by Katrina Brown | Aug 14, 2014 | Commercial Law, Nautilus Law, Tax Advisory
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.
by Katrina Brown | May 8, 2014 | Elder Law and Special Needs Advocacy – “Different-Ability Law”, Special Needs and Disability Planning
Planning for a person with a disability takes careful thought and preparation. Luckily Nautilus Law can help you!
If you would like to enquire about planning for a person with a disability, we welcome you to contact Katrina Brown BA JD ATIA TEP SSA, Practice Director of Nautilus Law Group, is the Senior Lawyer overseeing the Commercial, Estate Planning and Tax Division of the Firm. Katrina can be reached by email at katrina@nautiluslaw.com.au or by calling our offices on (07) 5574 3560. We thank you for considering Nautilus Law Group.
by Katrina Brown | Nov 7, 2013 | Body Corporate Law, Levy Arrears and Litigation
We are pleased to report our appeal in the matter of The Body Corporate for 399 Woolcock Street CTS 34770 v Sexton & Ors [2013] QCATA 055 (399 Woolcock) was successful. Unfortunately, the decision has sparked a new line of dispute in the industry as to whether debt recovery costs are “liquidated,” despite the Regulations granting the right to recovery only those costs which are “reasonably incurred” (See for instance, Section 145 of the Standard Regulations).
The question on appeal in 399 Woolcock was whether subsequent owners of a lot were liable to pay a body corporate debt in circumstances in which the body corporate had obtained a judgment for the outstanding levies and recovery costs against the previous owner. It was held that the body corporate was entitled to pursue the new owners, and that the recovery of the “body corporate debt” did not “merge with the judgment.”
Importantly, in our opinion, the decision did not deal with the question of what costs are “reasonably incurred” (for instance, Section 145, Standard Regulations). Whilst 399 Woolcock does settle the position that recovery costs are a “body corporate debt”, it remains the body corporate’s burden to prove the costs are “reasonable” if challenged by a debtor.
In the decision of Body Corporate for Sunseeker Apartments v Jasen [2012] QDC 51, Judge McGill opined at paragraph 36:
“…the mere fact that the body corporate and its lawyers have agreed that costs are to be payable in a particular way, for example at a certain hourly rate for certain partners and staff, is not something which in itself makes those costs reasonable. In determining whether the costs in fact charged on a certain hourly rate are reasonable, it is therefore necessary to consider whether that hourly rate is reasonable. That is an objective matter, and does not depend simply on the fact that parties have agreed to a charge at that rate, subject only to the qualification that the amount payable under s 97(1)(c) could not exceed the amount in fact charged to the body corporate, because of the requirement that the costs be “incurred”.
In this review, Judge McGill determined that not all recovery costs which the body corporate submitted, by way of assessed costs, were reasonable.
In the earlier decision of 3 Parkland Boulevard [2007] QBCCMCmr 437, the Adjudicator stated that:
“The body corporate needs to claim those costs as a debt and await either agreement by the defendant or a court order specifying which recovery costs are “reasonably incurred”. If the applicant and the body corporate cannot agree on what recovery costs have been reasonably incurred then the body corporate can initiate court action seeking its reasonable recovery costs.”
Also, in Body Corporate for Liberty v Alotier Pty Ltd & Stewart Silver King and Burns CCT KA009-08 (11 February 2009), the Commissioner found that a body corporate was entitled to treat recovery costs as debt when those costs were determined as either “reasonable” per agreement between the parties, or when determined by order of the Court.
The decision of 399 Woolcock does not supersede or reverse the findings of any of these cases, and in fact is consistent with these findings.
We appreciate that some practitioners in the industry (who were not involved in 399 Woolcock) opine that recovery costs, as a “debt” are “liquidated” in nature. Importantly, however, the Regulations only provide for the recovery of costs which are “reasonably incurred.” The question of “reasonableness” is, and remains, an objective standard of review – and not one that can be unilaterally determined by a body corporate in isolation. Certainly, bodies corporate and debtors are at liberty to determine between themselves what costs are “reasonable,” and are encouraged to do so as the quantum of recovery costs can quite quickly exceed the value of the outstanding levies and interest for which the recovery costs are incurred.
We strongly warn Managers and Committees to consider the possible claims which could be waged against the body corporate for “getting it wrong.” If a body corporate treats all recovery costs as “liquidated” and apply the costs to the OSA (in lieu of a separate unliquidated ledger), and those costs are carried forward on a running total showing a combined debt (arising out of levies, interest and costs), there stands a real and certain risk that the body corporate could interfere with the legal rights of an owner if the body corporate is found to have incurred costs “unreasonably”.
