International Update

International Tax Changes

I am constantly intrigued with the tax changes in other jurisdictions around the world. As a member of the Society of Trust and estate Lawyers we see a number of administrations that cross international borders including trusts controlled by resident Australian taxpayers.

 

Take a look at some of the recent changes of disclosure in member countries to the Hague Conventions on tax and succession.

FRANCE: Public access to trusts register is provisionally suspended pending hearing on privacy challenge

France’s Conseil d’Etat has suspended the public’s recently created right to view the online register of trusts that have connections with France, pending a full hearing at the constitutional court (CC). The CC is to determine whether public access to the register is a proportional measure under the French constitution. The case results from the appeal of an American citizen who claims that this register runs counter to the right to privacy. On 27 June STEP stated its opposition to public access to the trust register, noting that the data was supplied for tax purposes in good faith, and with no permission for it to be made public.

SWISS BANKING: UBS clients withdraw funds as end of secrecy approaches

Clients based in emerging markets, especially Latin America, have withdrawn CHF2.3 billion (approximately USD2.4 billion) from UBS bank accounts, according to press coverage of the Swiss bank’s most recent quarterly report. The bank’s management expects the outflows to continue for the rest of 2016 and into 2017 as emerging market countries implement voluntary disclosure programmes in anticipation of the full implementation of the OECD’s automatic exchange of information.

JERSEY: Trust law soon to be amended again

An expert at international law firm Ogier examines potential changes to Jersey’s trust law currently in the pipeline. A recently completed consultation centred on amendments clarifying that there is no need for the trust to have a beneficiary at all times during its existence; the rights of beneficiaries to information in respect of the trust; reservation of powers by a settlor; arbitration; retrospective approval of self-contracting by trustees; extended indemnity provisions for departing trustees; accumulation and retention of income in trusts; power of the Royal Court to vary a trust; and others.

MAURITIUS: Ultra-wealthy investors to be granted five-year ‘tax holiday’

Mauritius’ 2016–2017 budget introduces several reforms intended to boost its financial services industry. Foreign ultra-high-net-worth individuals investing a minimum of USD25 million in Mauritius will be granted a five-year tax holiday, as will licenced overseas family corporations, licenced asset and fund managers managing a minimum asset base of USD100 million, and international law firms issued with a global legal advisory services licence – to that effect, a limited liability partnership bill will also be introduced.

CANADA: Consultation on draft tax legislation

Draft legislation has been published implementing the important tax changes announced in Canada’s 2016 federal budget. They include proposals concerning multiplication of the small business deduction, avoidance of the business limit and taxable capital limit, country-by-country reporting and the Common Reporting Standard penalty.

US: FinCEN extends customer identification rules for real estate agents

The US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has extended its ‘temporary’ orders requiring US title insurance companies to identify the natural persons behind shell companies used to pay ‘all cash’ for high-end residential real estate in six major metropolitan areas. Similar ‘geographic targeting orders’ are already in place for Manhattan and Dade County in Miami, two of the US’ prime property areas. ‘All-cash’ does not mean actual banknotes but rather the purchase of property not funded by a loan.

NEW ZEALAND: Guidance on Common Reporting Standard for automatic information exchange

New Zealand’s Inland Revenue Department (IRD) has published guidance for financial institutions on the upcoming automatic exchange of financial information, based on feedback from a recent consultation. Draft legislation will be introduced in August.

If you have any questions regarding assets located overseas in terms of your trust and estate planning, please give us a call. Regards Tony

Duty and the Beast

DUTY AND THE BEAST (ie FIRST HOME OWNERS GRANT)

 

Long ago and far away the State Government in it’s wisdom created a Beast called “The First Home Owners Grant”.

This was designed to stimulate investment in domestic housing and drive the State economy forward.

We have a new version and a new threshold and if you or a family member meet the eligibility criteria, now might be a good time to take advantage of the payment.

