June Updates

Speaker A: This is Tax Talks Australia's tax news podcast for accountants and tax practitioners. The podcast designed to help you grow your practice.

Speaker B: Welcome to Tax Talks episode three. I'm Rajan Verma.

Speaker A: And I'm Andrew Henshaw. Uh, Rajan, we've another jam packed agenda here. Um, so many updates in the last month which are uh, excited to run through.

Speaker B: Yeah, it's been a really good time to actually um, uh, I guess take over Tax Talks because we've had an endless number of things to talk about. Um, so today we're joined by our guest Nick Schaefer, partner at PGP Consulting. Uh, Nick, you routinely advise, you know, high wealth individuals, private clients and businesses, um, startups, um, any other sort of particular areas or specialties that you sort of have in practice?

Speaker C: Uh, no, that pretty much covers it. We do, yeah a lot of work with private businesses, uh, you know, emerging family offices and wealthy families. That's sort of ah, our bread and butter client. And you're absolutely right, there is uh, I feel like for a while we had not too much happening on the tax landscape but the last 12 or so months it's just been non stop.

Speaker B: Oh yeah, absolutely.

Speaker A: And I think the last three months has been absolutely turbocharged. We had uh, budget speculation, budget fallout and then this is really sort of a continuation of that um, budget budget fallout. Plus a couple of big cases as well.

Speaker B: Yeah, well that's right. And in amongst the federal budget and all those changes we finally got our high court decision in Bendel which I think is uh, probably a good starting point for today's episode.

Speaker A: Absolutely. Let's get stuck into Bendel and what it means.

Speaker B: So I think everyone knows what Bendel was about. Basically concerned UPS that were from a trust to a related company. Um, and those upes were obviously they weren't put on diff7a terms or they weren't compliant with what the, the UM ATO's position was at the time. Um, this case went through the whole system, uh, went through the AAT federal court, full federal court, high court. In the end, um, and interestingly the ATO lost every step of the way but obviously being such a big case, um, the ATO wanted to take it right to the very end. Um and as I think everyone knows The ATO ultimately lost 52552. So pretty remarkable. Um, we've sort of been labouring under the ATO's sort of position um, in their original uh practice statements from 2010 and tax ruling and then the revised tax ruling in uh 2022 um, only to discover, um, 16 years later that they were wrong all along.

Speaker A: I'm trying to think of it. Can you think of any situation where this has happened before, where there's been Atos taken it through all of the courts and lost every step of the way? And if we add up the, um, tallies, I believe it was the AAT was 2 0, the federal court was 3 0, um, and the high court was 5 2. So we've got 10, two at the end of it. But can either of you think of any example where we've had a case that's literally lost every step of the way?

Speaker B: Uh, not one I can think of. Maybe there's a part four, a case somewhere that might fall into that category, but it's not one that comes to mind.

Speaker A: Pretty rare, isn't it? I mean that if you, I mean, if you're at the ato, you lost once, twice, you're taking it. I mean, reality is most cases would be settled in that, but I guess you can't settle when it's, uh, been your position for, you know, going on 20 years.

Speaker C: And it's such a consequential, uh, piece of, well, a position by the ATO that, you know, stems its way into every element of what we do day to day. For them to lose every step of the way and lose by a lot, um, I think says a lot.

Speaker A: Yeah, absolutely.

Speaker B: Um, really does. Yeah.

Speaker A: Maybe we dive into a little bit of detail on, you know, what the high courts actually said, and then we turn to, I guess, like, what does it mean practically? Um, I mean, for me, I spent, you know, we've both spoken and spent a bit of time sort of trying to unpack some of the technical, um, detail from, from the High Court's judgment. And it's sort of hard to sort of. I think it's sort of hard to get a, Get a final position on that. I think. I think it's clear, um, great for, for Bendel, um, you know, Division 7A doesn't apply to those UPSes, but from my read of it, it's sort of. It's not sort of like a very clear demarcation of does this mean that all UPS are always out forever in time? Or, you know, what does a trust deed say? What does the minutes say? What's been done since? What are your thoughts, Rajan?

Speaker B: I mean, it's interesting because, you know, following Bendel's case, the ATO released its decision impact statement and, you know, quite a bit of care has to be Taken because it's not quite. I mean the ATO is not saying, and you can understand why they're saying this, that, well, it doesn't mean that every UPE is automatically, you know, not subject to Division 7A. You have to consider all of those things, um, in terms of the trust deed, I mean especially like it's not just Div 7A, but the ATO has been quite active in with trust generally. So things like the flow through of franking credits, family trust distribution, tax, there's been a bit of noise about that lately. Um, even things like section 100A, which is specifically mentioned in the decision impact statement. So you're right, it's not like a clear pass with upes. It really isn't.

Speaker A: Yeah. So I mean they've essentially said in the, in the, they've now released the decision impact statement and they've said, right, okay, High Court's decided that, um, essentially if you've done nothing, that's not going to be caught. Um, Nick, we were chatting about this earlier. Uh, um, one of the interesting comments in that, in that decision impact statement is they say that, well, if you, if you went on a mistaken, uh, belief in law and have put them on Division 7A terms, you're kind of stuck.

Speaker C: And I think that's for me practically, that's one of the hardest bits to swallow about all of this, or the hardest bits for our clients to swallow is short of being Mr. Bendel and taking the ATO on for all of those years and then through the courts, uh, that's not really the way we operate with our clients. Generally we do. And I think most practitioners have tried to follow in the spirit of what the ATO have said. Um, but now we've got these arrangements in place that you can't wind back. They are legally binding loan agreements that aren't, they're not tax law loan agreements, they are commercial law loan agreements. Um, which means they are what they are now. And the ato, I do think it was a, a cheeky comment in there, or certainly one that, that made me flash red a little bit, was, you know, it's your mistaken belief in the law. There was a lot of people at the time that this happened that pointed out, you know, the fact that their interpretation of the way this, the 109D worked made EA somewhat irrelevant. Uh, they disputed that and they continued pursuing this, um, this way forward. To now get to this point, it is a little bit hard to swallow.

Speaker A: I think it would have been nicer if they said something like, um, you know, we, yeah, we've pushed this view for 15 years and you know, we made everyone comply. And um, you know that's wrong, but you know, it is what it is. And uh, you know, uh, uh, so be it.

Speaker B: I guess the thing also is like, it's how we got here. Like, I mean the ato, it doesn't make the law, it administers it. And I think it was incumbent upon the ATO to run a test case a lot earlier. No one really wants to be the test case. And As I understand, Mr. Bendel didn't even want to fight this.

Speaker A: I mean, I think started as a 109 RB application.

Speaker B: Yeah. So, um, sort exercise the commissioner's discretion to disregard the dividend. Um, I think there was even a potential settlement offers to look, we'll pay the tax if you release the penalties in interest. And the ATO so dog mindedly said, nah, we're taking you all the way through. We think you, you know, it's a deemed dividend and in the end to have lost, um, so decisively. I think a test case could have been run years ago.

Speaker A: I think let's, let's unpack this into. I guess I see it as. There's sort of three different categories. Nick, this first one is the one we just were talking about then that you had the upe, but, but you've done, you've changed it into a loan and you know the financials now book it as a loan and you've traded on Division 7A. Um, I think interested in your thoughts. It's really sort of business as usual. Really. For that category.

Speaker C: Right, for that category. I'm not sure we have a choice. Um, you know, it's business as usual. And you know, in some senses the way we administer a lot of our private groups, uh, often the cash is flowing to those corporate beneficiaries anyway, uh, except in limited circumstances. But so often those repayments will be made, the cash will flow in. It will become some sort of investment vehicle or something like that. So again, it's. I'm not sure we have a choice unless you guys know something I don't. But, um, ultimately it is. I think it's business as usual.

Speaker A: Yeah. Yep. And then I think the next category is really that do nothing type situation, like the Bendel type situation that um, you know, what's your minutes say? But basically you haven't done anything at all. Now Raj, how many clients are like that? It's very small. The amount that have literally done nothing. But I mean it's your view that, I mean, as close as you can to rely on Bendel, that you'd think that that category is.

