Answer: Maybe, maybe not.
This question asks whether an employee is a related party of their employer (or the employer a related party of the employee’s SMSF) for purposes of Section 71 Superannuation Industry (Supervision) Act 1993 (SISA), in respect to the In-House Asset Test and Section 66 of the SISA, in respect to the prohibition against acquiring certain assets (including residential property) from a related party.
There is no default rule that an employee is an associate of their employer. The analysis does not, however, end at that fact.
A related party of another is defined at section 10(1) of the SISA as a member, a standard employer sponsor of the Fund, or a Part 8 Associate of either the member or the standard employer sponsor of the Fund.
Assuming the employee’s SMSF is not an employer sponsored fund, the question is whether the employer may nonetheless be a Part 8 Associate of the employee.
A Part 8 Associate is defined at section 70B of the SISA as a relative of an entity (if the employee is unrelated to the employer, no problem), a partner of the entity (if the employee is not a partner – then not a problem), a trustee of a trust for which the entity is “controlled” (if the employee has no influence over the trust, receives no income or capital, etc. – then not a problem), or if the employee has a “sufficient influence” or “majority voting interest” in the entity (this could be the area in which the test is relevant, because as an employee she may have significant influence over the conduct of the entity), or another Part 8 Associate of the employee has this influence (for example, a family member controls the employer or a related entity of the employer).
In respect to the question of “sufficient influence”, we consider section 70E of the SISA, and note that it may be the case that the employee has considerable conduct in the employer’s affairs.
For example, the employee may, for a property developer, determine the properties to be acquired and/or developed, and be charged with the derivation of investors and the profit sharing relationships. The employee may also, in such circumstances, receive a bonus on the development projects. The directors may rely on the employee to provide recommendations across the business. In this case, the employee may likely have “sufficient influence” to be a related entity to his employer. Similarly, if the employee received, as a consequence of employment, the right to demand an asset as compensation for the services to the employer, this may be “sufficient influence” to be a related party.
On the other hand, if the employer is a property developer, and the employee is a secretary with float tasks over administration matters, it is quite likely the employee has little or no influence over her employer.
The circumstances in which section 70E may apply in an employee/employer relationship are complicated and should be considered on the facts and circumstances (consider for example the relationship between employer and employee for purposes of the Fringe Benefits Tax Assessment Act 1986 (Cth)).
Provided the employee is not a Part 8 Associate (nor a related party of the employee) to the employer, then the employee may acquire assets of the employer at arm’s length and commercial terms (subject to satisfying at all times section 62 of the SISA, being the Sole Purpose Test), without restriction under the test of section 66 (restricting acquisitions of assets from members and their related parties), and section 71 (In-House Asset Test) would not apply if the asset was acquired.
Notwithstanding the above, any transaction must be compliant with section 109, with every stage of the acquisition, including any vendor finance arrangements, made on arm’s length and commercial terms. Whilst sections 67 and 67A do not prevent an employer from lending money to an employee (subject to any restrictions posed by Division 7A of the Income Tax Assessment Act 1997), the finance arrangements (limited recourse borrowing arrangements) must be such that the vendor (employer) does not retain title over the asset pending settlement of the borrowing.
If you have any queries regarding the subject of this article, please do not hesitate to contact Katrina Brown via email or on 07 5574 3560.
“SMSF BLUEPRINT” LAUNCH – A WELCOME RESOURCE FOR SUPERANNUATION TRUSTEE PLANNING AND STRATEGY
During the last year, it has been my pleasure to assist Julie Dolan, of SMSF Blueprint, with ideas and concepts desperately needed by our clients who utilise self-managed superannuation funds (SMSFs) in their investment portfolios.I am pleased to see the launch of SMSF Blueprint in the industry, and have offered to share the platform with our clients to assist in the dissemination of what we believe to be a sound tool for our clients. The firm receives no remuneration whatsoever, but I believe strongly in the platform and its usefulness to our clients – so wanted to share this resource with you.
Whilst Julie is a consultant with the Firm, I find her educational platform to be an astounding educational benefit and compliment to the offering of our team generally.
I, along with Julie, have advised many trustees across Australia this year in respect to SMSF compliance, and this educational platform was established by Julie and her partners to address what appears to be an industry wide confusion as to trustee obligations and strategies. I have been consulted on a number of non-compliant SMSFs in the last year, and I am concerned about the expanding enforcement powers of the ATO generally (not to suggest that I disagree with the enforcement process, and its purpose in the marketplace).
Breaches of the rules and regulations can be a very costly exercise – as demonstrated by a recent case in which a 62 year old trustee was handed down an 80 hour community service order after failing to lodge multiple years’ tax returns.
Along with its existing compliance powers, the ATO introduced its new penalty regime effective from 1 July 2014. Penalties of up to $10,200 per trustee for certain breaches of the rules and regulations can be handed down by the ATO. These penalties are payable by the trustee and cannot be reimbursed from the fund.