Consider the following two examples as to why Judge McGill espouses the correct interpretation of recovery costs:
Example A: ABC Mercantile Agency/XYZ Law Firm –
Presume Joe Bloggs owns a Unit and he owes $5,000 in outstanding arrears, with continuing interest at 2.5% per month. The Body Corporate Manager (affiliated with DEF Body Corporate Management Company (“DEF”)) recommends to the Body Corporate that they use ABC Mercantile Agency (“ABC”), who carries out legal work under an agency arrangement with XYZ Law Firm who “oversee” the legal work. The costs of recovering the $5,000 debt exceed $8,000, because the “negotiations” in relation to legal fees and charges are conducted by employees of the sister companies in the same head corporate group without influence of outside competition. Joe Bloggs, on advice from his lawyer who reviews the charges, pays $5,000 to the Body Corporate for outstanding arrears and interest, and $5,000 in costs he deems “reasonable” as a debt. He then challenges the Body Corporate to prove the “reasonableness” of the balance. The Court finds in favour of Joe Bloggs, and finds that $3,000 in claimed recovery costs were “unreasonable” (as the Court agrees with Joe that the prices charged by the mercantile agency and law firm were above market and not reasonable in the circumstances, thereby finding of the $8,000 incurred by the Body Corporate – only $5,000 was in fact reasonably incurred). As a result of the loss of vote because whilst the Body Corporate deemed him “non-financial” as the Body Corporate treated the outstanding “$4,000” as a debt due and payable, he has been prevented from participating in the voting and administration of the Body Corporate. End result: Joe Bloggs has a cause of action against the Body Corporate for interference with his legal rights as an owner, and the Body Corporate is out $3,000 in costs (plus whatever further costs are incurred in trying to prove the outstanding recovery costs).
Example B: 123 Law Firm
Presume the above example of Joe Bloggs, but instead of incurring $8,000, 123 Law Firm takes the same steps, but the fees for that same process cost only $4,000. Is it reasonable for 123 Law Firm to mark up their fees to $5,000 (which was allowed by the Court as being reasonable in Example A), just because ABC and XYZ do? Who has standing to decide the question?
In sum, our advices despite 399 Woolcock are as follows:
1. Separately record debt recovery costs incurred against a debtor (most preferably in a “Debt Recovery Ledger”). If the costs are agreed as “reasonable,” then apply the debtors payments to the Ledger directly. Do not intermingle the Ledgers, to ensure transparency is maintained at all times;
2. Whilst debt recovery costs can be plead as “liquidated” without particularisation in the Claim, the body corporate must bear in mind at all times that the burden of proving those costs as being “reasonably incurred” remain with the body corporate. Chances are, if charges are at industry standard and strategic rationale can be demonstrated for the costs and charges, all recovery costs will be recovered as a debt;
3. If a debtor pays an amount of recovery costs the debtor argues is “reasonable” and disputes the balance, the body corporate needs to consider whether to treat the debtor as “financial” if the levies and interest are paid in full, excepting for the disputed amount of “recovery costs.” The body corporate can proceed against the debtor, the further costs incurred in proving the initial costs as “reasonable” are also recoverable on a finding of the Court; and
4. Update by-laws to address the manner in which costs and expenses are treated by the body corporate.
If your Body Corporate has questions about levy recoveries, we welcome you to contact our offices on (07) 5574 3560 or email info@nautiluslaw.com.au. We thank you for considering Nautilus Law Group.
Submitted by: Katrina E. Brown BA JD ATIA TEP SSA
by Katrina Brown | Oct 14, 2013 | Commercial Law, Debt Recovery
So you have an outstanding debt and you would like to collect it?
Your letters to the debtor have not brought about payment. You are at a loss as to what to do next – should you refer your debt to a collection agency? Should you seek assistance from a lawyer?
This article will attempt to dispel some common myths about mercantile agencies, debt collection agencies and lawyers, and will help you to decide the best step forward for your business and its debt recovery strategies.
Myth One: Lawyers are only for when you want to sue someone!
Many people believe that initial debt recovery steps must be performed either in-house, or through a debt collection agency, and that lawyers must only become involved where it becomes time to take a debtor to court.
While it is true that lawyers are often involved in debt recovery litigation, Nautilus Law Group believes that it is cost effective and efficient for our clients that we provide a “one-stop” debt recovery service that allows a client the best opportunity to recover their debt amount.
As such, Nautilus Law Group has the resources to provide you with initial collection services charged on a per item basis. We can work closely with you to formulate a strategy for recovery of debts which is suited to the particular circumstances of your business, which may include demand letters, telephone demands or arranging field calls.
Myth Two: I can’t afford a lawyer!
