Here is the Budget recap no one will write….

Federal Budget 2022 – October Edition         

By Paul Meissner,

Here is the Budget recap no one will write….

 Budget night has a long history in my house with some of my earliest memories were of my Accountant father dissecting the budget.

 Pouring over Budget papers no.2 every budget night is a guilty pleasure and it’s fun finding the big and the small of what’ll affect accounting firms. With almost nothing in this budget for small business, not that that is a bad thing, I’m left to comment more broadly. 

 Here are my 5 budget takeaways of the things that scared me after last night:

 1.      Structural deficit

It’s a term that is more widely used that understood (even by me) but how a first term government fresh off an election win, being the furthest any government can be from an election cannot even announce more saving measures than spending ones makes me honestly question politicians’ ability to manage the public purse. It almost seems like the current environment renders governments (globally) from making tough and fair economic decisions.

 Last night was as close to a ‘bring out your dead’ opportunity budget as you could get. Tax the rich (remove stage 3 tax cuts) and give to the poor (health, NDIS, and housing spending) under the guise of economic management would have hardly been challenged.

 During a period of enormous government debt, while it isn’t beholden on a first term government to solve the problem, surely, we can expect better than to make the deficit worse than announcing more spending that saving to the tune of $10 Billion.

2.      Small Business Representation, or lack there of

Small business mas mentioned 14 times in the budget, but boil that down to remove duplicates for the same purpose and you get 2 initiates out of the whole budget.

 Now, this is fine, it’s not all “what’s in it for me” as I’ll cover later. There is a greater good and significant opportunities for small business that, if our representatives could stop taking selfies long enough to listen, we could try to achieve.

 To see the gymnastics being performed by anyone keen to promote a small business narrative is astounding. 

Industry Bodies

 Individuals find it hard to affect change at scale, and in business we rely on professional bodies and associations to provide the ethical and measured 2-way translation between members needs/experience and how changes to the system affects us.

 What’s disappoints me is this compulsion the bodies have more to remain relevant and keep a seat at the political table than be honest with members. While I understand the need to have a voice to enact change, the lengths our industry representatives go to promote (read suck up to) the decisions of the government of the day and spin them as some amazing achievement for small business is absurd.

 Small business received $18 Million of a total of $36 Billion in announced measures, a record small amount in my living memory.

 If that was all our industry leaders got for their self-indulgent selfies outside parliament house, then they got scammed.

 Business Media

 It’s utterly embarrassing to see the small business landscape through the current media lens of clicks, monetised add revenue and influence of so called “experts”. Those that reduce the budget to a ‘winners vs losers’ debate hurt the chances of real conversation on tax reform and budget repair.

Accountants

 Accountants are the only ones that I can see being able to provide the community with practical knowledge to help businesses navigate the taxation landscape. If only our job wasn’t made harder by the representation bodies or the business media.

3.      The drug of “What’s in it for me”

 Structural deficit, ballooning government debt, significant economic factors affecting our future and the majority of the business media, professional bodies and commentators cannot seem to get past the vanity of the “What’s in it for me” question.

 We are stuck in a cycle of spending addiction seemingly paralysed by any thought of reasonable belt tightening worried what anarchy the great unwashed mobs on social media or tabloid press will whip up.

4.      Election cycles do not allow any long-term planning

 The Australian economy faces all sorts of long-term issues and none of these seemingly can be even remotely addressed in the current system of election cycles.

 Not to harp on it, but how a first term government fresh off an election win, being the furthest any government can be from an election cannot even announce more saving measures than spending ones makes me honestly question politicians’ ability to manage the public purse.

5.      Compliance IS NOT dead (you knew I would mention it)

  The ATO have received $1.9 billion to recoup $5.58 billion in additional revenue and the TPB has received $30.4 million which is expected to recoup $81.9 million.

 Here are the targets:

-          Multinational enterprises, large public and private businesses - $2.85 billion revenue

-          Shadow Economy - $2.59 billion revenue

-          Personal Income Taxation - $674 million revenue

-          High-risk tax practitioners and unregistered preparers - $81.9 million revenue

For the vast (vast) majority of small business accountants, review your ITR deductions going forward, tighten up on the explanations how your claims are ‘reasonable’ and get your s100A & Div 7A house in order and you’ll be fine.

