by John Wojtowicz (Director - Law Central Legal)

It’s that time again. The end of financial year (EOFY) is fast approaching and now is the time to ensure that you have checked off all of your outstanding accounting and tax matters for the 2018/2019 financial year. We’ve put together a list of issues for you to consider.

You can also ensure that you are in tip top (legal) shape going into the new financial year by taking our free Legal Business Health Check.

Read on for our tips to assist you in your EOFY review.

Seven year maturing Unpaid Entitlements (UPE) loans.

Trustees that have adopted Option 1 (i.e., 7 year interest-only loan arrangement) under Practice Statement PS LA 2010/4 for UPEs arising after 16 December 2009 will generally be required to repay the outstanding loan balance and the final interest by the end of the 7 year loan term. For example, for UPEs arising in 2011 the loan arrangement could have expired in May 2019 (or earlier). Any unpaid principal at this point will be treated by the ATO as a Division 7A loan.

Under PCG 2017/13 if all or part of the principal has not been paid by the maturity date the ATO will allow a standard 7 year loan agreement to be entered into between the sub-trust and the corporate beneficiary. The loan must comply with section 109N of the Income Tax Assessment Act 1936 Act with requisite benchmark interest rates and annual minimum payments terms being contained in the loan agreement. The loan is to be put in place by the earlier of the due date and actual lodgement date of the corporate beneficiary’s tax return for the financial year the sub-trust loan arrangement matures.

Self Managed Superannuation Funds

Does the trust deed allow for investment in cryptocurrencies?

Most Trust Deeds are silent on Bitcoin. This does not preclude the fund from owning these assets, and depending on the wording used, there may be a provision for the ownership of other asset classes that Bitcoin can slot into. However, there is a legal debate raging about whether the investment strategy must specifically list cryptocurrencies as an asset class. Ray Itaoui, Registered SMSF Auditor and Director of SMSF services with Hayes Knight, has indicated that his preference is to update the deed and to include it in the investment matrix (Law Central’s SMSF Deed has this inclusion).

Each year your SMSF needs to be audited, so it is important to have your SMSF deed in order before the end of the financial year.

You can ensure that your deed and Investment Strategies are up to date and compliant with the latest legislation with our SMSF - Update Rules, Investment Strategy and Derivative Risk Statement for SMSF Documents.

In addition to ensuring deed compliance, your Auditor will also be checking to see that any assets of the SMSF are recorded in the Trustee’s name. You will be required to show sufficient evidence to demonstrate that the asset in question is an asset of the SMSF. Preparing a Declaration of Trust (before you purchase the asset) or an Acknowledgement of Trust (if you have already purchased the asset) will assist in providing this evidence.

If your SMSF has invested in property, you will also need to show that any rental agreements are on commercial “arms-length” terms. This will involve a properly drafted lease agreement such as our Commercial Lease.

If a pension was commenced during the year, then ensure it is correctly documented by taking advantage of our “Pension Pack”.

Family Trusts

When did you last look at your Trust Deed? Older Family Trusts do not accommodate changes to the law relating to the taxation of trusts, some of which were highlighted by the High Court’s decision in Bamford.  The Tax Laws Amendment (2011 Measures No. 5) Act 2011 makes provision for “streaming” of capital gains and franked distributions to specific beneficiaries of a family trust, and taxing capital gains and franked distributions to which no beneficiary is specifically entitled in the same way as the other income of that family trust.

Gold and Platinum Members read on for more information about “Bamford”, and how you can tell if your Trust Deed has been updated to accommodate “Bamford” and other recent changes.

If your Family Trust Deed has not been updated to take advantage of these recent changes, then our “Family Trust – Streaming & Bamford Update” can assist you by updating the relevant clauses.

Trust Distribution Minutes Library

If your trust earns income, then it is vital that you prepare your income distribution minutes before 30 June. Gone are the days when the ATO gave some leniency in this and allowed you to prepare your minutes after the financial year had ended.

Just as your Trust Deed must be updated in accordance with the “Bamford” and “Streaming” rules, so too must your Trust Distribution Minutes be in an appropriate format.

If you are using the same pro-forma income distribution minutes that you have always used, be aware that there may be adverse tax consequences involved in this. The Law Central minutes have greater flexibility to make distributions by either fixed amounts or percentages across a number of income categories. The Trust Distribution Minutes Library covers a range of scenarios that you are likely to encounter in making your trust distributions. You can purchase minutes for a single trust here or if you are an accounting firm that needs to use the minutes for multiple trust deeds for your clients, purchase our Multi-Use minutes here.

Family Trust – Update to Exclude Foreign Persons (NSW)

This document provides for an amendment to your family Trust Deed to exclude a “foreign person” from being a beneficiary and receiving a benefit from the family trust.

The purpose of this document is to address the issues relating to the payment of a foreign duty surcharge and land tax surcharge under the following legislation:

• Duties Act 1997 (NSW);
• Duties Act 2000 (Vic);
• Duties Act 2001 (Qld).
• Land Tax Act 1956 (NSW); and
• Land Tax Act 2005 (Vic).

This document should only be used where the Trust Deed has a sufficiently wide variation or amendment clause in the trust deed enabling the trustee to vary the trust to exclude a foreign person from being a beneficiary and receiving a benefit from the trust. Legal advice should be sought on this issue.

See our Bulletin 510 – Family Trusts Hit With Tax and Duty Surcharge for more information.

Are you the Trustee of your Family Trust?

