resolution or arbitration clauses.

If you require further information regarding Estate Planning, please call us today on (07) 3839 7555.

In the excitement of signing a contract for a new property, what happens if you later realise you need to make a change to the terms of the contract and it has already been signed? What will it cost you to make this change?

Why Amend a Contract?

Before a contract can be amended, you need to agree with the other parties’ reasons as to why the amendment is being made. Reasons being:

• To fix an error, such as a spelling mistake;
• To delete a term that the parties agree is no longer relevant;
• To insert a detail which was omitted from the contract; or
• Amend the purchase price of the property.

Considerations before Amending

It is essential that before any amendments are made to a contract that proper consideration is given to the suggested amendments, and the possible consequences of these changes in relation to the payment of transfer duty.

The Queensland Office of State Revenue (OSR) has released a series of rulings which determine the way in which transfer duty is assessed on varied agreements, and it is essential that you are aware of the potential consequences. Generally speaking, duty will be assessed on the amount stated in the contract, and a written agreement signed by the parties to the contract will be required if duty is to be assessed on a lower amount.

It is also important to consider that any incentives you insert into a contact, such as rental concessions or the inclusion of furniture for a separate fee, may be considered to be an additional part of the purchase price when assessing duty and duty may be assessed on a higher value.

Sometimes due to the nature of the amendment required it is not possible to amend the contract and it is necessary to end the existing contract and enter into a new one. This may be the case where an incorrect entity has been named on the contract, for example naming an individual as the purchaser rather than the trustee of a trust. In these circumstances it is necessary to enter into a deed of rescission, effectively cancelling the existing contract, and entering into a new contract.

Be aware that if the cancellation and entering into of the new agreement is deemed to be a resale agreement, duty will be payable on both contracts. A resale agreement occurs if the cancellation of the original contract results in you, or a related party, receives a financial benefit from the cancellation other than:

• A release from the cancelled agreement; or
• An interest in the property to the extent that the value of this interest does not represent a profit due to the resale agreement.

It is essential that you seek advice as to the proper process to ensure that you comply with the transfer duty requirements and do not become liable to pay more duty than what you have budgeted for.

Amending before signing

Whenever possible, it is best to review the contract and have any changes made to the contract before it is distributed for execution.

Sometimes this is not possible, such as when you are meet at the property to sign the contract and notice an error or change you wish to make to the printed contract. In these circumstances you can amend the contract by hand and initial the changes. These changes must then be initialed by the other parties to become binding. This is also a way which negotiations in price can be carried out when you make an offer by way of signed contract, with the parties hand amending a purchase price until a consensus is reached.

Amending after signing

Despite everyone’s best efforts, the reality is that sometimes errors remain unnoticed until the contract is fully signed, or event after the signing of the contract can necessitate changes. Depending on the nature of the amendment required, there are different methods which can be used to amend the contract.

In the case of minor amendments, such as a spelling error or missing words, the usual process is that the parties agree to amend the contract to correct these details. This is done by exchange of letters by the solicitors acting in the transaction, who then hand amend the contract.

One of the most common changes made to a contract is an adjustment to the purchase price in the event of an unsatisfactory building and pest inspection. Although you can request that a seller undertakes repairs to the property, another alternative is to request a variation to the purchase price so that you may undertake these works yourself.

For small variations to the purchase price, it is usual that by exchange of letter the parties agree to reduce the price by way of adjustment at settlement. In these situations, the contract is not physically amended, and the change is only reflected at settlement.

If there is a substantial variation to the contract, it is best to prepare a Deed of Variation detailing the change which is then signed by the parties. This deed is then read in conjunction with the contract, which when read together contain the agreement between the parties. If there is a substantial variation to the purchase price, it is best to prepare a Deed of Variation, as this will be required when calculating the transfer duty payable.

Take Aways

Although ideal to have a contract in perfect order before signing, this is not always possible. In the case that changes are required, there are several options open to you, but exactly how you amend the contract will depend on the substance of the amendments.

If you require further information regarding purchasing or selling property, please call us today on (07) 3839 7555.