Speaker B: Yeah, well, I mean the ATO said that if you've got a up and they've literally done nothing, so it's little more than an entitlement's been created, um, then it falls within Bendel. And the really interesting thing that the timing of this decision and even the decision impact statement which came out just before the 30th of June, um, you could have like people had to make their resolutions for 30 June 2026, which means it could have been one of your final opportunities to make a present entitlement to a company and not have to worry about Division 7A consequences. And the really interesting thing, of course we spoke previously about the, the potential trustee minimum tax, um, which is, you know, due to come in on the 1st of July 2028. So Bendor may not have significant consequences in the long term. Um, but certainly for this year or at least the year just past, um, you know, you could, you know, on the strength of Bendor, you could have made a company presently entitled and then done nothing else.

Speaker C: We also have a couple of 25 returns where there were extended due dates for lodgement. I think the decision came out on the. Is it the 10th of June, something like that? We had some due dates that were the 12th of June. Now I can. None of our clients are, uh, sort of pushing that. I think for those UPS, it takes a certain. Obviously Bender was on foot and it had lost twice by then. So there are a number of particularly savvy clients who said, oh, I'd prefer to wait. Um, but for the vast majority of clients it would be irresponsible to say, let's wait for a decision that we don't know what's going to happen. Put you at risk of not complying. So, yeah, the vast majority of 25 UPS are, uh, on Division 7A terms. And then you look to 26 and 26 will be an interesting one. And I imagine we'll see a lot more guidance come out over the next piece of time between now and lodgement date for the 26 tax returns, uh, as to exactly how practitioners are going

Speaker A: to handle that, I agree. Um, uh, so I guess on that category too, you know. Yes, not Division 7A, of course there's Subdivision EA that sits there. So if the money's going out, you've got other issues. What I think is probably the most interesting category is what I sort of call category three where uh, hasn't been converted to a loan but we haven't quite done nothing. Perhaps you know, it's a sub trust arrangement or they've, you know, they've done myrs but they, they're not calling it a loan for example. And you know, where does that, where does that sit? Uh, I think no one really knows.

Speaker B: Yeah, I mean the ATO decision impacts that and makes it clear that I think to be on all four with Bendel you had to have been the UP and nothing else.

Speaker C: So not even a sub trust.

Speaker B: Well, I think with sub trust they said that if it uh, if it comes off the sub trust then you're potentially in Bendel territory at that point in time.

Speaker C: That was my understanding. It sort of goes into subtrust and then comes out after seven years and is theoretically still a UPE unless you do something with it. That, that.

Speaker A: Yeah, I think that's, that's my sort of view. And reading that um, decision impact statement, that's sort of where my head was leaning. That, that look, if you, if it still has that character, even if there's you know, things done in the sense of, you know, sub trust arrangement, things like that, that, that you, you're probably still in that, in that even that's

Speaker C: got a limited lifespan though because we don't have sub trust concept really anymore. So um, was it 2018 sub trusts popped out last year.

Speaker A: Yeah.

Speaker C: And it'll be 2019 and then you've got up to 2023 if you did sub trusts all the way through.

Speaker A: Yeah. I think what you'll find and be interested to get your view on this Nick, is that I imagine particularly where the situations are that the money's actually left the trust, you know, it's gone somewhere else. So even if you wanted to run that, that argument, well, you'd have an ea, uh issue anyway. I suspect for a lot of taxpayers and a lot of advisers they'd probably just want to keep it as per uh, the status quo anyway. Right.

Speaker C: Well that to date that's been our firm's approach is um, keep it per the status quo. So where we had used sub trusts in the past, uh, we've been managing division, uh, sorry, subdivision EA of division 7A. Uh, and so therefore any amounts that have gone out to shareholders are either separately treated on Division 7A terms or we've just ensured that that hasn't happened. Uh, where we've converted or where the cash has gone out. We may have made the decision to convert those to Division 7A loans to still stay within all of the rules. So as it stands right now, um, you know, my view from a non tax lawyer point of view is that there is sufficient uncertainty about how 100A, uh, we know how EA applies, but how 100A will apply reimbursement agreements that we are likely to go forward, keeping a keen ear out for, uh, the interpretations and advice that comes out over the next three to six months. Um, but we're pushing forward, you know, as status quo, uh, to make sure clients have certainty. And I think that's a really important thing. We, we don't want to. We have some clients who are particularly savvy and can make informed decisions about what we do. But a lot of clients just trust us to do the right thing and keep them out of trouble. And at the moment our interpretation of that is to apply the status quo.

Speaker B: Yeah, I think there's one, uh, other sort of interesting category to think about. And those people that got done under Div 7 as under the commissioner's, um, rules, so they didn't get 109 RB relief. They didn't, they didn't put it on uh, Div 7A loan terms. They literally just had a up and they were assessed as a deemed dividend. And what the ATO said about that under the decision impact statement is they've said, well, you could basically apply for um, well, an amendment if you're still within time or an objection if you're out of time. And that they would consider out of time objections. Um, so that'll be interesting. I don't know how many people this will affect because I think most accountants are pretty savvy and they um, sort of, you know, followed the ATO rules to avoid uh, deemed dividends. But there'll be a few. I suspect that, um, I think there'll

Speaker A: be a massive backlog. I mean I know that there's backlog of audits and reviews that this issue turns, you know, that they've been paused because of this. So uh, I mean there's that backlog. But then if there's all these other, um, taxpayers coming forward and saying, you know, this assessment was wrong, essentially, I, uh, imagine there's a fair bit of work there to do.

Speaker B: And it goes back to 2010. Like it goes back potentially 15, 16 years. So you could have someone from a decade ago saying, hey, you know, I'm still pretty angry.

Speaker C: Yeah, that's right. I'm still angry.

Speaker B: Still angry and I want my money back.

Speaker A: I think the interesting thing will come about, you know, the Section 100A stuff to your point, Nick, about, you know, will there be. I'm not hopeful that there will be and I'm not optimistic that there will be anything further. Cause I think, I think 100A has been sort of done to death. Um, but there's still going to be that risk that uh, look, if the money's not paid, depending on the time frame, could the, and you know, the repetition and perhaps it's done year on year that you know, is this. And then you know, is it an ordinary family or commercial dealing and just all the uncertainty there that it's sort of like, well, if your long term play isn't actually to put the money in the company, you're probably in um, risky territory anyway. Yeah.

Speaker C: And I know 100A has been done to death, but as a non legal practitioner I still feel like there's a lot of uncertainty about the specifics. And it's almost like we need a couple of different cases on what is ordinary family dealing, what is a re, you know, how exactly does reimbursement agreement play itself out when it's pushed? Um, that is unclear to me.

Speaker A: Still. I agree. Um, unfortunately, if the time period on Bendel and UPES is anything to go by, you know, it may be a very, very long time before we get uh, anything like that.

Speaker B: I guess the other thing too overlaying all this, the recent budget announcement, which you know, the Trustee minimum tax 30%. I wonder how much of an issue this thing will become in the future. Because things like reimbursement agreements, things like Division 7A, do they matter if the trustee's paying tax at 30%? Now of course this is not law and you know, given the way that politics are at the moment, who knows whether it will even come in. But assuming it does, uh, I wonder that some of these integrity measures, they might lose their sting, you know, they might not need them anymore.

Speaker C: While I don't, I don't love it, it is somewhat elegant in the way it's just destroyed all of these different aspects that caused a lot of complexity for trusts. Um, you know, just a very blunt instrument that's come in and as you say, it sort of makes Bendel somewhat redundant. It makes a whole bunch of things that we've always tried to comply with and deal with a bit redundant. Because you've got this 30% tax, no more distributions to corporates. Um, you know, there's something elegant in

Speaker A: that I think, I think it's like you're playing chess. You're avoiding. Check, check, check. And then all of a sudden the other side puts just another piece on the board and it's like check mate

Speaker C: flips the board up.

Speaker A: Exactly.

Speaker B: Or they're all queens, just, you got nowhere to go.

Speaker A: Um, well, I guess that's probably a good, a good segue into uh, I guess sort of government, uh, announcements and legislative changes. And it's a bit interesting because episode two, we're, we unpacked the budget and there was a lot there but somehow we have a whole round of additional things now to unpack.

Speaker B: It's really interesting. I mean obviously there's been so much, um, so many questions, political blowback from the announcements, um, particularly the startup or the memes of Albanese being the 47% equity owner. Um, I think it's prompted a bit of a rethink um, on uh, you know, some of these measures.

Speaker A: Damage control might be another word as well.

