Trusts and ATO

Tax experts are furious at a planned crackdown by the Australian Taxation Office on a commonly-used trust structure and say the ATO's backflip on the issue will have widespread ramifications for taxpayers and their advisers.
The ATO is unhappy with the use of discretionary trusts with corporate beneficiaries. It is believed there are around 200,000 of these trusts in operation.
Peter Bembrick, tax partner at HLB Mann Judd, says the structure is often used by trust owners who wish to accumulate funds within a trust. Under the structure the ATO wishes to target, distributions from a trust are allocated to a corporate beneficiary, but not actually paid (this is known as an "unpaid present entailment").
This allows the owners of the funds to reduce or defer income tax. The funds can then accumulate in the trust and be reinvested.
"Where this does work particularly well is where you are looking to reinvest the money," Bembrick says.
The ATO is growing increasingly concerned at the level of accumulated funds inside discretionary trusts, of which there are around 460,000 in use. It is believed half of these trusts have corporate beneficiaries.
The ATO is particularly worried about the use of "unpaid present entitlements" and appears to be moving towards a position where entitlements should be treated as a loan and taxed accordingly.
But Yasser El-Ansary, tax counsel at the Institute of Chartered Accountants, says the ATO's new stance represents a complete backflip from its previous position, which has been made clear in a number of tax rulings.
"There definitely is a strong case to the say that ATO has previously been asked a specific question on this issue and the ATO has in effect, sanctioned the use of these structures."
Bembrick agrees. "A change would have very big ramifications and goes against a lot of the planning and structures that people have a place."
El-Ansary, who is part of the national tax liaison group that meets regularly with the ATO, is in Canberra today for a meeting on the issue with tax commissioner, Michael D'Ascenzo.
El-Ansary expects robust discussion and says his organsiation remains concerned about the position of tax advisers, who could find themselves under fire from clients if the ATO does reverse its ruling.
"There is potentially a significant implication for advisers," he says. "Ultimately, what we are aiming for is a solution that is workable for the ATO and taxpayers and their advisers."Read more on:
Tax
Strategy
Trusts
Tax planning
lets hope that the ATO gets some common sense and realizes that trusts are a way of protecting assets from unscrupulous litigators. Lets encourage entrepreneurship rather than destroy it, bureaucracy is the most destructive force to progress(LT)

Aus leading the way

Australia will help lead the world out of recession, as the local economy rebounds strongly off the back of rising consumer confidence, a survey has found.
In the "first glimmer of hope" for the global economy, an Ipsos Reuters poll of 23,000 people across the globe has found that confidence is beginning to stabilise after eighteen months of decline.
The upbeat analysis follows yesterday's surprise revelation that Australia has dodged a technical recession.
Ipsos, a market research group, said that the resurgence of consumer confidence was strongest in the Asia Pacific region.
While average global confidence remained flat, the percentage of Australians that deemed the current economic situation either 'good' or 'very good' actually jumped 6 percent, and outstripped the global average by 7 percent.
"Interestingly, in the Asia Pacific region overall, including Australia, there was an increasing trend overall from 32 percent to 38 percent. This suggests that our region will lead the world out of recession and emerge relatively strongly", the Ipsos study concluded.
The group said the stabilisation has been fuelled by the green shoots of improvement in US consumer confidence, alongside "significant improvements" in China and India.
Meanwhile, the blame game has not shifted, with 42 percent of Australians naming the banks and financial professionals as the prime culprits in the crisis. America's former Bush administration and the current Obama administration were also blamed for the global fallout.
Surveying 23 countries, covering 75 percent of the world's gross domestic product (GDP), Ipsos found that by contrast to Australia, Europe - as well as the emerging economies of Russia and Brazil -recorded declining confidence. With Italy the only country in Europe to register a positive change – with a rise from 10 percent to 17 percent in consumer confidence.
The company also found that around three quarters of Australians have cut their household spending in response to the economic downturn. This figure has not changed over the last year, indicating that the health of the economy has begun to stabilise.
Australia's national accounts, published yesterday, showed that exports and household spending actually helped the economy grow by a 0.4 per cent in the first three months of the year - preventing a second consecutive quarter of negative growth that defines a recession.

