Adding control

Over the next week or so we'll be telling you all about a couple of changes in the weird and wonderful world of trusts as interpretations of recent - and ongoing - case law start coming to light. Information from our legal team is still filtering through, so we'll be sure to keep you posted as the fine print is digested and can be translated into something that makes sense to everyone.

The first of these changes is the introduction of a new role available for any future trusts that you might be looking to set up. This role is called the 'controller', and does exactly as it suggests.

Always nice to have control...
Always nice to be in control...

The idea being, that this third party can veto or approve any changes to the structure that the trustee may wish to make. Such changes could include adding or removing any of the beneficiaries, adjusting the vesting date, or, editing the trust deed. This gives better control over the structure, particularly in the unfortunate circumstances of it being examined in court.

The role is not a mandatory one, but future deeds will at least have the potential to appoint such a person. Advice to date suggests that this controller should ideally be a natural person, and a third party to the existing appointor and trustee. So, appropriate persons could include your solicitor or other professional advisor, or perhaps a trusted friend.

Even if the position will remain vacant to begin with, we do recommend that new trusts should be created with this role available so that it can be filled at a later stage. We have also been advised, though, that older deeds cannot add the position to the existing structure without re-settling the trust.

Of course, as always, just shout if you want more information or guidance on this or any other structural issues. We'll be happy to help.


Forest for the trees

Buying trees don't always yield much of the green stuff for you...

Following on from other recent posts about goal-setting, I thought it might be worthwhile to look at one of the traps that we see people falling into from time to time. The agri-business sector has, for a long time, been promoted as an avenue towards paying less tax by borrowing money to 'invest' in trees or olives or other such things that tend not to provide much of a yield or growth.

Many of these managed investment schemes also tend to pay ridiculously high commissions to financial planners and accountants when they recommend such products to their clients.

Important note - we never have.

Sure, paying less tax is always nice. I won't argue with that idea. But, it is far more important to keep sight of your goals and act with those in mind.

Dale used to teach us this focus by asking one simple question; "Does that idea bring you closer to, or, further away from, your goals?'

I think that this is a good way to look at any financial decision. Does buying a collection of trees bring you closer to your goals? Generally not, I'd suggest, unless you own a nursery or can see potential to flog them at a profit come December. Very rarely do we see anyone make a profit out of these things.

A couple of these companies have gone under in the last twelve months, too, which might also give a good indication of just how sound this type of 'investment' might be...

There are much more important things to focus on than paying less tax. A massive tax bill usually means you've made a massive profit - and that's hardly something to get too upset about. It also highlights the importance of talking these things over with your accountant well before the financial year is already over, to make sure that you're still on the right track and not getting sucked into schemes that usually just don't add up.


For research, of course

We received notice last night of a tax office response to a court case held last year, which determined that a travel agent was able to claim the significant costs of overseas travel to further his knowledge base and thus increase his income from his regular employment.

If you've got the time and inclination, you can read about it, here; Carlos Sanchez v Commissioner of Taxation.

Whilst this may not necessarily be directly related to your own circumstances (although I know that there are one or two agents reading this), these sorts of things do provide interesting insight about the thought processes at tax office and how they deal with these sorts of issues.

In this case, the travel agent in question earned a little under $40k in the 2005 year (made of retainer, commissions and bonuses), which increased to some degree in the following two. The agent also claimed around $10k in travel expenses - a good quarter of his income - despite being on annual leave at the time and receiving no allowance from his employer.

The tribunal stated;

The Tribunal was satisfied that the applicant's calling as a travel sales consultant required degrees of knowledge and skill that would benefit from personal experience of the travel components he sold to his customers, and that the 2005 overseas travel directly contributed to that knowledge and skill, and also contributed (or was likely to contribute) to his earning increased income.

