by Katrina Brown | May 26, 2016 | SMSF, Tax Advisory, Tax Advisory
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.
by Katrina Brown | Mar 28, 2016 | Estate Administration and Litigation, Powers of Attorney and Estate Planning, Succession Law, Wills
It is a common phrase heard, particularly from young adults – “I don’t have any assets, so I don’t need a Will”.
Young adults and non-homeowners are often of the opinion that, because they do not have “significant” assets – they do not need a Will. This article considers two of the most basic reasons to have a Will.
Firstly, everyone owns something – and the majority of young people have potentially significant superannuation death benefits.
Remember opening a “Dollarmites Club” account with Commonwealth Bank when you were in early primary school (or opening one for your children)? At a young age you started to accumulate assets.
In addition to many young adults concluding that their assets are not significant enough to necessitate a Will, there is generally one asset that they do not consider – superannuation death benefit proceeds.
Superannuation is held by the Trustee of your superannuation fund(s) on your behalf. Although you are beneficially entitled to the funds, they are not owned by you (but rather held for you). Therefore, the Trustee can pay the superannuation death benefits as the Trustee determines – which may or may not be in keeping with your wishes.
If you die having a superannuation member interest, the Trustee is obligated to pay the death benefit to any one or more of your “dependents” or your legal personal representative – unless you have made a Binding Death Benefit Nomination (and the Nomination names a lawful payment direction).
You may have significant superannuation death benefits, and have no idea! We discover this quite often, when we ask clients to provide copies of their superannuation statements.
For example, one standard cover by Sunsuper provides a combined total and disability cover for a 30 year old in the sum of $250,000, which decreases at age 60 to $25,000. Also, many industry funds have basic insurance coverage that is taken out on joining the superannuation fund.
In a Will, directions can be made in respect to your wishes on the payment of the superannuation death benefits. The Trustee may have regard to your wishes contained in your Will, but is not bound to act in accordance with your Will. However, your Will is an excellent starting point for the Trustee to consider, in assessing how the superannuation death benefits should be paid. Of course, making and maintaining a valid Binding Death Benefit Nomination in the form required of the Trustee is the best approach to ensuring the benefits are paid to the correct beneficiary.
You do need to be aware, however, that the Trustee is limited to who it can pay – including generally your parents, your children, your partner or spouse and your dependents and interdependents (in general terms – people whom you live with or whom rely on you for some level of financial assistance, or vice versa). Excepting in respect to any one or more of these, the Trustee must pay the death benefit to the Legal Personal Representative of your Estate.
Assuming the death benefits are paid to the Legal Personal Representative of your Estate, if you have no Will – the superannuation death benefit will be distributed in accordance with the intestacy rules set out in your state of residency’s intestacy rules (see, for example, the Succession Act 1981 (Qld)). But, you may not want to leave your death benefit to those who would take intestate, so it pays to draw a Will – regardless of the value you believe your Estate to be worth.
Secondly, if you do not have a Will, there is a question over who controls your Estate.
A properly drawn Will appoints an executor, which person (or people) has the authority to administer your Estate.
In the event that you die without a Will, the only way that a person can be granted authority to deal with your estate (in a way that is recognised by financial institutions and asset holders) is for that person to obtain a grant of Letters of Administration from the Supreme Court.
The cost and time involved in obtaining the grant of Letters of Administration is generally greater than that of obtaining Probate of a Will.
If you would like to speak to our estate planning team about drawing a Will, please contact our office on 07 5574 3560 or via email.
by Katrina Brown | May 20, 2013 | Commercial Law
Most directors are aware of the importance of compliance with PAYG withholding and superannuation guarantee charge obligations. However, what happens when the company fail to pay Superannuation installments for their staff? What are the consequences for the directors?
Since 1993 the Australian Taxation Office (ATO) has had the power to recover company liabilities through the director’s penalty regime. These new policies were aimed at ensuring that directors realise that they have a responsibility to ensure that the company meets its tax obligations. Further, if these tax obligations could not be met, directors would be compelled to immediately place the company into voluntary administration or liquidation. Directors were encouraged to comply with these obligations through the threat of personal liability for a penalty in the same amount as the outstanding tax liability.
The Commissioner of Taxation is able to commence proceedings against a director for payment of a penalty 21 days after issuing a ‘Directors Penalty Notice’. A DPN essentially gives the director notice of the outstanding liability, and provides them with time to arrange for the company to make full payment of the debt amount, enter into an installment arrangement, or place the liable company into voluntary administration or liquidation.
The ATO can make estimates of the amount of the tax liability where a company has failed to make lodgments. The Director’s Penalty Notice is then issued on the basis of this estimate.
What do the June 2012 amendments mean?
Further restrictions were put in place as a result of the amendments made to the Taxation Administration Act 1953 (Cth). Firstly, the director’s penalty regime extended to superannuation guarantee obligations in addition to PAYG withholding obligations.
Further, the changes restricted a director’s ability to evade personal liability through placing the liable company into liquidation or voluntary administration. The changes put forward in June 2012 divide tax obligations owed into two categories:
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Obligations that are unpaid and unreported for more than three months beyond the due date for reporting; and
- Obligations that are unpaid by the due date but are reported in Business Activity Statements (BAS) and Superannuation Guarantee Charge (SGC) Statements within the three month period of the due date for reporting.
In the first situation, unpaid and unreported obligations become a penalty imposed personally upon a director when the DPN is issued. However, a director cannot escape personal liability by placing the company into voluntary administration or liquidation. The only way to remove the penalty is for the director or the company to make payment of the debt in full.
In the second situation, a director can negate personal liability for unpaid but otherwise correctly reported obligations by placing the company into voluntary administration or liquidation.
These changes encourage directors to further adhere to reporting and tax obligations. The imposition of personal liability on a director that cannot be waived other than by transparent reporting in compliance with ATO requirements or full payment of the tax obligation.
What defences are available?
If a director can establish that the director was not involved in management of the company at the time the liability was incurred for the reason that the director was ill (or for some other good reason) and it would be considered unreasonable for the director to take place in the management of the company during this time, then the director can escape personal liability for the obligation.
Alternatively, a director can escape personal liability for any outstanding tax obligations if the director took all reasonable steps to:
What should I do when I receive a Director’s Penalty Notice?
You should seek legal advice immediately if you receive a DPN. You must remember that you have 21 days to take action from the date of the DPN before the ATO can/may take action against you to recover the penalty amount.
Where the DPN is received where PAYG withholding or SGC obligations are unpaid and unreported within 3 months of the due date, then we can consider options such as:
- Making payment of the debt in full;
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Entering into an installment arrangement with the ATO to make payments; or
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Place the company into liquidation or voluntary administration.
Where the liabilities are unpaid or unreported for 3 months after the due date, then the options are restricted to:
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Making payment of the debt in full; or
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Entering into an installment arrangement with the ATO to make payments.
Nautilus Law Group can assist you to reduce your liability to the extent possible where you have received a DPN. We can liaise with your accountant and the ATO where required to attempt to reduce your personal liability for payment of the tax obligations.
If you need advice, or would like further information, 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.
This article is intended only to provide a summary and general overview of matters of interest and the law. It is not intended to be comprehensive and it does not constitute legal advice. While we take all necessary steps to ensure that the information is current or accurate, we cannot guarantee its accuracy or currency. You should always seek legal or other professional advice before relying or acting upon any of the above content or information.
Submitted by: Katrina E. Brown BA JD ATIA TEP SSA