I am a subscriber to SMSF Blueprint, and find the content to be brilliant and easy to use. I ca use it with clients for demonstration purposes, and general education. However, it is a platform that you can subscribe to for ongoing compliance and training purposes. Plus, Julie and her team offer strategic ideas in respect to planning ideas. The platform changes constantly, with new content on legislation and forward planning ideas.
I am recommending the platform for all of my clients, and making it a mandatory subscription for my new SMSF clients because the risks of not complying are too great. It is such an easy and convenient platform, you can watch the videos anytime and anywhere. It is like having a financial advisor at your fingertips – and certainly gives you the fuel for informed discussions with your financial advisor and accountant. I personally think the platform saves clients’ money, because they can do research and investigate ideas on their own – and then go to the specialists for advice on the suitability and implementation process on those ideas that they find worthwhile considering.
Of course, I am always here to help you in your SMSF planning – but I believe clients should be informed, and the SMSF Blueprint platform is a minimal cost for a vast resource to SMSF trustees.
If you would like to speak to Julie, please feel free to give her a call on 040 445 5001, or email her. Definitely have a look at SMSF Blueprint, if you are considering or managing a SMSF – I think you will be quite pleased at the platform.
For your convenience, you can click here to view the link that I use to link through to SMSF Blueprint.
Katrina Brown BA ATIA SSA TEP
It comes as no surprise that the Tax Office has delivered its TR 2014/5 finding that distributions of property or money from a company as a consequence of Family Court Orders constitute assessable income. TR 2014/5 does, however, remind practitioners and parties that Tax Contingency Reports must be considered.
Whilst there exists significant roll over reliefs (essentially deferral of capital gains) and stamping exemptions arising as a consequence of Family Law Orders, the question is now answered definitively by the Tax Office that transfers of property or money, from a company structure in satisfaction of a claim to a family law property pool, are taxable.
It has been argued previously by a minority of tax practitioners that the transfers obligated as a consequence of Family Court Orders (section 79 of the Family Law Act 1975) constitute a “discharge of an obligation” by the company. This position, however, was at odds with section 44 of the Income Tax Assessment Act 1936 (ITAA 1936) which otherwise defined a dividend (in other words, assessable income) to be a payment out of profits of a company to a shareholder (or associate of the shareholder) and section 207 of the Income Tax Assessment Act 1997 (ITAA 1997) which deals with the availability of tax offsets (franking credits) in relation to dividends to shareholders (or associates). Certainly, within the context of Division 7A of ITAA 1936, the position has been that a payment, use or guarantee of company assets constitutes a deemed dividend.
In short, the Tax Office has its hand up whenever company assets are distributed or used for other than generating assessable income to the company. The upside of utilising the company as an operating entity is to quarantine (and recycle) profits at a 30% tax rate, until such time as determined reasonable to distribute the profits to shareholders (and/or associates). As confirmed by TR 2014/5 – the breakdown of a relationship does not change this position (reference includes an associate of a shareholder). Therefore, it is critical for parties to consider not only the equity of the family pool division – but also the tax consequences (and indeed the cash flow funding) of the proposed division.
A common situation arises wherein a husband and wife have conducted their family business through a company, and have retained profits. For this example, let us assume the couple have retained profits of $1,000,000 in the company, with cash in bank at $1,500,000. We shall further assume the company has a net market value (including assets and goodwill) of $5,000,000. Let us also assume the couple hold real estate in a family trust controlled by the couple that is worth $1,500,000. Finally, we assume the couple has a primary residence with a net value of $500,000.
Setting aside the potential for small business concessions and legal tax planning options, if the parties conclude that the wife should receive control of the family trust (valued at $1,500,000) and the family home (valued at $500,000), and a cash payment of $1,000,000 from the company and an asset of the company valued at $500,000 – this is not going to result in a 50/50 after tax outcome to the wife.
In fact, the $1,500,000 benefit from the company will attract tax at the wife’s marginal tax rate (in the ballpark of $650,000!). Whilst the company may be able to frank the payment to the wife, she will nonetheless bear a tax consequence of 16.5% of the franked dividend (in this case it could be in excess of $320,000!).
Therefore, it goes without saying that TR 2014/5 forces tax to be a significant factor in family law negotiations.
Katrina Brown, Senior Lawyer with Nautilus Law Group, authors Tax Contingency Reports for parties seeking definition of the possible tax contingencies factorable in property settlements. Consideration given in the Reports includes availability of franking banks (available for offset against tax payable on assessable income in the hands of a shareholder of associate), capital gains tax roll over reliefs and small business concessions, and funding options for legal entities operated in a family group. Further, it is often the case that non-family related business proprietors are associated with legal entities which are subject to family law proceedings (or threatened to be compromised as a consequence of such proceedings). The Reports, therefore, also have regard to best case outcomes for the non-family business proprietors.
If you are interested in speaking with Katrina Brown regarding Tax Contingency Reports, please feel free to arrange a meeting by our offices on (07) 5574 3560.
We thank you for considering Nautilus Law Group.