The Commissioner accepted this view and allowed the majority of the deduction. It is important to note that the agent took comprehensive notes during his travels and this contributed strongly to the treatment of his case. It's also important to note that the tax office eventually disallowed a good portion of the agent's claims on the basis that he could not properly substantiate them. So even though the basis of the claim was decided to be alright, the tax office still went through with a fine tooth comb to make sure that the actual cost could be proven.

So! Lessons to be learned from this, in all of your potential deductions; keep damn good records. And if you're doing something significant, keep extensive notes about the how and why of what you're trying to achieve. It might seem a little painful at the time (especially if you're supposed to be out exploring Spain instead - for research, of course) but it may count for a lot in the long run.


Gone phishing

I arrived in the office this morning, as I do most days, to a mountain of new emails to play with for the next couple of hours. Whilst I don't usually share the details of these on a public medium (for obvious reasons), there was one today that I thought was worth detailing for you all. A timely reminder, if nothing else.

One client received an email over the weekend, apparently from "<individuals@ato.gov.au>" with an official-looking signature. The email mentions that the tax office have recalculated her refund and there is an amount of around $568 owing to her. It provides an official-looking link, which when followed is supposed to provide a form where the recipient can complete the blanks and post back to the tax office.

Had the site worked - and thankfully, it has been disabled - the form would have asked for her bank account details including PIN, or credit card details including the three digit security code. When clicking the print button, it would actually send the information electronically as well.

This, clearly, would not have ended happily.

I know that most of you reading this will be savvy enough to know what is going on by this point, but the lovely client who forwarded the email on to me only did so to ask why the form was broken and what the next step should be to get her additional refund.

Michael D'Ascenzo, the Commissioner of Taxation, has commented on these types of things before, saying that anyone receiving such an email should delete it immediately; "The Tax Office never sends emails asking people to provide personal information including credit card details. People should always be wary of unsolicited emails claiming to be from the Tax Office."

It helps to bare in mind that should the tax office want your bank account details, they just need to ask the bank. If you don't believe that the bank can provide such details... try not paying a tax bill and see what happens next ;-)


Nothing to be scared of, here.

Avid readers of the tax office legal database may have spied the release of a new Determination dealing with what we commonly refer to as hybrid trusts.

This is a follow-up to the draft released late last year, which we commented on as part of the House Rules newsletter at the time.

As per our explanation in that article, this final determination looks to be good news. We spoke with our legal advisors this morning to be sure, and they were as rosy as ever in confirming that the trust deeds and resolutions that we like to use still comply with what the tax office are looking for.

The determination in question deals with a few scenarios, none of which apply directly to how we usually do things. In each example presented, the trust has the ability to distribute income to a beneficiary in a discretionary manner, despite the units on issue; or, the borrowings were not used in full for the unitholder in question. In those cases, the unitholder is only required to receive a disproportionate amount of income, and thus their borrowings are not of a direct commercial nature and they incur an expense for the (potential or actual) benefit of others.

It's also important to note that in the first example, we would suggest that (all else being equal) Paul's wife would likely be eligible to claim the interest on her share of the loan to acquire her units.

Looking at that first example a little closer, we can draw a fairly clear line from that point. You see, the tax office were happy in that example to allow Paul to claim 50% of the interest incurred based on holding 50% of the units. It is not a far stretch to conclude that should he hold 100% of the units in that example, he would be able to claim 100% of the interest.

So; what we need to show is that the unitholders who borrow funds for the purpose of buying units in the hybrid trust with the expectation and entitlement of income, will indeed receive that income. The trust deed needs to be very clear in that requirement (as ours are), and of course, the distributions need to reflect that as well (as ours do).

This means that for investors who use their deeds properly, the hybrid trust can still be an excellent choice of structure in the right circumstances and this determination is nothing to be scared of. As always, they're not a one-size-fits-all type of thing, so it's always a good idea to speak with your accountant before choosing the structure for each investment that you plan to make. Or, if you are after further clarification on your particular situation as it currently stands.

~J.