variable mortgage rates

Home buyers are flocking back into variable rate mortgages, which now account for 91 per cent of the residential lending market, their highest proportion in four months, a leading mortgage broker says. Mortgage broker Mortgage Choice reported on Tuesday that in April basic variable mortgages accounted for 48.15 per cent of all home loans approved - up nearly one per cent from March, while standard variable mortgages comprised 42.77 per cent of the market, down 1.47 per cent from March. Basic variable loans generally have fewer loan features than a standard variable loan, Mortgage Choice says.Fixed rate loans accounted for four per cent of all approvals, up one percentage point from a month earlier."Basic variable loans have been the most popular loan type for four months now, after overtaking standard variable for the first time on our records in January 2009," Mortgage Choice senior corporate affairs manager Kristy Sheppard said in a statement.Rates charged on variable home loans move in line with interest rates as set by the Reserve Bank of Australia (RBA), which has successively cut its overnight cash rate since September last year to a 49-year low."Despite interest rates being at their lowest in decades, the volatile global and domestic economic climate is having a strong influence over loan product preferences," Ms Sheppard said."Consumer conservatism with rates and fees continues to win out against loan flexibility and extra features."Line of credit loans in April, popular with property investors, posted a fall of five per cent from the previous month.
Commitments for owner-occupied housing rose 4.9 per cent in March, seasonally adjusted, to 59,793, Australian Bureau of Statistics data this month showed.Total housing finance by value rose by 6.7 per cent in March, seasonally adjusted, to $20.688 billion, the latest month in which data was available.

Federal Nudget and Reserve Bank differ

Just a week after the Federal Budget, Reserve Bank of Australia (RBA) estimates suggest the numbers do not add up.By the RBA's calculations, the Budget could be out by $11 billion.
Documents obtained by 7News show the RBA has a major difference of opinion on Treasury's growth predictions. Treasury secretary Ken Henry today rejected criticism of the "optimistic" economic forecasts put forward by his department and defended its independence from government interference. Last week's Budget forecasts predicted the economy will see a recovery with above-trend Gross Domestic Product (GDP) of 4.5 per cent in 2011-12.
Treasury says the stimulus measures taken prior to the Budget will raise GDP by 2.75 per cent.
But Reserve Bank estimates, obtained under Freedom of Information by 7News say they will boost growth by roughly 1.75 per cent. That is a difference of 1 per cent of GDP, or $11 billion.
When the anomaly was pointed out to the government today the response was that Reserve Bank estimates were three months old and that part of the Budget had been clumsily worded.
Shadow Treasurer Joe Hockey is concerned there may be other errors in the Budget. "The Budget is barely one week old and now it has this multi-billion dollar problem," he said. "These Budget papers need to be corrected immediately." The section referring to measures taken prior to the budget should have included measures taken in the Budget. It would have added another 0.75 percent of GDP, bringing the document closer to the Reserve Bank's prediction. Giving his annual post-Budget address to business leaders in Sydney today, Dr Henry took at swipe at those who "seemed to think we must have simply plucked the numbers out of the air".Dr Henry said Treasury's method for calculating GDP used several factors, including the unemployment rate, the population aged over 15 and productivity. "We can obtain an index of real growth domestic product simply by multiplying together those five things and that's actually what we did," he said. "Taken together, those factors produce a GDP growth rate of 4.5 per cent." Reserve Bank Governor Glenn Stevens gave his assessment of Treasury's outlook in hardly a ringing endorsement. "I don't think it's, crazily optimistic," he said. Prime Minister Kevin Rudd says Australia's debt will peak around $300 billion.
Mr Rudd had to be asked the question several times on television before he would name a figure.
He said the peak projected public debt would be 13.8 per cent of GDP in 2013-14. "We're aiming to a gross figure of 13.8, which comes out at about 300 (billion)," Mr Rudd said.
Read the Freedom of Information documents here (WARNING: Large PDF file)

capping salary sacrificing on super

The federal government has cut by half the amount some Australians can save in superannuation through salary sacrificing and has reduced its contribution to lower income earners who choose to save more."The government will reduce the generosity of some superannuation concessions for those with greater private wealth," Treasurer Wayne Swan said on Tuesday as he handed down the federal government's 2009/10 budget.
"The cap on concessional super contributions will be lowered and the matching rate of the superannuation co-contribution will be reduced temporarily."The cap on concessional super contributions for people aged under 50 will be reduced to $25,000 from $50,000, the budget documents said.The cap for those aged 50 and over, which was an interim measure to make up for the fact that they hadn't participated in the super scheme for as long, would be reduced to $50,000 from $100,000 up to the 2011/12financial year.The concessional contributions allows employees to salary sacrifice, avoiding the normal income tax rates of 30 per cent or more, and put the money into their super scheme, which is taxed at 15 per cent.The government will also reduce the super co-contribution matching rate to 100 per cent from 150 per cent, for lower income earners for the next two financial years. The rate will rise to 125 per cent for 2012/13 and the year after that.Up to this financial year, the government had contributed up to $1,500 to those who put an extra $1,000 after tax into their super scheme. The maximum contribution for the next two years would now be $1,000.