 

As announced in the State Budget 2016-17, additional duty of 3% will apply to acquisitions of residential land by foreign persons (including companies and trusts) from 1 October 2016.

This additional transfer duty is imposed to fund additional payments under the State Government First Home Owner’s Grant.

The Queensland First Home Owners’ Grant is a state government initiative to help first home owners to get their new first home sooner. Depending on the date of your contract, you’ll get $15,000 or $20,000 towards buying or building your new house, unit or townhouse (valued at less than $750,000). You can even buy off the plan or choose to build yourself.

Note: The $20,000 Queensland First Home Owners’ Grant is not available to contracts that replace previous contracts entered into before 1 July 2016.

To be eligible for the grant:

  • You must be an Australian citizen or permanent resident (or applying with someone who is).
  • You or your spousemust not have previously owned property in Australia.
  • You must be at least 18 years of age.
  • You must be buying or building a brand new home, valued under $750,000.

 

This means a significant opportunity for young people trying to purchase their first home and we recommend that you take advantage of it while you can.

 

Remember, the payment must be considered as only one part of the equation. Careful planning, research and valuation evidence must be obtained before jumping into a contract. You must have a reasonable due diligence process for the Contract including Building and pest reports and conducting adequate searches of the property. Ask us how we can help with a fixed fee solution today!

The Business Spectator

I was fascinated to read about the journey by Alan Kohler in National Australia Bank Business View about his rise and rise to ultimate exit point of his capital in the business known as “The Eureka Report”.

What struck me were the core themes running through his business success alongside his other stakeholders:

  1. They targeted a specific market and attacked it in a very strategic way.
  2. They worked every day according to a fundamental principle: “the customer is right and you must deliver quality first”.
  3. They only sought and retained the best people for their business including cultural fit.
  4. They had an absolute focus on costs to deliver their end product at all times.
  5. By careful management they ensured loyalty and engagement with their customers, including the pricing policy.
  6. They exercised management discipline around each aspect of the business to keep it on track.

As a result they achieved a capital exit by the stakeholders by sale to a large public company which gave them access to greater opportunities and achieved their goals.

They also joined in a strategic alliance with a boutique service provider to enhance the customer offering and technology base.

These are the key points for any business with a plan.

As advisors to business owners in similar journeys we see many different outcomes and they are largely due to these fundamental principles either done well or done poorly. We are constantly helping out clients with planning, with the end in mind, and regularly review their internal strategy.

Our role is far more powerful when we act as a strategic partner to facilitate change in a business to build value for the owner over time.

This might be securing a trademark to build goodwill, rigorously checking terms and conditions to ensure recovery of sales or checklist by due diligence the legal strengths and weakness of a business.

Ultimately these things will determine if stakeholders achieve their goal of sale of a business and ensure that if they do their exit price is multiplied.

This is really the fun part of what we do as it means our clients are more aware of the risks and connected to the end goal from an earlier time.

While we won’t be here forever, good planning means great outcomes.

I love reading about business success stories like Alan Kohler as they inspire me to make changes and to refine the plan my own business.

Although our personal ambitions may be modest it is the satisfaction in achieving even small goals that makes life fulfilling as a business owner.

Giving back by Pro Bono

We are very proud of our community support program which ranges from the new Life Trust orphanage in Myanmar to The Womens’ Legal Service Queensland.

We also support the Cancer Council and here  are some interesting comments from a referrer:

Referrer Q&A

Across the country we work with wonderful referrers including social workers and oncology nurses at cancer treatment centres and hospitals who refer individuals to the program who need assistance with legal, financial, workplace and small business issues. We spoke with Victorian referrer Jessica Valentine who has referred many clients to the Pro Bono Program over the past 2 years about her experience with the program. Here’s what Jessica had to say…

I work at… Western Health- Sunshine Hospital in St Albans in Victoria.

