CGT and the small business home office – big tax mistakes
The amount of Capital Gains Tax (CGT) you will be required to pay when you sell your home is calculated by multiplying the gross capital gains on the sale of your home by the percentage of business use over the period of ownership. To illustrate, if your home is sold for $800,000, but you invested $600,000 between acquisition costs and repairs – and you have deducted 5% of the costs of the home for your “business use” over a period of the 5 out of 10 years you have held the home – then your assessable capital gains will be calculated as follows: [($800,000-$600,000) x 0.05] x [10/5] = $5,000.
Caution needs to be had when opting to claim business expenses in respect to your home, via your annual business tax return. Although you are able to claim back a portion of your interest costs and other hold costs for the percentage of business use in your home, the loss of capital gains exemption for that part of the home may not justify the short term savings.
The ATO provides helpful tools for business owners to assist in assessing their personal circumstances and capital gains. Please click the following link to check out the tools offered by the ATO: ATO planning templates and tools.
Nautilus Law Group assists business owners in assessing and designing business and personal wealth structures, and consideration of capital gains tax is one of the services we offer.
If you are running a home office and have questions about your structure, please do not hesitate to contact our team to arrange a conference by emailing email@example.com or phoning our enquiries manager – Vicki on 07 5574 3550.
A complying self-managed superannuation fund (SMSF) is a trust at law, which is subject to the requirements and restrictions of the Superannuation Industry (Supervision) Act (SISA), Superannuation Industry (Supervision) Regulations (SISR), Income Tax Act Assessment Act 1997 (ITAA97), Income Tax Act Assessment Act 1936 (ITAA36), and such further relevant Commonwealth and State based legislation applicable thereto.
Whilst industry practice favours the establishment of a SMSF by “deed”, there is no obligation under Commonwealth or State legislation that a SMSF conform with the obligations of the common law characteristics of a deed. Section 10(1) of the SISA defines a deed to include “an instrument having the effect of a deed”.
Whilst the term “instrument” is not defined under the SISA, nor defined under the Acts Interpretation Act 1901 (Cth), the reference to “governing rules” and “deed” are used interchangeably, with the term “governing rules” defined at Section 10(1) of the SISA to mean, in respect to a “fund, scheme or trust”…“(a) any rules contained in a trust instrument, other document or legislation, or a combination of them, or (b) any unwritten rules, governing the establishment or operation of the fund, scheme or trust”.
Accordingly, setting aside the debate as to whether electronic transactions and digital signatures are allowed in respect to the settlement of a “deed” – a SMSF may be settled by any instrument which has the effect of a deed.
What, therefore, is an “instrument which has the effect of a deed”?
Returning to the nature of a SMSF, we cannot overlook the simplicity of what constitutes a trust. A trust has three necessary elements: the trustee, the trust property and a beneficiary. A trustee can also be the beneficiary, provided the trustee is not the only one (consider Section 17A of the SISA – with its restriction that a single member cannot act as a sole trustee). Whilst a trust may be settled by deed, there is no obligation at common law or statutory law to settle a trust by deed. In fact, a trust can be settled by common intention of parties, and to this end – the definition of “governing rules” at Section 10(1) allows for “unwritten rules.”
Whilst the writer does not suggest a SMSF may be settled on a resulting or implied trust, the writer does not agree with the proposition that the formalities of a deed are necessary for the establishment or maintenance of a “complying” SMSF under the SISA. To the contrary, the SISA accommodates settlement by any instrument which is a deed, or has the effect of a deed. The focus throughout the SISA is on the governing rules, to which there is no formality of implementation.
In particular, Section 8 of the Electronic Transactions Act 1999 (Cth) (ETAC) stipulates that a transaction is not invalid under the laws of the Commonwealth merely because it takes place wholly or partly by means of one or more electronic communications. A “transaction” is defined at Part 1, Section 5 of the ETAC to be “any transaction in the nature of a contract, agreement, or other arrangement”, “any statement, declaration, demand, notice or request” and “any transaction of a non-commercial nature”. Part 2, Section 10 of the ETAC provides that the signature of a person may be given electronically, provided consent is given to the execution and method. Part 2A of the ETAC allows for the application of Parts 1 and 2 of the ETAC to contracts and transactions in the nature of a contract. To the extent an “instrument having the effect of a deed” is in the nature of a contract, Part 2A makes allowances for electronic transactions and digital signatures in respect to such instruments, notwithstanding the exclusions at Item 142 of Schedule 1 of the Electronic Transactions Regulations 2000 (Cth). To read the exclusions at Item 142 to broadly prohibit the applications of the ETAC to the SISA for such purposes is, the writer suggests, against legislative intent.