Budget 2009

Some Australians bore the brunt of those hard choices, while others are set to benefit from the Treasurer's recession-busting budget plan.
Here is a breakdown of this year's winners and losers:
WINNERS
Pensioners Single pension payments boosted by $32.49 per week, $10.14 per week extra for couples on the full rate.
Carers Mr Swan plans to introduce one-off bonuses for Australia's 500,000 carers - $600 per year for carer payment recipients and an extra $600 per year for carer allowance recipients.
Parents18 weeks of Paid Parental Leave from 2011 – paying minimum wage of $540 a week - worth $731 million over four years.
Homebuyers First Home Owners Fund extended by a further six months from June 30.
People who enter into contracts on or before September 30 will still be eligible for a grant of $14,000 for an existing dwelling and $21,000 for a new home.
The more generous scheme will then been phased down, and end after December 31. Read more
CompaniesSmall businesses will be able to claim a 50 percent tax deduction on new capital worth $1,000 or more, such as vehicles, purchased between December 13, 2008 and December 31 this year. Read more
Larger companies – particularly industrial and transport groups – are set to gain from the $22 billion infrastructure plan.
Low-income earnersThe average person will be better off from July 1 - when the tax savings from last financial year will range from nearly $3 for those with annual salaries of $30,000 up to about $10.50 for those on $100,000 a year.
Middle-income earnersThey will receive the tax cut but some will be hit by the rise in the Medicare Levy, the phase out of Private Health Insurance rebate and changes to superannuation contributions.
InvestorsThe vast infrastructure plan will lift activity from listed industrial companies and promote growth. However, some investors will be hit by the changes to concessional superannuation contributions.
Students$1.5bn for the Jobs and Training Compact, providing education and services to support young people, retrenched workers and local communities.
LOSERS
Baby boomersThe decision to raise the pension age to 67 will come as a big blow for baby boomers born after 1952.
The qualifying age will increase in six monthly increments between 2017 and 2023 as the government attempts to lighten the burden of the "demographic time bomb" of a growing pension bill and a shrinking workforce.
The rich High-income earners will suffer a rollback of tax breaks on superannuation. Read more
From 1 July 2010, the private health insurance rebate will be reduced on a means tested basis by 30 percent for those earning more than $75,000.
The Medicare Levy will be pushed up from 1 percent to 1.5 percent for singles earning above $90,000/couples $180,000, single income earners above $120,000 will pay the full surcharge of 1.5 percent.
Middle-income earnersWhile generally winners, middle income earners will also be hit by cap on salary sacrificing for superannuation. Read more
From 1 July 2010, the private health insurance rebate will be reduced on a means tested basis by 30 percent for those earning more than $75,000.

Difficult times ahead

AUSTRALIA will encounter an increasingly difficult time over the coming months as the economy battles against the backwash of the global financial crisis, the head of the Commonwealth Bank said yesterday.But Ralph Norris stopped short of agreeing with Gail Kelly, his counterpart at Westpac, that the country would fall into recession this year as a consequence of the worldwide drop-off in economic growth.Speaking a day after Mrs Kelly said a local recession was now unavoidable, Mr Norris, who heads the country's second largest bank by market capitalisation, said his organisation, remained cautious about the short- to medium-term outlook for growth.With more than 70 per cent of the developed world now in recession, the Commonwealth Bank chief executive told a Credit Suisse-organised investment conference in Hong Kong that the current state of play represented the "worst economic performance in our lifetimes".World growth was now forecast to go backwards this year and this would have a direct impact on the Australian economy, which was already slowing and experiencing rising unemployment, Mr Norris said. The effects would be felt across a broad range of the bank's customers, which made the domestic outlook "increasingly difficult".However, he joined both Mrs Kelly and ANZ Bank's chief executive, Mike Smith, who spoke at the same conference this week, in praising the strong policy responses by the Government and the Reserve Bank in helping to offset the worst of the global downturn.
The Federal Government's twin stimulus packages totalling $52 billion and the deep cuts in interest rates by the Reserve Bank would help to "soften the impact" of the slowing economy.
Mr Norris also highlighted the strength of the Australian banking sector which, unlike the shattered financial services industries in the US and Britain, was now among the strongest in the world. With four of the only 12 globally "AA" rated banks, the Commonwealth, Westpac, ANZ and National Australia Bank were also now listed among the world's top 20 safest such institutions, he said.Each was profitable, well capitalised and, just as importantly, continuing to lend, as witnessed by the finance flowing to the housing market. That was being helped by three main drivers: a chronic undersupply of homes, the boost provided by first-time home buyers, who have been bolstered by the Government's direct grants, and the 400 basis points cut in interest rates.As for the state of consumer credit - a key indicator of both the economy's immediate health and the quality of the bank's lending book - Mr Norris said its housing and personal loan portfolios remained sound.While conceding that there had been a small rise in the arrears rate of those home-owners who were 30 days or more behind in their repayments, this, he argued, was off an historically low base.As to a recent jump in credit card arrears, that could be put down to a one-off change in the minimum monthly amount that borrowers now needed to meet