Speaker B: Yes, government calls a consultation. But let's be, let's be honest, you, you consult before you do things, not after. But in any event, um, what's happened since we last spoke about these measures is legislation's uh, gone through now. So this is um, in respect of the CGT and negative gearing changes. Um, but they didn't go through that smoothly. Um, obviously some deals were done uh, to get it across the line. Um, I think one of those things was about the sort of LRBAs, the Limited Recourse Borrowing Arrangements for SMSFs. Um, there was also the issue around uh, you know, broadening the access to the active asset reduction under small business concessions. So that was something else that was added in. And then there was also this point about potential further consultation on innovative businesses and um, how they might sort of soften the cgt, blow for them.

Speaker A: Yeah, um, those are three points exactly that I mean we talked about last time that the, the actual legislation's so complicated to start with. But let's leave that to one side and then you know, the nine different steps and the four categories and this, that and the other. Um, but let's unpack those three. Those three, um, issues. Two are CGT related and one is um, um, the LRBAs. Perhaps we'll start with the LRBAs because that's sort of a bit more of a standalone topic.

Speaker B: Yeah. So, um, I must admit, I think when I first heard the announcement in the media about the, the LRBA thing, I think I was a little bit confused. I initially thought that they were banning LRBAs for everything. So no more LRBAs. But it's uh, like reading the legislation, it seems to be just limited to residential property so you can still use them for business real property and obviously non property related assets, shares or whatever. Um, but it's just residential property. You can't use LRBAs anymore.

Speaker C: And interestingly no carve out for new residential property which seems to have been a feature of some of the other policy elements is a carve out for new residential. Whereas I don't believe this has a carve out for new residential.

Speaker A: And it's a good point.

Speaker C: Yeah, um, one of, you know there's essentially a whole industry built on or a whole subsection of accounting, wealth advisory and you know buyer's advocates built on selling new residential apartments normally off the plan to SMSFs using LRBAs.

Speaker A: Their industry just died overnight.

Speaker C: I couldn't agree more. The Australian had a stat that 25% of off the plan sales were to SMSFs. Um, maybe not all of them use LRBAs but um, that's to me that goes almost directly against the stated policy agenda.

Speaker A: That's really interesting because. Yeah, I mean it's a good point Nick that you know in the CGT in the discount stuff there was, you know the new residential um, builds have this choice whether to apply indexation or 50% discount carve out from negative gearing as well. But when we come to the LRBAs there's not a, there's not a carve

Speaker C: out and that is often again there's this whole subsection of the industry that's built off selling new residential property to self managed super funds. Um so it's just an interesting element of that policy.

Speaker B: The interesting thing is that this wasn't something that was announced previously so at least that feedback could have been provided. It's already in the legislation. M. Um, so I'm not sure how easy it's going to be because I mean it makes complete sense. I was sort of thinking when I saw that announcement that oh, uh, I don't get many clients approaching me asking me about you know, LRBA is for residential property but it tends to be more existing residential property. Like I don't think too many people are buying a, you know, buying a house, an existing house through their self managed super fund. Because the problem is once you do that you can't use it yourself.

Speaker A: Yes.

Speaker C: Yeah, it kind of doesn't um, there's an element of, of um, yeah. Misleading the or you don't get what you want out of it.

Speaker B: That's right. So people don't. So it Tends to be more limited to like business, real property. Especially if you're running a business and you can buy your premises through your SMSF and pay rent effectively to your super fund. It's great.

Speaker C: It's such a good wealth building strategy. Cause then if you ultimately sell that once you've retired and you sell your business, the gains for the entire period, you may have held it for 15 or 20 years. And if you are retired and in retirement phase, the gains for the entire period on that property are tax free.

Speaker B: So thankfully that's still a strategy. You can do that. But um, yeah, I guess I hadn't appreciated that a lot of off the plan sales were being made to SMSFs. Yeah.

Speaker C: Which I think is probably not, you know, I don't think necessarily the business clients are the ones that are going into that. It is more of a retail product that gets, that gets pushed on people.

Speaker A: Yeah, yeah, yeah, yep. Well that's. So that's number one. Um, number two, small business CGT concessions.

Speaker B: Okay. So this one I can have a good old rant about. I'm sure we all will. But yeah, basically, um, you know, I guess some of the, some of the feedback was, oh, you know, these, these measures are going to completely destroy small business. You know, especially if you don't have cost base to index, which to be honest, a lot of small businesses don't. I mean if you set up a small business you've got no cost base in your goodwill, um, which is where your main capital gain comes from. So, um, to sort of soften the blow on that, um, the government then said, okay, well, um, what we're going to do is we're going to increase the turnover threshold for access to the active asset reduction. So the extra 50%. Um, I say extra, it's now the 50%. Um, so, uh, ordinarily it's $2 million to get into the concessions. And I might say also that that turnover threshold hasn't changed in a very long time. Like what, 10, 15 years for as

Speaker A: long as I practice. 2007, I believe.

Speaker B: 2007, right. It's like $2 million in 2007.

Speaker A: It's only 20 years.

Speaker B: It's not $2 million in 2026. So that's, that's something that should have changed anyway. Um, so they've lifted that to 10 million, but only for that concession, only for the 50% reduction, not for any of the other concessions. Um, now I think when I first heard this I sort of thought, I don't think this is all that generous. To be honest. And I think that it's a little bit misleading because the vast majority of businesses, particularly that are at that higher turnover level are in companies or they might be in unit trusts, but they're not sitting in discretionary trusts. And in fact, because of the 30% minimum tax, which is the other announcement, the government is actively encouraging people to restructure their businesses into companies. Now, the problem is, once you do that, the active asset reduction becomes not, um, particularly helpful, um, personal reasons. I'll let you explain, Andrew.

Speaker A: Yeah, well, I mean, yeah, I guess to that point that. So we're at the small business concessions at the moment. We've got the. They've got two different entry paths. One is the 2 million turnover, um, which also requires to be carrying on a business. And then on the other side we've got the 6 million net asset value. Um, I guess for me first point is that. So really we're talking about businesses. So we're talking about situations where you're carrying on a business which typically means is a business sale, not a share sale, not always, but typically. And you've got turnover between 2 and 9.99. 9 million. Now I think. Look, I ask you this as well, Nick, but typically in that situation where there's revenue between 2 million and 9.99, you're probably meeting the 6 million net asset value test. Unless you've got a lot of other wealth that's unrelated to the. If you're talking about a business valuation, you're saying your value is below 6 most of the time in that situation anyway. Right.

Speaker C: You'd think so. You know, if you're turning over $10 million and you get even 20% out the back, that's $2 million at a three multiple is six maybe. Yeah, you're kind of maybe there or thereabouts. Um, to your point about business versus share sale, I think that's where a lot of this kind of comes down to is it's really good if you get a share sale, but that's not particularly common for these sorts of small businesses under $10 million either.

Speaker A: Yes.

Speaker C: Um, you know, the people I feel for it and like, even $10 million isn't a particularly large turnover for. I know what they're trying to get at here, which is those innovative startups. Um, and we'll get to the next bit of the announcement or the consultation on the next bit of the CGT discounts as well. But the thing that I find here is most of our clients that are genuinely building businesses might be Issuing equity. They might be issuing different classes of shares. Um, so they may not end up owning even 20%. They have trouble meeting the first set of criteria.

Speaker A: Yes, yes.

Speaker C: Um, whether it's, yeah, being a CGT concession stakeholder. And so I think it's, you know, there are a niche class of people or businesses that this might help. But for a lot of our clients, if I just apply it into my client base of those more sort of startups or innovative businesses, a lot of them just fall straight out of this anyway. Um, it's. Yeah, it's going to be very niche. This particular. Yeah.

Speaker A: And even if I'll take an example just to explain even where it is relevant, let's say you got, okay, company carries on a business, turnover is $5 million. Um, there's a business sale makes, makes, let's say a million dollar capital gain. And let's just assume that, you know, the stakeholder tests are met and um, they can't meet the 6 million test. Um, so they've got the $1 million capital gain. Um, no discount, um, no other concessions other than the active asset reduction. So the $1 million capital gain goes to 500,000. Uh, you pay tax, corporate rate on the 500,000. But what happens to the untaxed amount? You know the answer to this, Rajan, it's stuck.