Traditional debt collection agencies will often charge a collection fee based on a commission, or a percentage of the recovered debt. Nautilus Law Group believes that your costs associated with recovery of the debt should relate to the amount of work performed by us, and not to the size of your debt!
Nautilus Law Group is a small business, and understands the importance of being able to plan for expenses. Nautilus Law Group does not charge a collection fee or percentage of amount collect as you would encounter if you took your debt to a traditional collection agency. We work with you to provide a fixed fee schedule for all initial collection services so that you always know what the cost will be to your business.
We provide our clients with a “Strategic Plan” for their debt recovery, which outlines all fixed-fee costs associated with the litigation process. To the extent that we cannot provide a fixed fee estimate (such as on a file which is defended by the debtor), we will always aim to provide you with an accurate estimate of the costs associated with the next step in the process.
If you have exhausted traditional debt recovery options (or if you prefer the aggressive approach) and want to proceed to litigation, we are here to assist you. The Court applications we recommend to our clients are governed by the Uniform Civil Procedure Rules 1999. In the legislation is a scale of costs that the Court considers reasonable professional fees for the cost of issuing items such the Claim and Statement of Claim, Judgment and Enforcement proceedings. These Court-approved amounts are the amounts that Nautilus Law Group charges its Clients and the amounts we seek to recover from the debtor.
Myth Three: Legal fees are not recoverable – I may as well just write off my debt!
As discussed above, Nautilus Law Group charges scale fees to our clients where possible – which are the fees already deemed reasonable by the Court. This means that in the event that we were to proceed to Default Judgment or Summary Judgement on a matter, we are more likely to recover the majority, if not all, of your costs associated with the litigation.
Filing fees to the Court and a portion of the service fees are also recoverable from the debtor. Interest, whether it is an amount you are entitled under your contract or an amount provided for under legislation, will be added to your debt amount and will continue to accrue until full payment is received.
Does that mean that this won’t cost me anything? No. Unfortunately, some costs will be incurred for the day to day management of the file. Not all matters proceed directly to Judgment. When a Defence is received on a matter, time must be spent responding to the Defence and preparing for Trial if necessary. Defended matters incur costs which are not fully recoverable and are not provided for by the Court in the scale fees. Nautilus Law Group strives to provide the most effective advice while being conscious of costs.
Interest that is recoverable under contract or by statutory right is intended to be ‘compensatory’. This means that interest is imposed to assist in compensation for any out-of-pocket expenses that are incurred in attempting to resolve the matter which are not otherwise recoverable if the file moves to Judgment.
At Nautilus we strive to be transparent in our costing and will provide to our clients our Strategic Plan which outlines the costs of our services for every step of a debt recovery matter. We provide our client’s options in pursuing the debt and always consider the amount of the debt, the likelihood of the debt being recovered and costs of pursuing the debt. We believe in providing commercial strategies for your business.
If you would like to enquire about collecting your outstanding debt, we welcome you to contact our offices on (07) 5574 3560 or email info@nautiluslaw.com.au. We thank you for considering Nautilus Law Group.
Submitted by: Nautilus Law Group
by Katrina Brown | Oct 13, 2013 | Succession Law
Special Disability Trusts can be an extremely useful tool to both plan and provide for the future needs of your son or daughter with a severe disability. This Trust was introduced by the Federal Government in 2006 and is part of Australia’s social security framework. The Trust is designed to assist families to make their own legal planning provisions for their family member with a severe disability. Proper legal planning, such as the formation of a Special Disability Trust, ensures that any inability of a primary carer to maintain care is provided for and the needs of the person with a severe disability remain met.
WHAT ARE THE BENEFITS OF A SPECIAL DISABILITY TRUST?
Special Disability Trusts are Trusts established by a parent to meet the specific, long-term needs of their child with a severe disability both now and in the future. The Special Disability Trust can be established by parents whilst alive or through their Last Will. There are a number of key benefits in establishing a Special Disability Trust.
Firstly, the principal place of residence of the beneficiary becomes an asset of the Trust. As an asset of the Trust, the beneficiary has a life interest in the property. This provides security of tenure for the life of the beneficiary.
Secondly, the trustee may spend Trust assets on reasonable care that is directly related to the care of the beneficiary. To fall within this ambit, the need for the care must be for the primary benefit of the beneficiary and this need must be met within Australia. Examples of reasonable care needs could include any relevant aids, communication devices or vehicle modifications required for the beneficiary’s disability. This is certainly not a definitive list.