 For any agents in the shadow economy or who are high-risk or unlicenced, then you were in strife anyway and (hopefully) cleaning up that small segment of the market will better the industry overall.

 There is a lot of compliance work coming, be ready and be confident to have a pricing conversation up front the ATO do come knocking. We are ATO whisperers, and our clients will pay for that service.

 Paul Meissner is the Head of Compliance at 5 Ways Accountants and co-host of From the Trenches Real Life in the Accounting Industry

Response: Rebecca Mihalic FCA - When a family trust is not right for a trading entity

In Season 4 Episode 1 Paris Financial Partners and Managing Director of www.Cotchy.io commented that the classic family trust still had a role to play in helping clients save tax.

LISTEN: To the episode

READ: Grant Abbott’s response “How To use deeds to overcome trading trust issues

From the Trenches is committed to showing what real life in the accounting industry is and a key part of that, is sharing differing professional views.

In this response: Rebecca Mihalic, Director at Business Depot Sydney shares trenches level reasons why a the humble family trust does not work for trading businesses.

Views expressed in this article are the authors and we all encourage a positive conversation in the comments below. This article isn’t sponsored by anyone.

When a family trust is not right for a trading entity

It is probably fairly safe to assume that the readers of this are aware of what a family trust is, however just in case: a family trust is essentially a trust that has been established to hold assets or run a business on behalf of a family. Usually, a family member will manage the trust as trustee (or director of a corporate trustee) and the profits are distributed at the discretion of the trustee in accordance with the trust deed. There are no fixed entitlements to distributions in a family trust.  

Although a family trust can be used to run a business, and it can have tax advantages from doing so (via tax effective distributions to entities and individuals), that does not always make it the best vehicle for a business. Much like purchasing assets to get depreciation deductions – you should never do something just for the tax benefit. 

Profits must be distributed. 

While not technically true – the trustee can always choose not to distribute the profits and pay tax at the highest marginal rate, but it is unlikely anyone actually wants to proactively do that.  

So, with that aside the profits of the family trust will usually then be distributed to eligible beneficiaries. It’s this profit distribution that many trustees use to take advantage of family members with lower tax rates if available or sending it off to a bucket company (watch out for Unpaid Present Entitlement issues), as a discretionary trust this can change each year as the trustee sees fit (don’t forget your trustee resolution!)  

However, this process creates two problems in itself being no retained working capital in the business and no fixed entitlement to income to assist with personal lending. 

Retaining working capital requires a work around. 

One of the impacts of distributing profits to beneficiaries is that if the business requires retained profits for working capital, it effectively needs part or all the distributions to be lent back into the trust.  

If these loans come from a bucket company, they are likely to be caught by Division 7A and you will need to comply with those rules as well, just to ensure the trust can use its own business profits to meet its future capital needs.  

Problems with finance 

Whilst I have heard it said that there can be problems accessing funding for family trusts from financial institutions because the structure is complicated, I don’t find this to be a problem specifically for the trust. If the business can pass all other bank requirements, and the bank is educated on the structure, just being in a trust should not necessarily stop it from getting a loan. 

However, a family trust can impact the ability for family members to get finance. No fixed interest in the business means there is no certainty to an individual’s entitlements to profit- especially if that individual is not a trustee or director of the corporate trustee.  

 Consider the adult children of the business founder that work in the business. They are potentially not trustees and cannot determine distributions. They derive all income from the trust, and possibly have their wages “topped up” via a trust distribution, often actually paid in cash. This may happen every year. However as this “top up” is not fixed, most lenders will not include it when determining an individual’s borrowing capacity. This can at times greatly reduce that person’s available credit limits, even though they can afford the loan based on the profit distributions that they are receiving.  

Whereas if the adult children had a fixed interest (via a company or unit trust for example) the lender is far more likely to include their fixed entitlement to profits as part of their income when determining serviceability.   