Speaker B: Um, the problem is that how do you get it out of the company? Um, you know, if you're going to keep it in the company and reinvest it, okay, that's fine. But not many people do that. They typically want to get the money out. Now the thing is, you don't have franking credits because it's untaxed. So it comes out as an unfranked dividend and then the shareholder ends up paying full tax on, on it anyway. So effectively you've lost the benefit of, uh, the 50% reduction. Then you've got to get into things like doing a voluntary liquidation so that you could trigger a capital gain at the shareholder level and then potentially try and claim the concessions again that way. But again, that only works if it's a company you can get rid of. And maybe that helps, but it doesn't. Even that is not a tax free exit. There is still tax on that.

Speaker C: And that shouldn't be the standard path that we're expected to follow necessarily either. That's a relatively complex path.

Speaker A: Absolutely.

Speaker C: Um, and there's a whole bunch of ways you can fall out of it along the way. As you said, you might not be able to get rid of the company, there might be a whole bunch of things.

Speaker A: So I kind of equate it almost to like an instant asset write off. It's sort of like one, to Nick's point, it's pretty niche when this is going to actually apply. Um, and then two, it's really like an instant asset write off type sugar hit to the company. But the second money wants to come out, you're going to have the, you're going to pay the tax. Basically at that time. Probably, um, probably at that time, that's right.

Speaker B: And the issue is not just limited to companies. Unit trusts have a similar problem because of CGT event E4. So again, you know, it's not subject to assessment in the trust and the carve outs that they have to CGT event E4 which is effectively when you receive a tax preferred or effectively untaxed amount out of the trust, there were carve outs for things like the 50% discount. So if the unit trust got the 50% discount, you know, there was adjustments for that. Um, there were other adjustments for pre CGT and whatnot, but there's no adjustment for the 50% reduction under the small business concessions. And so typically for us, like when we're looking at claiming the concessions either through a company or through a unit trust, we try to avoid using the 50% reduction because we can't get the money out very easily if we use. So we try to. Well, 15 year exemption's the best and if you can't get that then maybe you use the retirement exemption because they let you get the money out a lot more easily. Um, and we just completely try. We tend to sidestep the 50% reduction so making it easy to claim. Um, as you said, I think it's a bit niche. I think it will work for some people, but not for many that we deal with.

Speaker C: And importantly, it sounds good as a media grab.

Speaker B: Yeah, it sounds really good. If you don't understand the technique, it

Speaker C: sounds good when you announce it. Um, the practicalities can come later.

Speaker A: Yeah. And to me, you know, there's all these kind of weird loophole Y type niche type situations where, okay, we say that you generally can't apply the turnover test to an equity sale, but there are situations where the taxpayer, the shareholder is carrying on a business, um, in which case it brings that turnover test into play. And if you design a system that kind of rewards that then you may have that happening more and more. More behavior like that as well. Yeah, uh, but yeah, it's completely hodgepodge. It hasn't Been thought out well, um, but here we are. Yeah.

Speaker B: And I don't think it will actually benefit that many people in the end.

Speaker A: No, I don't think so. Yeah. Would have been far more benefit to just look at the original thresholds that haven't been indexed for 20 years. Just index those, that's all you needed to do. But no. Yep.

Speaker B: So we've made it more complex now because we've got a separate threshold for one of the concessions but not the other one.

Speaker A: Yes, yeah, yeah.

Speaker B: But all the other basic conditions still apply as you mentioned. So um, you know, you've still got to work through those to even get to the um, active asset reduction. Yep.

Speaker A: Well, let's move on to the last one which is perhaps possibly the most intriguing one I think. Uh, and it's this innovative business CGT concession. Now, so to the points we've mentioned. Okay. One of the problems with indexation is that where you have a very low cost base, you do far better out of the 50% CGT discount than you, than you will under indexation. So, and then, you know, we had the 47% memes and all this other stuff as a result of that. So this appears to be a bit of an attempt to sort of

Speaker C: put

Speaker A: a bit of ground back on, on that and give some sort of basically a 50% discount in those type of. In certain situations where um, this, this innovative business threshold is met. Um, uh, yeah, thoughts on it. Just at a high level before we go into the details.

Speaker B: Kind of felt like a bit like reinventing the wheel. Um, I think that, you know, there are conditions to get this, you know, and again this is still at proposal stage. Ah, so I think the consultation period closes on the 10th of July. Um, from memory. Um, so at least on this one, at least they're doing the right thing of actually asking the industry, um, before they go ahead and legislate it. Uh, but basically um, what's been proposed by treasury is that effectively there's got to be, ah, a company that's less than 10 years old, $50 million turnover cap, um, there's a potential extension to 15 years for certain biotech companies and whatnot that might need a bit longer to commercialize their, their products. Um, the interesting thing is the, the, like the employee share scheme rules, like they have provisions that deal with startups and they were, you know, I feel like they could have leveraged off that rather than sort of. And I appreciate this is still a consultation, this hasn't been set in stone but felt um, like a bit of reinventing the wheel.

Speaker A: To me, it's like you got a pot of boiling water on the stove and you're going to get a few spices off the rack. You're, uh, gonna put a bit of, uh, essic, early stage innovation company flavor. You put that in, um, a bit of employee startup scheme. Put a bit of that in as well. And just to finish it off, just a little bit of R D, R and D. Yeah.

Speaker C: Ah, put that in. That's the flavor it gives you.

Speaker A: Mix it all together.

Speaker C: The flavor it gives me is a bit of R and D. Because, you know, the biggest thing I see is definitionally, what is an innovative business? Where do you become an innovative business versus not an innovative business? And I know you can write rules around all of that, but I think it's just, again, it's another layer of complexity over what is a really complex area in any case. Yeah, um, yeah, it's.

Speaker A: Yeah. Look, there's, I mean there's a number of things in this, in this consultation paper. This is actually pretty short consultation paper. Um, so I'm not really sure it's that much of a consultation. But, um, essentially it's sort of looking at equity issues. So that's the first point. It's got to be an equity issue. Um, there's this cap of a $10 million capital gain. And so that's the maximum amount that this can apply to, um, 10 years. Company can't be more than 10 years old. Generally 50 million revenue. Um, and then this kind of unknown about innovative business and, you know, what does that mean?

Speaker C: Yeah, it's hard. You start to think that we probably would have been better off with the concept of passive versus active assets. Just holistically that'll capture all property and anything passive that you invest in and leave anything that can pass some sort of active asset criteria in the old system.

Speaker A: Well, that's, I mean, it's. To your point, Nick, about the, you know, the small business concessions. They'd be relevant if you get above that 20%. So, you know, you're 19.99%. You get, you don't get them. And then you tip over, uh, one, you get them and you know, is that, is that the way the system should really be designed? Like, you know, it would be far better to have a, just a distinction between what's a business versus passive.

Speaker C: I've had a. Two different scenarios over the past couple of years where a client's been selling their business and they don't meet the turnover threshold to meet the maximum net Asset threshold they were better off accepting. Well, we genuinely had conversations with the purchaser about buying for a lower price because does that like, you had a better. You get a better after tax outcome. And neither of them ended up going ahead for various other reasons. But that, that should never happen in a functioning tax system.

Speaker A: Yeah, yeah, I'll be better off if

Speaker B: I take less money.

Speaker C: I'm genuinely better off if I take less money and that. You don't want to be in that kind of situation because that's not commercial. It's a very, um, it's an awkward place to find yourself in a functioning tax system.

Speaker A: And it also doesn't encourage, um, I guess when you set these type of rules and you know, there's things around this innovative business concept as well, that it will discourage certain things, it'll discourage growth beyond a certain number or, um, all this type of stuff, that's not what system should do. So, I mean, they've issued a consultation paper. There's seven questions on it, and they're each pretty targeted and limited. Um, so, yes, I mean, there is some consultation, but one of the questions is not is this a good system overall and do we have too many different, you know, competing things and, you know, how do we rationalize all them together? That's definitely not a consultation question. Um, it's more like, is this number the right number? Um, type questions.

Speaker B: Yeah, it seems like the framework's already set so.

Speaker A: Well, that. To my. Yeah, look, I think that's essentially. Look, they're saying this is the framework, you know, can we move, you know, five degrees on this part or that part, but not. Is this a good framework at all? Yeah, well, I guess there'll be, there'll be some more to play out on that. Um, uh, you know, yeah, it's a consultation paper. There's no, um, legislation. I, um, think the really interesting thing is the interaction between this, the ESSIC rules, the ESS rules and, and potentially the R and D rules as well. And then also how that overlays on the small business CGT concessions as well.

