Birchstone Brief for the week ended 10 June 2022

News and Events

Section 100A – Practical Tips – What to do before AND after 30 June

On Tuesday 21 June at 11am AWST, Birchstone Tax Law will be hosting a free webinar on section 100A. The webinar may be postponed if the additional guidance expected to be released has not been released before the webinar.

To find out more details and register, click here. If you can’t make it but would like a copy of the recording, register and we will send you a copy of the recording.

Birchstone Insights

Shot Down in Flames: The End of the Gift and Loan Back Strategy?

A Supreme Court case in Queensland may have just shattered the efficacy of the “gift and loan back” strategy. The decision in Re Permewan (No 2) [2022] QSC 114 marks the first firm judicial opinion on the subject.

The “gift and loan back” strategy is popular for individuals with high:

  • occupational risks;
  • bankruptcy risks; and/or
  • family provision claim risks,

who also own assets in their personal capacity that would be vulnerable to those risks. The strategy aims to strip the value out of the personal asset pool, without transferring the assets themselves (which would otherwise trigger capital gains tax and duty).

With that as our backdrop, the Re Permewan story goes like this:

  • Prue died in September 2019, leaving three adult children: Scott, Marla and Donna.
  • At first glance, the estate had about $3 million worth of assets, including the home and a share portfolio.
  • The Will named Scott as the sole executor and gave the whole estate to Prue’s family trust (of which Scott was also given control).
  • However, rewinding to April 2018, Prue had entered into a series of transactions:
    • by a promissory note, she gifted $3 million (i.e. the equivalent of her net worth) to her family trust;
    • Prue then “borrowed” $3 million from the family trust – although no funds changed hands; and
    • the family trust registered security over Prue’s home and share portfolio.
  • This effectively stripped all value out of the estate, putting Marla and Donna in a position where it would be futile to make a family provision claim on an apparently worthless estate.

In Re Permewan (No 1) [2021] QSC 151, Scott was removed as the executor and an independent lawyer took his place. With an impartial executor to lead the inquiry, the No. 2 decision looked at the validity of the 2018 transactions.

During the course of those No. 2 proceedings, Scott conceded that the transactions were invalid and unenforceable at law. He could not prove that the promissory note had been delivered, which meant that the transactions were technically incomplete. Notwithstanding the “technical” failure, the Court went further and suggested that the transactions would almost certainly be found to be invalid and unenforceable at law on two other grounds:

  • being contrary to public policy; and
  • sham.

The Court’s reasons were that the transactions were illusory – Prue had no intention of parting with her property during her lifetime. Her sole and clear intention was to defeat a family provision claim by Donna and Marla.

Advisors who advocate for the “gift and loan back” strategy, as well as those clients who have already implemented it, are now on notice as to the Court’s views. Given Scott’s concession, an appeal is unlikely.

ATO Updates

PCG 2017/13 Updated: Division 7A UPEs under Sub-Trust Arrangements

The ATO has updated PCG 2017/13, which sets out the ATO’s compliance approach regarding the repayment of loans entered into under Option 1 (investing the funds representing the UPE on an interest only 7-year loan) or Option 2 (investing the funds representing the UPE on an interest only 10-year loan) of PS LA 2010/4.

PCG 2017/13 was previously limited in its application to sub-trust arrangements maturing in the 2017 to 2021 income years, and has now been updated to extend to eligible sub-trust arrangements arising on or before 30 June 2022. The Commissioner’s view in TD 2022/D1 is proposed to apply to trust entitlements arising on or after 1 July 2022.

Decision Impact Statement Issued: FCT v Carter [2022] HCA 10

The ATO has issued a decision impact statement on FCT v Carter [2022] HCA 10 (summarised in the Birchstone Brief for the week ended 8 April 2022). The Carter case considered whether a valid disclaimer operated retrospectively, such that section 97 of the Income Tax Assessment Act 1936 (Cth) does not apply. The High Court unanimously held that a valid disclaimer executed by a beneficiary after year end did not have the effect of retrospectively avoiding the application of section 97. 

The ATO’s decision impact statement states that disclaimers do not disturb what would otherwise be the tax result. Beneficiaries who have an interest in trust income should take this into account if they are considering disclaiming their interest. The closing date for comments in 8 July 2022.

The ATO has withdrawn ATO ID 2010/85 which provided that a beneficiary who has validly disclaimed an entitlement to trust income is not presently entitled to a share of the income for the purposes of section 97.

Decision Impact Statement Updated: Greig v FCT [2020] FCAFC 25

The ATO has updated its decision impact statement on Greig v FCT [2020] FCAFC 25. The decision impact statement had stated that the ATO would review its existing public advice and guidance (relevantly, TR 92/3 and TR 92/4). The update provides that the decision is consistent with the ATO’s existing public advice and guidance.

Decision Impact Statement Issued: Collins atf The Collins Retirement Fund and FCT [2022] AATA 628

The ATO has issued a decision impact statement on Collins & Anor atf The Collins Retirement Fund and FCT [2022] AATA 628. The issue in this case was whether the sale of subdivided lots by a superannuation fund was to be disregarded from the GST turnover of the fund under section 118-25 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

The decision impact statement notes that this is the first time a case has considered the requirements of section 118-25 of the GST Act, and that the AAT’s interpretation of the provision are consistent with the Commissioner’s views in GSTR 2001/7. The closing date for comments in 8 July 2022.

PCG 2020/5 and LCR 2021/2 Extended: Non-arm’s length income rules for super funds

The ATO has extended its transitional compliance approach in PCG 2020/5 and LCR 2021/2 in relation to the non-arm’s length income (NALI) rules for super funds to 30 June 2023.

The updated PCG provides that the ATO will not apply compliance resources to determine whether the NALI provisions apply where a super fund incurs non-arm’s length expenditure in the 2019 to 2023 income years that has a sufficient nexus to all income derived by the fund. The updated LCR delays the commencement of the ATO’s compliance approach for determining whether expenses are not at arm’s length to 1 July 2023.

Class Rulings

The ATO has issued the following class rulings:

  • CR 2022/50 – American Pacific Borates Limited – exchange of shares for shares in 5E Advanced Materials, Inc; and 
  • CR 2022/51 – American Pacific Borates Limited – exchange of options for options in 5E Advanced Materials, Inc.

 

State Taxes

NSW Revenue Ruling: Primary Production Exemption

Revenue NSW has updated its ruling on the land tax exemption for land that is used for the dominant purpose of primary production. The ruling has been updated to reflect additional court decisions.

NSW Revenue Ruling: Retirement Village Exemption

Revenue NSW has updated its ruling on the land tax exemption for retirement villages and aged care establishments to provide additional guidance.

 

Legislation

Super Splitting: Family Law (Superannuation) (Interest Rate for Adjustment Period) Determination 2022

The Family Law (Superannuation) (Interest Rate for Adjustment Period) Determination 2022 was registered on 6 June 2022 and commences on 1 July 2022. This determination specifies the interest rate to be used for adjusting the “base amount” allocated in a Court Order or superannuation agreement under the Family Law Act 1975.

 

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