EXECUTION BY A CORPORATION
Section 127 of the Corporations Act 2001 (CA) does not limit the means by which a corporation can execute a deed. The Electronic Transactions Act Regulations 2000 (Cth) (ETR) exclude the application of the ETAC from applying in respect to “company laws” – but the inclusive nature of Section 127 of the CA does not prevent the company from resolving a means of executing a deed by way of electronic signature.
Whilst parties referring to a deed executed by a corporation, other than a prescribed manner at Section 127 of the CA, may require additional evidence of the corporation’s execution of the deed – the provision of the evidence does not invalidate the execution made by the corporation in accordance with its own mechanisms.
EXECUTION BY AN INDIVIDUAL
The following States either allow for, or are likely to be deemed to allow for, the execution of a deed by electronic means by an individual:
The following States do not allow deeds to be executed by electronic means by an individual, and it is therefore in these States that consideration must be given to what constitutes the execution of an “instrument having the effect of a deed”:
Therefore, returning to the question of what is an “instrument having the effect of a deed”? The formalities of the common law execution of a deed in respect to the signing and delivery on “parchment, vellum or paper” are not obligated by the SISA. Notwithstanding, four of the Australian States allow deeds to be issued electronically. It follows that an “instrument having the effect of a deed” is an instrument, transacted with consent of the parties, by way of electronic mechanisms suitably qualified in accordance with the relevant Electronic Transactions Acts of the Commonwealth and States.
The Queensland Court of Appeal, in 400 George Street (Qld) Pty Ltd v BG International Ltd  QCA 245, considered the question of what constitutes a deed, and in doing so considered 12 Halsbury’s Laws of England, 4th ed, para 1301, which defines a deed as “an instrument” which:
“…must express that the person or corporation so named makes, confirms, concurs in or consents to some assurance (otherwise than by way of testamentary disposition) of some interest in property or of some legal or equitable right, title, or claim, or undertakes or enters into some obligation, duty, or agreement enforceable at law or in equity, or does or concurs in some other act affecting the legal relations or positions of a party to the instrument or of some other people or corporation.”
The term “instrument” is not defined under the SISA or the Acts Interpretation Act 1901 (Cth) (AIA); however the Acts Interpretation Act 1954 (QLD) (AIA), Schedule 1 defines a “document” as “any paper or other material on which there is writing…and any disc, tape or other article or any material from which sounds, images, writings or messages are capable of being produced or reproduced (with or without the aid of the device)”. An “instrument” is defined in the AIA as any “document.”
Section 44 of the Property Law Act 1974 (QLD) (PLA) entitled “Description and form of deeds”, does not require a deed to be on parchment, vellum or paper. Notwithstanding, Part 2 of the Electronic Transactions Act (QLD) (ETAQ) allows for an electronic instrument to be effective, provided the execution standards are satisfied and the transaction is not excluded.
Specifically, an electronic instrument is taken to be effective by Sections 16 and 17, of Part 2 of ETAQ, where: a) the electronic form of the document is provided by a reliable mechanism which maintains the integrity of the information contained in the document, b) it is reasonable to expect the information contained in the electronic form will be readily accessible for subsequent reference and c) the parties to the communication consent to the provision of an electronic form. Part 4 of the ETAQ reads Part 2, to apply to any “transaction” in the nature of a contract.
Therefore, deducing from 400 George Street, “an instrument which has the effect of a deed” is an instrument in which parties thereto express a consent, undertaking, obligation, duty or agreement which affects an interest in property, or some legal or equitable right, title or claim. The formalities of execution are not necessarily dispositive, provided the intention of the parties is demonstrated.
Is an “instrument having the effect of a deed” not, therefore, for purposes of establishing a complying SMSF, in the “nature of a contract”, such that Part 2 of the ETAQ allows for the execution of SMSF deeds (which are, notwithstanding the name, an “instrument having the effect of a deed”)?