Speaker C: Uh, the good, the big thing about the startup concessions in ESS was that you got to treat it on capital account because of, you know, those options always get issued at virtually nothing. Um, it's almost not worth, you know, the effectiveness of that has completely diminished now as well.

Speaker A: Yeah, well, I mean, it will only work if you meet these, these, you know, these conditions essentially. So it's kind of like really, these innovative arrangements are for ESS and potentially founders where they probably weren't looking at ESS in the first place. Those two categories.

Speaker C: I've had one, one client in particular mention to me and it's commonly known New Zealand has zero percent cgt. Um, it's a four hour flight away. Pretty much feels like Australia when you're over there.

Speaker A: Yep.

Speaker C: Um, you know, what does it genuinely look like to go and found a company or a business in New Zealand if you have big growth goals, um, as opposed to doing it in Australia? You know, it's pretty practical, it's not far away. A lot of stuff is quite familiar. I think that's probably not a huge risk that we're going to have this exodus, but I think it has to

Speaker A: be put in context. Look, I think there is some there, I mean I've seen those conversations too that, you know, they're either Australian, New Zealand, dual citizens or even if they're not, you know, the nature of the reciprocal visa arrangements are that, you know, there's no impediment really to moving. It's funny, I went to, I went to a conference, um, after the budget was released, um, in New Zealand and uh, you know, so it was a New Zealand tax specialist speaking, um, uh, to an Australian audience and said, oh, I never thought say this but apparently we're a tax haven to Australians. And it was met with laughs and nodding heads. So, um, look, I mean, would there be that many? I don't know, but at least I've seen the conversations already around it.

Speaker B: Yeah, um, I think that perhaps that's a good point to uh, move on from the federal, um, announcements, uh, and move into some state based ones. Yeah, or at least one. Um, so, uh, we're in Victoria and uh, the Victorian State Revenue Office has updated its guidance on its website, uh, regarding when a discretionary trust variation will trigger duty. So a bit of, um, bit of context on this one. So, um, it's been an issue for a while that when you're varying a trust deed, um, you know, the variations to the deeds might be so extreme that they effectively cause what's called a resettlement of the trust. Um, and there was some cases at the federal level, um, Clark's case being the most notable one. Sorry, um, that basically said, look, as long as it's in the power of the deed, um, any changes you make, it's not going to cause a resettlement. So at least then your cgt, you can make most changes that you need to with the trust deed. It's not an issue. State revenue's never really fallen in line with that, um, and in fact, uh, there was a ruling or a document that was produced by the Tasmanian State Revenue Office that basically said look, while Clark's case has some relevance, that's for federal, doesn't apply to state. So for some reason the common law applies differently, um, to state based taxes compared to federal ones. Um, but in any event, every state Revenue office in Victoria has a slightly different approach. Um, some, uh, jurisdictions have specific rules around trust variations that are codified in statute. Um, others are more by way of, um, you know, rulings or website guidance. Um, in Victoria it's by website guidance and they've got this, uh, this particular webpage which they decided to update on the 3rd of June, uh, 2026 that um, sort of spoke to the circumstances in which they felt a trust variation would either cause a resettlement or would change, cause a change in beneficial ownership of dutiable property in the trust.

Speaker A: Yeah, we included this because I think it's a bit of a sleeper issue, um, particularly in Victoria. Now, um, uh, Rajan's right that there's been a history on this and it was what you'd normally say in the past was you'd think about resettlement and that would be the kind of concept you'd talk about. But the states have changed their legislation since then and they've put much more expansive deeming provisions in about essentially what rights beneficiaries have in trusts. And that's the way that they've kind of, you know, sharpened their claws, so to speak. Um, most of my work is either Victoria or New South Wales. And both Victoria and New South Wales have done this. Um, but the difference is New South Wales have carved out a lot of things through legislative instrument. Now where I'm seeing this come up is that, you know, you've got trusts and you pull out the trustee, it's got some properties and then, um, you know, the primary beneficiaries, the stated beneficiaries aren't who the client might think they were. They might be that it's their children or you know, there's a spouse or something else that their parents, et cetera. And then you tell them, well, based on Owie's case and you know, other cases about disputes in discretionary trust, the, the primary beneficiaries have this really, you know, critical role and you can't, even though you've got control, you can't just exclude them entirely and just pull them out. So then the clients say, well, what's my options and how do I deal with that? And Then, okay, one of them is you vary the trustee, assuming there's a power to do so. What if we change those primary beneficiaries or takers in default? And in Victoria until this, there was a previous guidance, but it was a lot more um, vague in the situations in which a variation might trigger um, stamp duty. This updated guidance, which sort of gives you a bit more detail, it's still a bit wishy washy, but what it does say is that there is a ruling coming. And from having delved into the technical on this, I think what it's going to say is that look, it's a no go zone for doing any changes of primary beneficiaries. If you hold Victorian property or if you do it, you're going to pay some degree of um, stamp duty on it. Do you see that issue commonly in practice, noting that it's a state tax issue?

Speaker C: Yeah, we certainly deal with trustees all the time, particularly leading up to the 30th June and doing all of our resolutions. Uh, obviously whenever it comes to variation, we are in contact with uh, lawyers about that. Um, to be honest, we haven't seen it too much in terms of removing certain primary beneficiaries. We obviously went through a big stage of varying income clauses. Um, we also have been through a stage of excluding foreign beneficiaries.

Speaker A: Yes.

Speaker C: Um, but that's now kind of um, baked into our trust setup, uh, structure as well. Um, and then the only other time we really do it is around estate planning and intergenerational wealth and usually that's around appointors and trustees and potentially putting in corporate appointors and things, things like that.

Speaker A: Yeah, yeah, I mean I've got. Yeah, I think that's right, Nick, that like I've seen this conversation, it's almost always in the context of the estate planning, uh, you know, one, one, uh, one hypothetical scenario that's based on a real one is, you know, number of properties, uh, controller, uh, and then the trustee says the primary beneficiaries are ah, uh, their two children. Um, but the estate plan is not that those people will benefit for various reasons, but they're the primary beneficiaries of the trust. What do you do? Um, okay, yeah, maybe you vary the trust deed, um, but you're running right into a risk of um, stamp duty or transfer duty on the variation.

Speaker B: Yeah, absolutely. Or I mean you could have a situation where you've got ah, perhaps a liability for absentee owner surcharge for land tax. That's true as well because that's based on your. In Victoria, it's based on your named beneficiaries in the deed. And if any of them are foreign, so say you had one that was foreign, you wanted to take them out to avoid an absentee owner surcharge, you trigger another. You trigger another problem, potentially.

Speaker A: Yeah.

Speaker B: Um, and, you know, it's interesting because, again, there's a lot of inconsistency in how the states do things. So some states in Australia, they actually have specific legislative provisions that say that if there's any change to a default beneficiary or a named beneficiary in the deed that triggers duty. That's like a trust acquisition or a trust disposal. So it's dutiable. Um, Victoria and New South Wales are a little bit more cagey on it.

Speaker A: Yep.

Speaker B: They're not saying it will. Uh, I think if you took the position you changed all of them, it almost certainly would if you changed one.

Speaker A: What used to happen in New South Wales. So New South Wales, sort of similar to Victoria, that you've got a. You've got a. You've got a sort of surcharge rates, essentially, that apply to discretionary trusts. But if the property's held in a fixed trust, you get a lower land tax. And what the practice was was essentially you could vary a discretionary trust to make it a fixed trust in New South Wales, and that would work for land tax and would also not result in a transfer duty issue. Um, unfortunately, the law's changed since then. There's been a number of cases that have, where people have tried it still, and the court said, no, that that triggers. It's effective for land tax, but it triggers, um, transfer duty on the basis that it's a change of equitable interest. And essentially that primary beneficiary goes from being, you know, a mere beneficiary with, you know, all the rights that you have normally in a discretionary trust to a 100% interest. And that's, That's. That will trigger it. So I think we haven't seen a sort of an onslaught of cases in Victoria, but I think it's just something to be really wary of whenever you're thinking about major changes to, um, trust, and particularly through your estate planning process.