Thirdly, the trustee may also spend up to $10,500 per annum for care that is not directly related to the care and accommodation needs of the beneficiary. This is called discretionary spending. Whilst some may find this concerning, this recent legislative amendment ensures that there is some flexibility in meeting the day to day needs of the beneficiary. Examples could include workshops or recreational activities for the beneficiary, basic food as well as any required household cleaning. Again, this is certainly not a definitive list.
Fourthly, there are also significant social security benefits to a Special Disability Trust. These are outlined below.
THE SIGNIFICANT SOCIAL SECURTY BENEFITS
As noted, a Special Disability Trust enables parents to provide assets to their son or daughter. However, when social security such as a Disability Support Pension is applicable, the transfer of assets can have significant implications for a person’s entitlements. This is generally not the case in relation to Special Disability Trusts. The term ‘special’ in the name Special Disability Trust is not a reference to a beneficiary’s disability, but is in fact related to the special Social Security treatment of the Trust. This is because Special Disability Trusts are intended to encourage families to make their own arrangements for their family member with a severe disability. The Social Security treatment of Special Disability Trusts is outlined briefly below.
Firstly, the income test for Special Disability Trusts is unique. Money utilised for care, accommodation, maintaining the trust assets and on the discretionary spending noted above is not considered income for social security purposes.
Secondly, the assets test is also unique. As at July 2012 and indexed annually, the beneficiary may have assets worth up to $596,500 in Trust as well as the principal residence as noted above before there are any implications on the beneficiary’s Disability Support Pension or other relevant social security payment. This encourages families to ensure that there are sufficient assets to care for the beneficiary for their lifetime.
Thirdly, the gifting concession is also unique. As opposed to the ordinary gifting concession of $10,000, the gifting concession for Special Disability Trusts is $500,000 for immediate family members providing assets to the Trust. This figure is not subject to indexation and immediate family members may also receive concessional treatment. This encourages families and others to gift to the trust for the ongoing care of the beneficiary.
WHAT ARE THE REQUISIT COMPONENTS OF A SPECIAL DISABILITY TRUST?
Special Disability Trusts must confirm with a number of specific requirements. Firstly, a Special Disability Trust can only be established for a beneficiary with a ‘severe’ disability. The term ‘severe’ is defined under section 1209M of the Social Security Act 1991. Under this section, there are two means of classifying ‘severe’.
Firstly, a person 16 years or over must be eligible to qualify for the Disability Support Pension. The person must also have a disability that, if they had a sole carer, ensure the care is eligible for Carer Payments or Carer Allowance.
Alternatively, the beneficiary must live in an institution or group home where care is provided pursuant to Government funding. The beneficiary must also have a disability that limits the ability to work more than seven hours per week or above the relevant minimum wage. This reference to minimum wage regards the Supported Wage situation. However, amendments made in early 2011 now ensure that a beneficiary may work up to seven hours a week at or above the minimum relevant wage in open employment and still qualify.
If this definition is met, there are further requirements to establish a Special Disability Trust. Firstly, the Trust must have only one beneficiary. This ensures that there is one Trust per person. The Trust must also be established primarily to provide for the care and accommodation needs of the beneficiary. This ensures that the long-term needs of the beneficiary are protected. The Trust must also have a Trust Deed that contains all clauses outlined in the Model Trust Deed. A Model Trust Deed identifies who the relevant parties are, any important factors the trustee must consider, as well as the specific powers and duties of the trustee.
Whilst the Model Trust Deed governs the actions of the trustee, there are also important considerations for selecting a trustee for a Special Disability Trust. An independent trustee or, preferably, a panel of trustees must also be provided for by the Trust. If appointed solely, the trustee must be a prescribed person such as a solicitor, an accountant or the Public Trustee. Alternatively, a panel of two trustees who each do not qualify as a prescribed person may be appointed.
Finally, a Trust is a separate legal structure in relation to taxation. As such, the Trust has its own responsibilities to pay tax as required and submit tax returns. It is advisable that an accountant attends to these obligations. If the trustee is a company there are also ongoing legal and accountancy obligations to maintain the company.
IMPORTANT CONSIDERATIONS
Whist an excellent planning tool, Special Disability Trusts can be extraordinarily expensive to establish. This is highly unfortunate and in some situations they are not feasible solutions to a family’s planning needs. There are also ongoing legal and accountancy costs to maintain the Trust. These factors must be considered when planning for the future needs of a son or daughter with a severe disability.
HOW CAN NAUTILUS ASSIST?
Nautilus practices in Special Needs Law and has a team with significant experience in this area. We welcome you to contact our offices on (07) 5574 3560 or email info@nautiluslaw.com.au. We thank you for considering Nautilus Law Group.
Submitted by: Katrina E. Brown BA JD ATIA TEP SSA