There is no case law to answer this question; however, reading the statutory provisions above cited as inclusive, rather than exclusive, it would follow, the writer suggests, that a SMSF may be validly settled by a quasi-deed (for example, a self-managed superannuation fund deed of establishment, settled without compliance to the PLA and/or common law execution standards), electronically by not only corporations – but individual trustees. Electronic transactions are not foreign to the SISA (see Section 11D) or CA (see Chapter 2P), and the modern business practice of electronic dealings would reasonably lead to a conclusion that it is unlikely that a SMSF would be found to be non-complying merely because a deed was executed electronically and by way of digital signatures of company officers and/or individuals and their respective witnesses – as a SMSF can be established by an “instrument having the effect of a deed” (Section 10(1) of the SISA).
It may be that third parties may require a company to execute more traditionally for their internal requirements; however, this requirement does not negate the effect of the “instrument having the effect of a deed,” given the consent and intentions of the parties to be bound therein. Further, given the inflexibility of banks and other relevant institutions, it is best practice to adopt a means of execution by individuals likely to be universally accepted; however, given a SMSF does not have to be settled in common law deed form, there is no express prohibition to adopting digital signatures for the execution of a deed (notwithstanding in absence of the formality, it would be “an instrument having the effect of a deed) of the individual and his/her witness.
Which structure is right for me? Business advantages and disadvantages for sole traders.
Sole traders opt to operate their businesses as individuals, without any business structuring. Sole traders often trade under their personal name, while others will register a Business Name with the Australian Securities and Investment Commission.
Being a sole trader provides you with ultimate control over your business and its operations. However, a downside to operating your business as an individual means that there is no division between personal and business assets. This means that personal assets can be utilised to make payment of business debts, which can assist with liquidity and maintenance of the business, but also puts your personal assets at risk of creditors.
A sole trader can easily incorporate a company or establish another business structure at a later date or as the company expands. The flexibility afforded to a sole trader can allow the company to grow and develop without any pre-established restrictions. This can allow a sole trader to gauge the success and potential direction of a business venture once it is established.
Operating as a sole trader is, for obvious reasons, the cheapest option for running a business. It is also the easiest to administer, as it does not require any reporting (other than that relating to normal income tax requirements) and is not subject to onerous regulations (such as those found within the Corporations Act).
Further, unless a sole trader employs individuals when expanding the business, a sole trader is not considered to be an ‘employee’, and thus a sole trader is exempt from PAYG withholding, superannuation and WorkCover. It is highly recommended that a sole trader take out insurance to ensure that the business can be sustained in the event the sole trader is sick or injured. In addition, sole traders are often required to invest significant amounts of their own time to ensure the smooth running of the business (where there is no expense of support staff) and are not considered employees so have no entitlement to annual leave or similar benefits.
There are little to no costs associated with establishing a business as a sole trader. There are costs associated with registration of an Australian Business Name, if the sole trader decides to do so. There may also be costs associated with obtaining software for the management of the business, including accounting and invoicing software for the purpose of keeping financial records.
Losses associated with the running of the business can be offset against other personal income, as the business is treated as personal income for reporting purposes. Additionally, any income is taxed at personal income tax rates.
A sole trader may find it more difficult to obtain financial funding as there is less likely to be a large sum of capital available. This means that a sole trader may have to rely on the provision of credit, which can be risky especially where the success of a business may be yet to be determined. However, as stated above, personal income and assets can be utilised to fund the business and this flexibility can be useful in situations where the business requires more funding.
Starting a business as a sole trader is very popular, as it is cost effective, there are taxation benefits and significant advantages relating to the flexibility of the business. However, there is also a substantial amount of personal risk that is involved where you enter into business transactions (including overdraft accounts and credit facilities). You should always seek professional legal advice before starting your business to determine whether a sole trading structure is best for you.
Nautilus Law Group can help you weigh the the risks and benefits of starting your business as a sole trader, and can provide advice on the best structure for your start-up. We welcome you to contact our offices on (07) 5574 3560 or email firstname.lastname@example.org. We thank you for considering Nautilus Law Group.
Submitted by: Katrina E. Brown BA JD ATIA TEP SSA
National Privacy Principles: Is your company or business collecting personal information about your existing or potential clients? Personal information is defined in section 6 of the Privacy Act 1988 (Cth) as:
“Information or an opinion (including information or an opinion forming part of a database), whether true or not, and whether recorded in a material form or not, about an individual whose identity is apparent, or can reasonably be ascertained, from the information or opinion.”
But what does it mean for an individual’s identity to be “apparent”, or “reasonably” ascertainable from the information collected?