Speaker B: I think another situation, I can see it come up, which is, I suppose it's the inevitable destiny of every trust is, uh, when it comes to an end. Uh, because, um, you might recall a couple of years ago the ATO had this, um. I think it was a ruling or a practice statement or something that talked about what happens when a trust effectively vests? Um, and essentially they say it goes to effectively turns into a fixed trust for the default beneficiaries or the specified or the capital beneficiaries. Now if that happens, then you have a change in the nature of the trust. So you have a duty liability.

Speaker A: That's uh, a good point.

Speaker B: Even though the trustee hasn't changed, you haven't distributed anything out, it's on the same trust, but once it vests, you've got duty.

Speaker A: Um, interesting. Yeah. Well, I bet often the solution with property issues is just to sell all property and don't have any, and then you don't have any property tax issues. But uh, I don't want to do that.

Speaker B: Well, look, that's exactly right. And I must say that we've had a significant uptick in our practice in the number of people who wanted to get properties out of trusts. Um, there are some duty exemptions that let you pull properties out of trusts. The CGT is often the problem, of course. M There's no equivalent CGT exemption, but I must say we've had a very, very steady stream of inquiries.

Speaker C: It's funny when we're structuring so particularly since the budget changes to cgt, there's always been this inherent tension when a client who derives most of their income from a business that's in a company wants to acquire say a property, do you put it in a trust and ultimately deal with the drawings from the company and the Division 7A and the top up tax?

Speaker A: Or do you put it.

Speaker C: But uh, you get the CGT discount or you got the CGT discount or do you put it in a company you can then more effectively get the funds across but you don't get the discount. We've done a bunch of modeling and created a couple of internal models that show the set of assumptions you have to make to now make a company a better investment vehicle under indexation as opposed to a trust has just grown so much.

Speaker A: Yeah. Cause you'd have to assume what's the indexation rate as well.

Speaker C: Yeah. So if you make reasonable indexation assumptions and then reasonable income and growth assumptions, and in particular if you hold it for a long enough time period, um, the range of scenarios in which a company is a better holding structure, uh, not to mention simpler for all of these reasons that we're talking about, uh, has grown substantially, particularly where you are funding that from business profits.

Speaker A: Yeah, that's a good point. Cause I mean it was something even when they had the discount. It's kind of like well if you want an easy road and if your

Speaker C: time horizon was long enough the lower tax in the corporate environment eventually compounded to get to overtake the discount. But now that time horizon has shrunk your assumptions around capital growth versus inflation versus income has sort of uh, become a bit more equal and as I said that the number of scenarios is just has grown so much. Yeah.

Speaker B: So I suppose one concluding comment on um the sort of the website changes on resettlements so why the SROs decided to do this now. Uh, and it makes me think that perhaps uh there's more state revenue shenanigans afoot, um more compliance activity, um, perhaps more cases that are coming through the system. So it'll be interesting to see how this plays out.

Speaker A: I agree they do say um, uh you can seek a ruling um if in doubt. Um I haven't had great success seeking rulings from the revenue officers as opposed to the ato. But it is something to consider if it is quite a major change particularly if it's something that you don't need to do. It's an optional choice essentially something to think about whether you do a ruling to the State Revenue Office.

Speaker B: Thing is though that like oftentimes you're making trust changes there tends to be a degree of urgency about them. Like you need to do them because there's some reason why um unfortunately the ruling process isn't quite as uh, quite as fast.

Speaker A: Yeah. Um, well let's move on to uh, I guess cases uh for June. Um now um, we've got, we've picked out three interesting cases. They're all uh two of them are art, uh decisions and one's uh a uh NCAT New South Wales um decision. Uh so the cases are ah Bewlie and the Commissioner of Taxation Prasa and the Commissioner of Taxation and Wynya Indigenous Office Furniture ah PTY Ltd and the Commissioner, Chief Commissioner of State Revenue. So I'll um, I'll introduce the first one uh which was a taxpayer actually they're all taxpayer wins. Um but the first one is, is Bewlay and this is a, this is a residency matter. Um now normally most of the most cases you get on, on residency are about whether they're an Australian resident for the purposes of Australian domestic law. You know you go through the ordinary resides Test and the 183 Day and the permanent place of abode and all that stuff. Um now this is not one of those cases. Um firstly on those cases they're typically sort of people trying to leave Australia Exit the Australian orbit and, um, you know, more often than not that they're still a resident is the flavor of those cases generally. Now, in this case, uh, the taxpayer, Mr. Bewley was an Australian resident for domestic law purposes. He was also a tax resident of Singapore. Um, and, uh, we've got these double tax agreements applied between countries. Uh, and they, in certain situations, they will allocate taxing rights. Now, this was relevant Mr. Bewley's situation. Essentially, uh, he was earning, uh, employment income in Singapore. Um, and the double tax agreement said if you're a resident of Singapore, only Singapore will tax employment income. Now, in determining whether you're a resident of Singapore, for the purposes of the double tax agreement, we've got this tiebreaker test. It doesn't leave you in a position where you can be resident of two places. It always has to be resolved. Um, so. So that was what's relevant in this case. Um, I'll, ah, briefly run through a few of the facts. Uh, uh, Mr. Bewley was. He had a, ah, spouse and a young child in Australia, had a main residence in Australia, spent 38% of the year in Australia, remitted significant amounts of money to Australia, um, had, you know, super, ah, private health cover bank accounts in Australia. So clearly an Australian resident.

Speaker B: For domestic law, it was about $1.7 million, I think.

Speaker A: Correct? Correct, yes. Um, so that was sort of on the Australian side. On the, um, Singapore side. He'd lived in Singapore previously, including had a child born in Singapore previously when the, when the family previously lived there. He'd worked internationally in oil and gas for many years, moved internationally nine times for work, held 12 roles in five countries, uh, and had various sort of connections to Singapore, friends, um, social club memberships, things like that. So, I mean, yeah, what's. Obviously for the domestic law purposes, you're saying he's probably ordinary concepts, resides here, et cetera. Um, Commissioner assessed on the basis that he was a resident, um, income tax and DIV293 assessments. And the argument by Mr. Bewley was, okay, yep, that's fine on the domestic law position, but there's a double tax agreement and it says that if my personal and economic relations are closer to Singapore than Australia, then Singapore has exclusive taxing rights over this amount. Uh, and imagine the tax is far, far, far less than the tax that'd be payable in Australia. Um, maybe I'll go to you, Rajan, first. I mean, what are your thoughts without giving away what actually happened in the case? You know, where's your personal and economic Relations closer to, I think, like, if

Speaker B: I didn't know the outcome, like, I would say that, um, it would be Australia for the simple reason that I've dealt with a few residency cases in the past, and I've sort of argued with the ATO in the past in these things. And typically the ATO's approach and position is if your family is in Australia and you own property in Australia, that's it. Like, that's it. Because, I mean, who can be closer to your spouse, um, and child, and you own a family home in Australia that you regularly come back to? Um, yeah, I appreciate there might be a few. Maybe your source of income's overseas and, you know, maybe you've got, you know, investments in both places and whatnot. But usually it's like, where is your family? Like, where is your spouse and child and where's your family home?

Speaker C: There's that old rule of rule of thumb. It's probably not quite that of where is the dog? Where does the dog live? That's probably where you reside.

Speaker A: Yeah. And in this case, it's quite interesting because this term and this term is in a number of double tax agreements, personal and economic relations. And essentially what the court. So the tribunal said was that, well, it's a composite phrase. You've got two different things, personal and economic relations. And the personal relations were closer to Australia. Spouse, child, house. Um, but there wasn't. There were some connections still to see. It wasn't sort of like 100 0%, but it was definitely accepted that it was closer to, um, Australia on the personal side. But on the economic side, they said that, well, yeah, you got the house in Sydney, but it's not really. It's not really an investment asset. Um, but on the Singapore side, well, you know, that's. That's the whole source of your income. It's all there. So your economic connections, actually closer to Singapore. And I guess the real challenge is, well, how do you weigh up which one of those is stronger?

Speaker B: End of the day?

Speaker A: Um. Uh, tribunal said that essentially it's a holistic assessment and they came to the view that it was closer to Singapore than Australia. But, I mean, it's a really challenging. It's a really challenging one.

Speaker C: You could have easily seen it go the other way.

Speaker A: Yeah.

Speaker C: And you wouldn't be surprised.