Multigenerational businesses 

The difficulty in obtaining personal finance for the next generation of the family is not the only issue created by a lack of fixed interest.  

If there are multiple generations of a family working in a business, it is important for their own asset position and estate planning to have an actual stake in the business. A family trust structure means that for most adult beneficiaries working in the business they will have no defined interest in that business, and effectively nothing to then pass on to their own children.  

It is relatively naïve to assume that all families will get along well and will all work just as hard as each other in the same business. And although family trusts are often seen as a great vehicle for a family business (as the business in theory can easily from one generation to the next until it vests), it makes actual estate planning incredibly difficult.  

The reality is not all families get along all the time and it is common to have a family business that not all family members work in. This then becomes complicated when non-working members are part of the beneficiary pool, and a very simple question is asked - who really owns this thing?  

No ability to have others buy in 

If a business is run in a family trust, there is no ability to take on new investors. This means that if the company grows, or changes direction there is no way that you could have a third party buy in to the business. That includes no ability to bring employees on as owners and no option to bring on new business partners that are not beneficiaries per the deed.  

Not every family business will be small and stay small, and not every family business will be passed down to the next generation. Many small businesses in Australia will grow and will employ great people. More and more business owners are looking to their employees as part of the growth of their business and eventual succession plans. This often involves having employees participate in employee share plans, employee share option plans, or just straight buying in. None of these options are available to a family trust.  

Employees aren’t the only people that may want to invest in a business, many SME’s have a great business that may attract third party interest. Someone that is not a family member may want to buy in and contribute capital to help the business continue to grow. Again, this cannot occur in a family trust. 

To allow any investment from outside the family, the business would need to be moved to another entity with all the potential tax issues and headache that those sorts of things bring.   

The ATO is not a fan. 

It is no secret the ATO is not a fan of family trusts. It may be for this reason that trusts aren’t always included in new measures and aren’t always eligible for the same offsets and grants.  This should be considered when looking at operating a business in a family trust. Two current items you cannot take advantage of in a family trust include:  

• Loss carry back tax offset: For any businesses that have been operating in family trusts will suffer from recent losses in the 2021 and/or 2022 financial years, there is no ability to apply the loss back measures as they are not eligible entities.  

• Research and development tax incentives: Again, family trusts will not be eligible for these incentives that provide a tax offset for certain research and development activities. 

Expiration of Trusts 

Whilst not high on my list of reasons not to, as it is probably not very common, there is a concern about running a business in an entity that has a defined expiration date. Due to the “rule against perpetuities” most trusts have a finite date that they will vest with many being 80 years.  

I know that 80 years sounds like a long time and many SMEs don’t quite make it that far, however I am seeing more and more businesses (and have a quite a few as clients) that are hitting that 40-50 year mark. Now in the case of a family business, it will only take one more generation for these businesses to hit their vesting date, at which point the trust's assets will need to be addressed per the deed.  

What this means for the trust and the beneficiaries will vary depending on the business, its assets etc, but it can have considerable tax implications. 

Trusts are not separate legal entities. 

I am only mentioning this for completeness, but a trust in not a separate legal entity like a company is. The trustee of the trust is the legal entity who owns the assets and operates the business. This also means the trustee is responsible for the debts and liabilities of the trust, which is problematic and can be risky if the trustee is an individual. However, I acknowledge that this is fairly easy to mitigate by using a corporate trustee.  

Does this mean I never use family trusts? 

 Family trusts have their place, and they absolutely exist in my client base (mostly as investment vehicles). I do believe however that they are not best suited to run a business for the myriad of reasons listed above and when inheriting these kinds of clients from other accountants we are often faced with the challenge of having to move the business out of the trust as the structure is no longer (or never was) fit for purpose.  

When looking at the kind of entity to setup to run a business, family trusts really only have a place when you are absolutely sure that the business will: 

• Have a short shelf life. 

• Unlikely to grow or need working capital to be reinvested. 

• Have no need or desire for additional investors or owners. 

• Have enough adult beneficiaries with low tax thresholds to make the effort worth it. 