I refer patients to the Pro Bono Program because… I have had positive feedback from patients who have utilised the financial planning and legal service. A cancer diagnosis can often cause financial disruption that can cause additional distress for patients and their families. These patients often feel pressured to continue working despite feeling unwell during their treatment. They are sometimes unaware of insurances that may be attached to their superannuation, mortgage, credit cards etc. The pro bono financial planning service can assist patients to navigate their best financial options and advocate on their behalf.

A cancer diagnosis can also alert people to legal issues that can cause them to feel overwhelmed in their already stressful circumstances.  Patients are often relieved to learn of the legal service available when they are experiencing financial hardship.

 

We have achieved successful outcomes for patients in these difficult circumstances and can be proud that we helped someone in a time of need.

If you or any of your friends are affected by cancer please let us know as we are able to work pro bono through the cancer Council to provide legal solutions.

Buyers from Foreign Residents Beware!

Deceased estates – Foreign residents withholding tax

Look out Foreign Residents that own property in Australia!

Our clients that are foreign based who own property here, may not have yet know about the new rules that commence on the 1 July 2016.  We thought it might therefore be prudent to share some insights, given we have a number of clients possibly affected.

Australia imposes various taxes on non-residents who hold specific classes of assets within Australia.   A number of these taxes are imposed at source using either a non-resident withholding tax or via non-resident tax rates.

An area that has an extremely low compliance level is the payment by non-residents of the capital gains tax on the sale of taxable Australian real estate.

In following a similar journey of a number of other jurisdictions such as the US and Canada, our federal parliament passed the ‘Tax and Superannuation Law Amendment (2015 Measures No 6 Bill) 2015 on 23 February 2016, which received royal assent on 25 February 2016, nearly some three years after its initial announcement.

The Bill imposes from 1 July 2016 a 10% non-final withholding tax obligation on buyers when they purchase certain assets from a non-resident where the purchase consideration is greater than $2 million dollars. It is aimed at improving the integrity and collection of our non-resident CGT regime. It is widely recognised that not only is compliance low in this regime, but the ability to obtain unpaid taxes once proceeds have left the country is extremely difficult and a costly exercise for our regulators. Particularly if the non-resident does not hold other Australian assets which the ATO is able to obtain access.

 Non-Resident Capital Gains Rules

A non-resident is exempt from capital gains tax in Australia under subdivision 855-A of the ITAA 1997, unless the gain relates to what is known as either Taxable Australian Real Property (TARP) or Indirect Australian Real Property (IARP).

Taxable Australian Real Property is defined in section 855-20 of the ITAA 1997 and broadly includes real estate, assets used in conducting a business and a mining, quarrying or prospecting rights if the minerals or petroleum are located in Australia.   Indirect Australian Property on the other hand is defined under section 855-25 of the ITAA 1997 which essentially captures a non-portfolio interest in an entity, which is where the equity interest exceeds 10% and the underlying value of Australian real property.

 Impacts on Deceased Estates

Executors of deceased estates will need to be aware of these provisions in the following circumstances:

  1. Disposal of a deceased’s property with a value greater than $2 million dollars
  2. The deceased, executors or beneficiaries are non-residents for tax purposes and the property is sold under their names.
  3. A non-resident executor acting for a deceased Australian tax resident

When selling a residence or other property holding of a deceased person, an executor should be  aware that the purchaser has an obligation to withhold 10% of the purchase price and to remit this to the ATO, unless a Clearance Certificate is provided with the sale, the sale is an exempt sale (e.g. less than $2 million), or a variation of the withholding amount has been from the commissioner.

Clearance Certificate

The ATO is establishing an online application process for vendors to apply to the Commissioner to provide a clearance certificate. The certificate is then provided to the purchaser to substantiate that the vendor is considered an Australian resident for tax purposes and accordingly the foreign resident capital gains withholding tax will not apply.   The online process will be mostly an automated process. However, the certificate will only remain valid for a period of twelve months.