One of the great things about Family Trusts is its asset protection characteristics. Having a corporate trustee in place can greatly enhance the asset protection capabilities of a Family Trust. You can set up your corporate trustee in a matter of minutes with our Build A Company (ELodgement) document and update your Trustee using our Change Trustee Of Family Trust document

Beneficiary Loan Accounts

If your Trust’s beneficiaries have loaned back unpaid distributions (and the Trust accounts have treated it as a beneficiary loan), you can now remove these from the accounts by having the Beneficiary “forgive” the loan using our Forgiveness Of Debt document. If the Trust accounts have treated the distribution as an unpaid present entitlement or Sub-Trust, you can use our Release Of Unpaid Trust Entitlement document. A word of warning. Forgiving a debt or releasing an unpaid trust entitlement may have certain tax and stamp duty/transfer duty consequences. Always seek advice from your accountant or tax lawyer before using these documents. For more information, you can purchase (free for Platinum Members) our White Paper on the tax effects of debt forgiveness/release of unpaid trust entitlement here.

Shutting down unwanted structures

Avoid paying for another year’s tax returns for dormant and empty structures such as Trusts or Companies.

Often these entities were set up for a purpose in the past and were either never utilised, no longer hold any assets or the purpose for which they were created no longer exists. If the entity is no longer required then it may be more economical to simply close it down.

Avoid the temptation to keep the structure going for some potential future purpose. Reusing existing entities at some future point is not always wise, particularly given the cost to set up a new trust is relatively low. You can also then be certain that the new structures will not have any unwanted issues.

You can shut down unused Family Trusts using our Family Trust - Vesting kit for only $249.

Debt Collection

EOFY is the ideal time to sit down with your accountant or book-keeper to review your finances. It is also the ideal time to chase up any debtors or to write off debts that are unrecoverable. If your business invoices clients, it is important to identify any clients who are not paying their accounts on time, or those who are not paying at all. If you are aware of any prolonged debtors, take a look at our “Demand for Debt” documents. These documents can be a useful final tool for collection and hopefully trigger that debtor to pay.

Division 7A

Start thinking about any loans companies you control have made to their shareholders or parties related to those shareholders. You will need to complete a Division 7A Loan Agreement for any loans made throughout the year which remain outstanding.  It may be better to repay any money lent before the end of the financial year.

As you may recall, extensive amendments were previously outlined in Treasury’s Targeted amendments to Division 7A. These were slated to commence 1 July 2019.

The most prominent of these amendments included:

• Division 7A loans under the new rules would only allow for a maximum 10 year loan agreement. Annual repayments of principal and interest would be required to prevent a deemed dividend from arising.
• Transitional rules would be introduced to ensure that all existing Division 7A loans are brought into the 10 year loan model. 7 year loans would retain their existing outstanding term. Existing 25 year loans would be largely exempt from the new rules until 30 June 2021.
• Unpaid present entitlements (UPEs) will trigger a deemed dividend unless they are paid out or placed under a complying loan agreement by the lodgement day of the company’s tax return. Existing UPEs that arose between 16 December 2009 and 30 June 2019 will be brought within the scope of these new rules as well.

Earlier this year, the government elected to defer these changes for another year, so the new commencement date has been pushed back to 1 July 2020.

The upshot of this is that 7 year and 25 year Division 7A Loan Agreements remain in place for at least another year. You can build your complying (7 year) Division 7A Loan Agreement here on Law Central.

Platinum Members read on for a tip about Division 7A.

Estate Planning

When you are reviewing your business affairs, take time to also ensure that your own personal affairs are in order. Whilst not financial year critical, reviewing your own Estate Planning is an important task that needs to be performed regularly. Do you have a Will? If so, does it need updating? There are many reasons why your Will may need to be updated. Just a few include:

• Relationships: perhaps new children, friends or relatives have entered the picture. Or maybe you have married or divorced since making your last Will. Did you know that in some States and Territories marriage or divorce can completely nullify an existing Will?
• Relocation: you may have moved interstate or overseas. Different States and Territories have different rules when it comes to estate taxes and the way they treat property.
• Finances: your financial situation may have changed in some way. You may like to consider creating a Family Trust or a Testamentary Trust, which could help reduce your tax burden, and that of your dependents.
• Other Structures: If you have made changes to Trusts, SMSFs or Companies that you control, these may impact on your overall Estate Planning Structure.
• Trusts: If you have established a new Family Trust or Unit Trust.

Other estate documents you may consider include Enduring Powers of Attorney or Enduring Powers of Guardianship. Find out more about these documents by clicking here.

Disclaimer: The content of this Bulletin is general information only. It is not legal advice. Law Central recommends you seek professional advice before taking any action based on the content of this Bulletin

Related documents:

• SMSF - Update Rules
• Investment Strategy
• Derivative Risk Statement for SMSF
• Declaration of Trust
• Acknowledgement of Trust
• Commercial Lease
• Pension Pack
• Family Trust – Streaming & Bamford Update
• Trust Distribution Minutes Library for 2018/19 - Single-Use
• Trust Distribution Minutes Library for 2018/19 - Multi-Use
• Build A Company (ELodgement)
• Change Trustee Of Family Trust
• Forgiveness Of Debt
• Release Of Unpaid Trust Entitlement
• Dealing with Forgiven Debts (White Paper)
• Family Trust - Vesting
• Division 7A Loan Agreement

Related webinars:

• Webinar Recording - Superannuation: Current status of the proposed changes
• Webinar Recording - Year End Tax Planning