New Tax? Debt-Equity Rules

Interesting and potentially disturbing article in Herald Sun money section Monday:

Herald Sun , 16-12-02 , Ed: 1 - FIRST , Pg: 050 , 119 words , MONEY
FAMILY businesses will be adversely impacted by new tax laws that come into effect on January 1. The new laws, known as the debt-equity rules, will apply to most loans made by shareholders to their own private company. Under these rules when a company repays that loan it will be taxed as a dividend in the shareholders hands.
Does anybody have more in depth info on this? Tried to search on the ATO site for any further reference but no luck so far.

The thrust of the article suggested that if a shareholder loans his own company interest free money then repays the loan, the repayment will be treated as a dividend payment.

Could this mean that if I used equity from my home (or cash etc) as a loan to the company trustee of my family trust for a property deposit, then wanted it paid back to me later, that it would constitute a taxable dividend? Would I then have to charge my trustee company loan interest to avoid this - with the interest obviously adding to my personal tax liabilty.

I would appreciate the views of anybody who has more in depth knowledge of this new law and it's potential implications (Dale maybe??).

Bill
 
Hi Bill

Im not a tax expert, but a bit of a cynic when it comes to tax laws. Mostly, but not entirely the when someting new is introduced it is commonly NOT in favour of the tax payer.

Ta

Rolf
 
Thanks for the URL Kim but it does not seem to want to let me in. Typical ATO - give you a teaser and make you find out the facts the hard way!!

Rolf like you I get a bit cynical about new tax laws - I assume they are going to hurt my hip pocket unless proven other wise. Part of the problem with tax law is not just what is written but a little factor called the law of UNINTENDED CONSEQUENCES - this seems to bite when least expected.

Bill
 
Hi Bill,
I saw this article too and emailed my accountant straight away. Yesterday he sent me a copy of a fax from National tax and Accountants Association dated 17.12.02. There is a paragraph in this letter saying "In another win for taxpayers the Minister for Revenue and Assistant Treasurer, Senator Coonan, has announced that the application of the new debt equity lawsto interest free at calls loansto companies from associates will be delayed 18 months to 1 July 2004. These draconian laws were due to apply to theses types of loans from 1.01.03"

These news calmed me down a lot!

As my accountant said we have to make sure that any loan to the company is done via agreement stating the repayments schedule and interest rate. As our loans to the company usually come from LOC there is interest which is tax deductible to us personally, so the whole arrangement should have nil effect on personal taxable income ( unless you charging the company higher interest rate than one of LOC).

That's about all I know.
Irina
 
Thanks Irina - news of a delay is helpful as that gives more time to prepare future paperwork to avoid problems.

Aceyducey - It would be hard for the ATO to distinguish between a company operating for it's own profit and a trustee company that is generating income for my family trust. As far as the ATO is concerned I want to be very careful. You hear too many stories of ATO internal inconsistencies.

I am also looking for opinions on the potential pitfalls and implications of this tax change if or when it does occur.

Bill
 

Sim

Administrator
Originally posted by wbthom
It would be hard for the ATO to distinguish between a company operating for it's own profit and a trustee company that is generating income for my family trust.

Actually it should be quite easy to distinguish. A trustee company should not be a "trading" company. That is - it should not have it's own income or assets.

Don't forget that the tax return is prepared for the trust, not for the trustee !
 
Sorry if there was confusion Sim - you are right in that a trustee is best if it is non-trading. However I have a problem in that my family trust originally had a prior trustee. The current trustee company was running a business before it took over as trustee. It was a merge done for expediency and cashflow at a time when things could have been better. The problem is being cleared up by divesting pure company assets but I am concerned about Tax rulings that may possibly place me in a vulnerable position

Bill
 

Sim

Administrator
Ahh... a potentially tricky situation - I can see where the concerns would be. I hope you are getting some professional advice !
 
Thanks Sim - yes potentially tricky. Problems arose due to advice from a large corporate accounting firm where you struggled to see the same person each time you contacted them. Created some expensive mistakes. Working with a local accountant who has his own property investments to solve the problems. Have also done some heavy reading such as Renton's book on trusts.

Do some people with trusts operate businesses through them for cashflow? Do you have separate trusts for investing to avoid liability issues?

Bill
 

Sim

Administrator
One suggested structure for running a business is to have a separate company as trustee from the trading company, with shares in the trading company actually owned by your trust.

The structure would be:

Company XYZ (trading)

Trust ABC (shareholder in Company XYZ)

Company DEF (as trustee for Trust ABC)

You (shareholder of DEF, Director of DEF, Director of XYZ)

... and if there is intellectual property involved - that should actually be owned by a trust as well - so that the trading company only lisences the intellectualy property from the trust - that way if the trading entity gets into trouble, your intellectual property is protected.

Please not that this is NOT a professional opinion, and may actually be incorrect (but I tried to remember how it was done !) - this stuff really needs some professional advice !!!
 
Thanks Sim - you have an excellent concept there; gives me some good ideas for future restructuring. May need some polishing to allow for a parallel structure I have in place but it should fly and as you noted professional advise should pick up any problems. The laugh is it was "professional advice" that got me in a tangle in the first place. As Rabbie Burnes said "what a tangled web we weave...."

Bill
 
Originally posted by wbthom
As Rabbie Burnes said "what a tangled web we weave...."

Hi Bill!!

Who's Rabbie Burnes?

and, just as a by-the-way, it was Sir Walter Scott who said "What a tangled web we weave, when first we practice to deceive".

I remember this because it was first told to me by one of my high school teachers. He was extolling the virtues of honesty, and I have held this to heart since.

The other favourite quote of mine is "Do what you fear most".

When assigning priorities to tasks I find it best to do the one I least want to do first. Whether that be the most difficult or the most embarrassing, or the one that I know will be unpleasant. That way it's done, and usually isn't as bad as I thought it was going to be!! This also helps to get all the others done quickly as there is no tendency to procrastination.

Thanks for reminding me of these quotes Bill!!

Have a great new year.

asy :D
 
What can I say Asy - you're memory is fantastic as usual!!! Just wait till you get to my age and are suffering from post Christmas celebrations!!

The quote I accidently wrote was from Sir Walter Scott's Marmion as you mentioned.

The one I meant to write was:

" The best laid schemes o' mice an' men
Gang aft agley,"

This is from a poem called "To a mouse" by the famous 18th century scottish poet - Robert Burns

If you are interested you can read more here:

www.library.utoronto.ca/utel/rp/authors/burns.html

Hope all on the board have a great new year. I think John Dunlop's poem "Here's to the Year That's Awa" sums up my feelings for the friends I have gained through this board in the last year.

"Here's to the friends we can trust
When the storms of adversity blaw;
May they live in our song and be nearest our heart,
Nor depart like the year that's awa;"

regards

Bill
 
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