The Explanatory Memorandum to the Bill makes it clear that a purchaser is to adopt a default position of considering any vendor as a non-resident, and accordingly withhold 10% tax for sales over $2 million unless a clearance certificate is provided by the vendor prior to settlement.

If executors do not provide a certificate on a sale of property from an estate, taxes will be withheld and remitted to the ATO by the purchaser that could both delay and complicate the estate administration process.

Exemptions

The provisions provide for the following exemption from the 10% withholding:

  1. The property sale is for less than two million dollars in consideration.
  2. The transaction is already subject to an existing withholding tax process.
  3. Where the vendor is subject to formal insolvency or bankrupt proceedings.
  4. Vendor provides a clearance certificate from the Commissioner.

Variations to Withholding Amount

An application form for vendors to vary the withholding percentage down is also provided on the ATO website, and it will take up to 28 days to process. Circumstances where the application of the 10% withholding amount would be considered inappropriate are,

  • Where the foreign resident will not make a capital gain
  • The foreign resident will not otherwise have a taxable income, for example they have carried forward capital losses.
  • There are multiple vendors and only one is a non-resident.
  • Properties secured by a registered mortgage and the sale proceeds will be insufficient to discharge both the mortgage and remit funds to the ATO.

Penalties for failure to comply

Purchasers are required to register as a withholder and to remit 10% of the first element of their cost base (generally the consideration paid) either on or before the day that the purchaser becomes the owner of the property.   The penalties for failing to do so include the value of the withholding liability per Division 268 in Schedule 1 ITAA (1953), general interest charges and the application of possible administrative penalties.   It is for this very reason that purchasers and their advisors should be taking these obligations extremely seriously. As a result, these new withholding rules could easily impact on the administration of an estate.

It should be noted that these provisions are considered as a ‘non-final withholding tax’ and accordingly have not addressed the tax obligations of the estate on the disposal of the property. Rather the estate will be entitled to a credit to the value of the withholding amount and is still required to declare the CGT event within the estate’s income tax return.

The provisions relate equally to residential and commercial property and also apply to property sales that occur on revenue account which are taxed as ordinary income. For example, property sales relating to a property developer.

Executors need to be aware that these provisions will apply to contracts entered into on or after 1 July 2016, although care should be taken to monitor any contract for TARP that will settle post 1 July 2016.

 

Avoid disaster with your SMSF

Is your Self Managed Super Fund a disaster waiting to happen?

Wow! What a question! If you are like most of our business and investor clients, then you will have already established a self managed super fund (SMSF).

I wonder how that came about. Did your financial advisor tell you about the benefits? Was it your accountant just trying to save you capital gains tax on a sale of a significant asset?

All SMSFs are established with a set of rules contained in a Trust Deed. The Deed is vital to the operation and compliance of the fund.

We want to alert you to problems that can arise with  SMSF Deeds and what you can do about it.

  1. Establishment of the fund

When the Trust deed is prepared it will have a section in which the Trustees need to sign to accept their role and confirm the terms of the deed.  Signing these papers might seem simple but common mistakes can cause a great deal of problems and costs later on.  A couple of common mistakes are:

  • The proposed trustee signs the deed ‘as trustee’ rather than personally;
  • The date the Deed is signed is before the proposed corporate trustee has been established.

Signing as ‘as trustee’, cannot occur until the formal establishment of the fund has been completed. Questions as to the proper execution of the deed and the capacity in which the deed was signed can arise if you get it wrong.

Secondly, a company cannot be taken to have properly executed a deed if the date of the document is a date earlier than the incorporation date for the company.

  1. Variation

For a variation to a SMSF Trust Deed to be valid, it must be done strictly in accordance with the powers stated in the deed immediately prior to the variation. For example, if the fund deed requires that the fund member(s) alone can vary the terms of the fund deed, then a variation of that deed by the fund trustee(s), in that capacity, will be invalid. If the fund trustee is permitted to vary the fund deed but only with the consent of the fund members, then that consent must be obtained in writing (at the time).