Speaker B: Oh, absolutely. I'm not surprised at all. The ATO litigated this matter. In fact, interesting thing about this case is that I had a client about nine years ago who was in a virtually identical situation where had a business In Singapore, like all the income coming from there, but wife and children in Australia. And um, we didn't end up litigating that, um, in the courts or tribunal, but in the end ended up having to settle it with the ATO on the basis that there was tax owing. Um, and so I know exactly how the ATO would say something like this because I've been through it. Um, I would not be surprised in the slightest if this gets appealed.

Speaker A: Yeah, I mean, yeah, I agree with that. I mean, um, Nick, uh, I guess if you've got, you know, a client, this type of situation, particularly this sort of ones that, yeah, the dog is here. Uh, what's your, uh. And they say they're adamant, they want, they, they want to, they want to not be taxed in Australia. What do you do?

Speaker C: I mean, for me, that's, uh, honestly it's, that's not international tax. Probably holistically is not something that I consider myself a specialist in. Um, you know, most accountants and probably a lot of people listening to this are business advisors, they're business coaches. We do a lot of accounting and we do a lot of tax. You can't be a specialist in everything. And this is absolutely something. On these facts, you know, you'd be saying, okay, if you want to push it, it's a matter of engaging a tax lawyer and getting a private ruling, um, or one, you know, certainly engaging a tax lawyer. And then we take the advice of where we go from there, um, or

Speaker A: moving the dog and the, you know, the family and selling, selling everything.

Speaker C: You know, I always approach this as substance over form. I don't want to be cherry picking facts that suit you to be a non resident. When holistically you do look at it and go, well, you know, there's certainly going to be ties here.

Speaker A: Yeah, yeah. I mean, with the, with the, in light of that whole discussion we had earlier about the movement, you can see people, you know, this case, sort of perhaps people applying these rules somewhat naively or not fully considered and say, oh, well, you know, Mr. Bewley was fine for. So it's good enough for me. I mean, but there are some, some facts that are a bit more unique in this case.

Speaker C: And you do get, um, you know, with the AI models around, we get clients who put their factual scenario with cherry picked facts into one of the models. And I can guarantee that the model spits out, yeah, yeah, you should be fine on this, this and this basis. But then, you know, you look at it more holistically and you dig in a bit and sometimes it may be the case, but often it's not. Or it certainly needs a lot more work to withstand an ato, uh, audit

Speaker A: or a review and particularly being aware of the risks of getting it wrong as well. Penalties.

Speaker B: Absolutely. And to be honest to that point, I think that one of the probably best pieces of advice I could give to someone is for heaven's sake, even if you think you're a foreign resident for tax purposes, for heaven's sake, lodge your tax return in Australia. Even if it's a nil return, just lodge it. Because the biggest issue that these people have is that they assume that they're not residents. So they don't lodge any returns unless they've got other sources of income in Australia, but they typically don't. So they don't lodge any returns. And then you never start the clock on your amendment periods. And so you could end up with a situation where a person gets picked up 10 years later or 15 years after that and they're up for taxes going back the entire period because they never started the amendment period, never closed off. At least if you lodge even a nil return and you do that on the genuinely um, you know, the genuine belief that you're a non resident, then you know that does really close the door for the ato. Assuming there's no fraud or evasion of course. But it limits the ATO to that four year amendment period.

Speaker A: Well I mean that's a good point. And to that point there's a case floating around, I can't remember the name off the top of my head but it was a Perth based one where the ATO's trying to open up the door on fraud and evasion on a tax residency and finding it difficult to do so.

Speaker B: Yeah, well that's what they have to do. If you've lodged returns and they're out of time then that's really the only way the ATO can. But uh, it's much harder for them to do that. Fraud and evasion is not quite as easy as assuming that you've been reckless or failing to take reasonable care. It's a much higher threshold.

Speaker A: Well, let's move on. Um, uh, I guess over to you Rajan. Uh, uh, for Prasa and whatnot.

Speaker B: So Prasa's case is an interesting one. So this is a case that concerned um, like serious hardship. So this particular taxpayer had a fairly sizable tax debt um, that related to periods of work around the pandemic period. This taxpayer was in a bit of a dispute with the ATO because Um, he was essentially working for a foreign organisation and his plan and intention was to actually relocate overseas to do the work. Um, and he'd gotten some advice from the ATO to say, look, as long as you're not here and you do the work overseas, we won't seek to assess it. Of course the pandemic happened, the borders closed and he had to work remotely, but the work had to be done from Australia, um, remotely. And so the ATO's position was, well, we're going to, that's going to be accessible in Australia because you're doing the work here. So he uh, obviously didn't have a choice. So he, you know, he had to earn a living. He did the work, um, he declared it for income, uh, and received uh, an assessment, uh, but then sought to basically have the debt set aside on the basis of serious hardship. Now the interesting thing, you don't see many cases for obvious reasons. I mean this would have been a self represented taxpayer, but if you're claiming serious hardship, you're not spending money on lawyers and barristers to litigate your case, um, or even just putting the time to run it through the art. But this is one of the few that did. And look, I don't have a huge amount of experience with hardship cases. They tend not to come to lawyers for obvious reasons. But the few that have come, they tend not to succeed. And my feeling with these sort of cases is that like, unless you're like terminal or you like, you know, like serious health issues, you know, possibly even terminal, the ATO won't really, um, consider, uh, you know, waiving a tax debt on hardship grounds. What I find really interesting about this case is that the tribunal essentially looked at what the financial situation was. This family was financially constrained. I think their disposable income was around $600 a month, you know, after their necessary expenditure. Um, and the tribunal basically concluded that, yes, if this taxpayer was forced to pay this tax debt, they're already under hardship, they would face serious hardship.

Speaker A: So Nick, have you had any experience doing hardship applications?

Speaker C: Not with hardship in terms of setting aside a tax debt, um, but this, when I read this case, it probably reminded me more of the levels we have to go to around applying for GIC remissions and things at the moment, which comes across our desk every single day. Yes, um, so it's not quite to the level here, but I mean every practitioner knows the ATO has more or less closed the door on GIC remissions outside of the most exceptional cases. And so you Know where clients come to us, sort of. And one of the hard things about it as well is it's such a backflip from what clients have been used to, particularly over the pandemic era.

Speaker B: Yeah.

Speaker C: Um, where, you know, to put it bluntly, we would get the grads to call up for GIC remissions, and that'd be, you know, just something that would be done at a graduate level.

Speaker A: Yeah.

Speaker C: Now for a, you know, a $500 GIC remission, we have to write a full letter addressing, you know, the specific areas of the legislation and the rulings and attaching evidence, and it just becomes impractical. Um, and even those. Often you'll submit them, you'll spend all the time and you get a one line answer back on the tax agent portal saying, no, sorry, we don't agree. Um, so the lesson out of all of that is the first conversation we have with clients is, one, is it material enough to warrant the work we're going to have to do? Two, do you have evidence of, um, some factors outside of your control that have, uh, contributed to you not paying your tax debt? And we've found that, you know, the business going through a hard period is not good enough. The, you know, there are not many reasons that that kind of meet that threshold now, as you said, apart from genuinely being in hospital and having. Having records to prove that or having to be a way to care for a loved one while they're going that, you know, the threshold is so high now. So, um, part of me is surprised that this.

Speaker A: You just got through. Yeah, um, yeah, I think it's. It's sort of set like, you know, again, to Raj's point, it's not something that we typically deal with, and the JIC is much more common. But, um, in terms of this, this is, this is a. This is a provision that allows the commissioner to release an individual from a tax liability. So not the jic, the tax liability, if they're satisfied that the individual suffers serious hardship. And I mean, that was always understood as a really high threshold. I think it still is a high threshold, but when I read this, it's sort of lowering it a little bit in that. What. What is serious hardship? Um, I think the more practical point is that often if you're in this type of situation, you might be better served speaking to an insolvency practitioner than trying to run this course, though, because, um, it's a whole different conversation when you're talking about, uh, those sort of bankruptcy or bankruptcy light type options. Um, there's a lot more of that we're seeing these days with director penalty notices and that sort of thing as well. So um, it is a little bit of an unusual one. I don't think it's gonna be a trend, but it was notable enough to uh, warrant an inclusion.