In 2002, the (then) Privacy Commissioner, released a statement as follows:
“Identification is the action of being identified, of linking specific information with a particular person. An individual’s identity has a degree of fluidity and is likely to change over time. The extensive linking of different information about an individual may restrict or limit this fluidity …
Identification can potentially relate a wide range of elements of an individual’s identity. In practice, identifying an individual generally involves focusing on those things that distinguish that individual from others including, legal name, date of birth, location or address and symbolic identifiers such as a driver’s licence number.”
Whether information can readily identify an individual is greatly dependent on the situational context. For example, the disclosure of gender, ethnicity and the information that the individual suffers a rare medical condition, has been considered to be enough to identify a person.
Generally, information such as a full name, address, date of birth or even an email address can be considered information that makes a person capable of being identified.
Most businesses collect this information on their websites, through order forms or when a potential customer signs up to receive their newsletter. It is important for businesses to understand their obligations when collecting, and dealing with personal information. While there are some exemptions to compliance with the Act, it is good practice for businesses to comply with the Act and the National Privacy Principles when conducting business, as it encourages customers to feel comfortable sharing personal information when interacting with your business.
The National Privacy Principles (NPPs) are the standards of privacy to which private organisations (as opposed to government agencies) must adhere when collecting and holding personal information.
The 10 NPPs are summarised as follows:
1. Collection – This NPP describes how an organisation should act when collecting personal information. Restrictions include:
a. The information collected must be necessary for one or more of the functions or activities of the organisation – for example, for sending of a newsletter or for posting goods purchased by the customer;
b. The information can only be collected by lawful and fair means and not in a way that can be considered unreasonably intrusive;
c. The organisation collecting the information must take reasonable steps to make the individual aware of:
i. the identity of the organisation and any contact information;
ii. the purposes for which the organisation is collecting the information;
iii. the fact that the individual is entitled to access the collected information;
iv. to whom the information may be disclosed; and
v. the consequences (if any) of failure to provide the information – for example, full services may not
be able to be provided without all information;
d. the organisation should, as far as reasonable and practicable, only collect personal information directly from the individual it pertains to.
2. Use and Disclosure – This NPP provides guidelines as to how personal information can be used and disclosed. The obligations can be summarised as follows:
a. The information must only be disclosed for the primary purpose for which the information was
i. the secondary purpose for collection is related to the primary purpose; and
ii. the individual would expect the organisation to disclose the information for the secondary purpose; or
iii. the individual provided consent to the disclosure; or
iv. if the information is not of a sensitive nature and the secondary purpose is direct marketing and the
individual has not declined such communication, and the organisation provides an ‘unsubscribe’ facility; or
v. where the information is related to health and is necessary for research or statistics pertaining to public
health and safety; or
vi. disclosure is necessary to prevent a serious and immediate threat to the life of an individual, the public or
public safety; or
vii. the organisation reasonably suspects that an unlawful activity has been carried out and discloses the
information as part of its investigation; or
viii. the law authorises disclosure or use of the information.
3. Information Quality – The organisation must ensure that the information is maintained complete and up to date.
4. Data Security – The organisation must do all possible to maintain the security of the information, and prevent any unauthorised use or access.
6. Access and Correction – An individual must be allowed access to their personal information (except as otherwise specified under the Standards) and may correct such information if it is inaccurate or incomplete.
7. Identifier – An organisation may not use or make reference to an identifier used by the government as its own reference number.
8. Anonymity – An organisation must, where possible, allow an individual the opportunity to deal with the organisation without having to identify themselves to the organisation.
9. Transborder Data Flows – An organisation cannot transfer information outside Australia only if the external territory is subject to similar legislation regulating the use of information, or where the customer consents to the disclosure.
10. Sensitive Information – Sensitive information cannot be collected except where an individual has specifically consented, where it is required by law or where it is necessary for public health or individual safety. For reference, “sensitive information” includes information or an opinion about an individual’s:
a. racial or ethnic origin; or
b. political opinions; or
c. membership of a political association; or
d. religious beliefs or affiliations; or
e. philosophical beliefs; or
f. membership of a professional or trade association; or
g. membership of a trade union; or
h. sexual preferences or practices; or
i. criminal record; or
j. personal information about an individual’s health or genetic matters.
If you are collecting personal information about your customers you may need to ensure that you are acting in compliance with the National Privacy Principles. If you are unsure about your obligations under these rules, we encourage you to contact our office to discuss your concerns.
We welcome you to contact our team on (07) 5574 3560 or email us email@example.com. Thank you for considering Nautilus Law Group.
Submitted by: Katrina E. Brown BA JD ATIA TEP SSA