If the rules for the SMSF are not properly varied, then the trustee may be forced to accept that the rules in place immediately prior to the  variation will continue apply. The ATO does not care if you are technically wrong and want to fix it. Timing is everything!.

 

  1. Change of trustee

The variations required for changes to the SMSF trustee (including by adding a new trustee) – must be completed strictly in accordance with the rules for the fund. This might seem boring but stay with me. If you get it wrong it means someone other than you may be in control of the super fund. (like a former spouse who uses the company for another purpose)

Check the Deed to see if  individual trustees or a company must act as trustee.

The defective drafting usually only comes to light when someone wants to rely on what is believed to be the current fund rules – by which time it might be too late to remedy the problem, without great expense.

  1. Transactions/dealings

When entering a transaction or undertaking some sort of action involving a third party (buying a property) often brings to light defects in SMSF documentation. Banks and other Financiers will read the terms of the Deed strictly or a party to a contract will check  to be certain that there will be no problems enforcing that contract against a fund trustee.

What happens if the Trustee does not have the power to enter into the transaction? Can you just later amend the rules for the SMSF to include the relevant power? If it were only that simple.  The fund trustee can be bound legally to perform but with a question as to whether it was a valid exercise of power. The financier might refuse to lend the funds necessary unless and until a further Variation is signed. A costly and most likely, urgent problem to deal with.  The end result – a number of deeds that fixes the initial problem, but creates a paper trail that is much harder to follow.

Does the invalid trustee appointment give the ATO a right to challenge the transactions entered into by the trustee and will that cause additional tax to be payable?

If the change relates to a change in the law then it is best to get this done when recommended by your accounting advisor or fund auditor.

  1. A Prudent Approach

A sensible position to take is every time you handle a SMSF ask whetehr it an be checked for compliance. Every time you make a change, resolve key decisions, appoint a trustee or add or remove a member, make sure the basic establishment facts are checked.

Don’t  risk failing to have a valid document for your retirement intentions, your clever investment strategies and the payment of benefits from the SMSF on death!

 

Crowdfunding Laws Bring an Exciting Change

Last year, the Federal Government announced it would introduce new laws to enable “Mum and Dad investors” to invest directly in start-up companies.

Some of the changes to existing laws include:

  • a 5 day cooling off period;
  • an increase in the allowable cap on funds to be raised;
  • a higher level of money to be held, up to $5 million.

The Corporations Amendment (Crowd-sourced Funding) Bill 2015 aims at allowing small companies to attract investment in their business by the public injecting equity via “crowdfunding” as an on-line method.

This is a revelation in the prior laws and runs against the regulations and political background which have resisted this method of capital raising.

The key amendments are to the Corporations Act 2001 and will provide for a large number of shareholders to apply for shares in return for share capital in the start-up companies.

Despite this forward thinking development in the law there are some sections of the business community that have expressed frustration with the proposed laws on the basis they do not go far enough and impose too many restrictions. The experience in other countries, such as Israel, point to alternative methods which are faster and less regulated in the process of raising essential capital for these new companies.

As a form of consumer protection, the Australian legislation now requires that investors must go through appropriately licenced crowdfunding procedures.

These procedures require a high level of due diligence on the proposal, to avoid likely misleading or deceptive conduct by company promoters.

The public as investors are “consumers” under the Act and are strongly encouraged to seek their own independent advice on the potential investment. The requirements include investors confirming they make their own decisions on the level of risk in losing their investment, by an acknowledgement statement required to be signed as part of the investment process.

It is interesting to note that the Prime Minister, Malcolm Turnbull, previously stated the preferred model is that adopted by New Zealand in 2014. That model allows the number of potential investors to be unrestricted (not limited to 20). A larger number of investors can purchase smaller amounts of shares, without a Prospectus. This resulted in 21 companies raising $12.1 million with an average investment of $4,100.00. Let’s wait and see what happens over the coming months.