Speaker B: Yeah, I guess the thing with these hardship cases is the, they're so specific to the taxpayer, they're so nuanced. So I think if nothing else this case maybe gives a bit of hope that maybe the threshold isn't as high. But will the ATO necessarily change its approach? I don't think so. Um, my hope for uh, PRASA is that this doesn't get appealed because if it did, um, you can imagine uh, the continuing sort of uh, accumulation of GIC interest paying the tax and then app potentially paying the ATO's legal costs if you lose. So if there is hardship that will only be compounded, uh, far. So hopefully the ATO just drops it and leaves it there and just says look, this is just a case on its facts and we all move on. Uh, I think so.

Speaker A: I mean they're so factual dependent it really. You'd be surprised, you'd be surprised.

Speaker B: Anyway, and it's an interesting case nonetheless.

Speaker A: And then we've got uh, Winyah, which was a winyah for the taxpayer, very

Speaker B: aptly named taxpayer in this case. So this is a payroll tax case and um, very timely I must say, because we are seeing a lot of payroll tax, um, activity, um, audit activity. It's been going on for a little while. Um, it's sort of, there was a brief lull and then it's kind of picked up again, um, uh, recently. Uh, but this concerned grouping, um, so the payroll tax rules basically have grouping provisions in them that you know, basically say that if you've got common controls, it could be common shareholders, common directors or even common employees between two or more businesses that they're, you know, basically treated as a group. And the consequence of grouping for payroll tax is that it's only one tax. It's only one sort of tax free threshold for the group. All the taxable wages between all the grouped entities get aggregated to one. So it inevitably results in much higher payroll tax liabilities. Um, that's really the consequence of grouping

Speaker A: and the consequences have gone up I guess as well because those payroll tax thresholds have also gone up over years. Um, you know most of the states are over the million, I think Victoria's 900,000, but a lot of the other states are well over a million so, you know, it can cost 50, 60, 70,000 per, uh, entity per year for whether it's grouped or not. And that could be the difference between profitable businesses and unprofitable businesses.

Speaker B: Oh, absolutely. I mean, very basic examples. You could have two businesses that are both under the threshold. Neither are registered, neither are paying payroll tax, but if they're grouped, they're over. Um, and that's typically what happens, actually. That's what I often see. Um, and then, of course, these things, they never. They never really come in a timely manner. Um, by the time the SRO catches it, their typical, um, position is they'll go back five years. And so you're not just wearing one year of assessment, you're wearing five years of assessments with penalties and interest. So it's quite catastrophic and can often lead a business into insolvency if that plays out. Now, in the case of Wynya, there were, um, factors. So Wynya was effective furniture company, um, and it was 49% owned by another business referred to as Vibe, but that was in turn owned by another group of companies that. They were also in furniture too. So 49% ownership there, and then the other 51% was, um, an individual. Now, what happened in this particular case is that. The OSR attempted to group Winya with that 49% shareholder on the basis that there was common control and whatnot. And they. That would have obviously led to a fairly sizable payroll tax liability for Wynya. Now, what happened is, when this was considered by ncat, they effectively said, look, yes, there are some factors. It's a very low bar to be grouped. I mean, any common employees, common directorships, um, common shareholdings, that's enough. So it doesn't take much. But where it kind of. Where the battle tends to occur is around degrouping. So while you might be grouped for common control, you can be degrouped if you can demonstrate that your businesses are sufficiently independent. So to give a very, very simple example, um, say that I own a law firm, but I also own a cafe. Okay, yes, they'd be grouped because I own both of them, but the businesses are so distinct and different that it'd be foolish to group them. It's just not sensible. So it's a similar sort of thing here. They tried to argue that, well, we ought to be degrouped if we are grouped, which was a position that NCAT ultimately accepted. The really interesting thing about this case, though, is that they had a number of, um. Uh, there were a number of factors that sort of trended against uh, degrouping. So normally if you can demonstrate that there's no financial dependencies, there's no trading, um, you know, the decisions are being made independently, you're operating in different market segments. You know, you need to sort of demonstrate all of those factors in order to get successful degrouping. The interesting thing here is um, the, in this case both companies were in the furniture, furniture business, but there was a difference. The NCAT basically said that Wynya was more in the sale of furniture to a particular market, whereas, um, the other entity, Vibe, was more in sort of uh, manufacturing and distribution. Um, it was doing some sales but it wasn't a big part of its business. So there was a difference there, There was also evidence to show that Wynya was acting in its own interest. So I think at one point they were subleasing um, premises from Vibe, but decided that, well look, no, this doesn't suit us. So they decided to move on. So there was some evidence that there was a bit of independent thinking, um, that was happening. But on the other hand there was evidence to show that there was a bit of um, uh, like there was some shared Head Office functions and that tends to sort of, uh, sort of tend away from exercise of degrouping. So it's a really interesting case because, um, I've seen lately that State Revenue Office has been quite strict on it. Like we've got one with NCAT at the moment and um, you know, if they see too many common connections between the group, then they'll just say no, we won't degroup these. But in this particular case, despite those common connections, NCAT said that, well, the weight of it tends away from grouping in this situation.

Speaker A: I think the really interesting thing here with this one is that, you know, it's a 5149 type arrangement and uh, I suspect that given the name of the entity, there's some clear reasons why that's done and structured the way it was. And it seemed very clear that they really needed that 49 and the, the, the, the, the services and sort of. Yeah, there were 49, but perhaps there were 49. They're a bit more than 49. Um, and um, and as you said, you know, there was significant connections but they still were degrouped. So I mean, I think, I think it, you know, it does provide um, some hope. It's. These payroll tax degrouping cases are very fact specific. Um, but you know, when, whenever I've been doing payroll tax degree grouping applications, I'm definitely highlighting the cases where, you know, the commissioners exercised the discretion or the tribunals exercised it in the shoes of the commissioner.

Speaker B: As, uh, I mentioned at the beginning, it is somewhat timely because we're seeing a lot of, um, payroll tax activity at the moment, um, not just in Victoria but New South Wales. And I should mention also, payroll tax is largely harmonised across Australia. So even though this was a New South Wales decision, it has relevance in Victoria, it has relevance in Queensland, it has relevance in, in other states. Um, just because the payroll tax rules are largely, largely the same, they've been harmonised. So, um, definitely helpful and uh, certainly one that uh, I'll be quoting in my next payroll tax review.

Speaker A: Um, I guess to sum up, um, you know, we've covered quite a bit of ground, I guess. Just wanted to hear from you Nick, about, you know, we've just started a new financial year probably, probably too soon to start, you know, although it's never too soon, uh, to start looking forward to what you expect. Well, uh, what do you expect to see or what do you think is going to keep you busy, uh, in this new financial year?

Speaker C: Yeah, I mean definitely the hangover from the budget announcements. Uh, we got the, you know, the budget announcements were good timing in that we see nearly every single client when it comes to tax planning. So there was a lot of really positive discussions about what it means for you, how we might navigate it, et cetera. But I imagine we will see some legislation for the uh, 30% tax on trusts and the way that's going to play out over the next six months. I, um, imagine that we'll see some further, you know, guidance, commentary or practical, um, ways forward for Bendel and Division 7A and UPES. Uh, so there's certainly no shortage of things that are happening. But I think planning for uh, the CGT budget changes to kick in, um, you know, starting to think about valuations and what happens there. Do we get one? How do we navigate all of that? Do we need any restructures within our client group? Our advice to clients so far has really been to, you know, with a few exceptions, hold tight and let's see how this plays out. Um, but yeah, there will be no shortage of things.

Speaker A: Definitely an interesting and busy, busy time for everyone in tax.

Speaker B: Absolutely. Yeah. Never been a better time to be a tax lawyer if you.

Speaker A: That is true.

Speaker B: Tax advisor really.

Speaker C: Uh, particularly in the budget there. I don't know how many times simply would have been mentioned, but it's anything but isn't it even just the things we've covered today um, generate so much more complexity whether it's definitional steps in processes or otherwise. Um yeah it is ah an interesting time to be a tax practitioner. Um the complexity seems to be increasing all the time. Um the audit activity seems to also be increasing. You've got the ATO not changing their views but reaffirming views on section hundred A and um, you know approaching FDDT and family trust elections in a way that they haven't necessarily in the past. And it's an interesting time to be a practitioner.

Speaker A: I think that's a great summation uh and also a great affirmation of why it's important to tune into uh tax talks.

Speaker B: Um.

Speaker A: Uh yeah I guess. Uh I just wanted to thank you Nick for being part of this uh episode. Um um really valued your your insights. Um uh and uh yeah thanks again

Speaker C: for being on um you Andrew and Raj for having me. It's been.