• Have no need for beneficiaries to show a defined interest in ownership. 

Otherwise, you may find corporate structure is a better option.  

I personally have been pleasantly surprised multiple times over the years at what my clients have been able to achieve in their businesses. The entrepreneurial spirit runs strong in Australia, as does opportunity for dedicated business owners and although none of us have crystal balls, we shouldn’t discount our client’s capacity for growth. Just because something might start small it may not stay that way and we should always consider more than just tax savings when establishing structures for trading entities.  

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 About the author

Rebecca Mihalic is an Australian Registered Tax Agent, a member of the Chartered Accountants Australian and New Zealand, and a member of the Institute of Public Accountants. She has been working in public practice since 2003. Rebecca is a director of the businessDEPOT Sydney operations and is the Head of Accounting (APAC) for Practice Ignition. 

Response: Grant Abbott - How To: Use Deeds to Overcome Trading Trust Issues

In Season 4 Episode 1 Paris Financial Partners and Managing Director of www.Cotchy.io commented that the classic family trust still had a role to play in helping clients save tax.

LISTEN to the Episode

READ: Rebecca Mihalic’s response “When a family trust is not right for a trading entity@

From the Trenches is committed to showing what real life in the accounting industry ia and a key part of that, is sharing differing professional views.

In this response: Grant Abbott, founder of LightyearDocs shares trenches level reasons why a the humble family trust can work for trading businesses.

Views expressed in this article are the authors and we all encourage a positive conversation in the comments below. This article isn’t sponsored by anyone.

Trading Trusts are great but Leading Member Discretionary Trusts are the bees knees

1.       What is a Discretionary Trust really?

A discretionary trust enables the Trustee of the Trust to:

1. Distribute capital to a range of beneficiaries (a person receiving a capital payment or asset of the trust);

2. Distribute income to beneficiaries including streaming specific types of income such as dividends, capital gains, interest and foreign income; and

3. Conduct business and other operations including investment for the benefit of the beneficiaries of the Trust.

In short, the Trustee has a wide range of discretion which it exercises generally each year, no later than 30 June so that the Trustee is not taxed on the trust’s income at 45%.  By streaming income and specific types of income enables the Trustee to spread the income around ensuring that the tax liability is spread across the family thereby lowering overall family average tax rates.  Plus having assets in a Trust protects them from beneficiary and trustee creditors.

Running a business through a trading trust provides a range of options, opportunities, tax benefits, asset protection and estate planning benefits that a company will never have.  BUT the discretionary trusts that are used by most accountants are weak as they have no line of succession and do not look after bloodline beneficiaries only.  And these are important to your client if you asked them that.

2.       The most important part of a Trust that companies can never have and accountants forget

In a normal, off the shelf trust deed a person or company, named as the Appointor has the power to appoint and remove the Trustee.  This may include themselves.  In essence they control the Trust from behind the veil of the Trustee.

It is important to read that again.  It is the Appointor that really controls the trust as they can hire and fire the Trustee.  Like a director of a play backstage, the trustee and beneficiaries are the performers but the Appointor is the one who really controls the whole play.

However there are limitations with the Appointor being in control, not from the control perspective but we see too often no real time, resources or management flowing into appointorship and how is to be the successor appointor, the second successor appointor and so on down the chain of appointors. After all, with all your deeds:

1. What happens if the appointor dies or loses mental capacity?  Is there a successor appointor available and what happens if they are dead?  Is there a second successor appointor? 

2. What happens if the appointor goes bankrupt?  This may limit their capacity to act financially and also potentially put the Discretionary Trust under attack.

3. Who will be the appointor in fifty years’ time?

4. If there is a divorce and both spouses are appointors and trustees, expect tens of thousands of dollars to be torn up as both parties fight for control – which cannot be achieved unless going to the Supreme Court.  And if a trading business will it be able to continue to trade in warring litigation?

Succession is the weakest link of many current discretionary and family trusts in Australia. But it does not have to be this way.

5.       A Leading Member Family Discretionary Trust

A Leading Member Family Discretionary Trust focuses on the key role of Appointors and also the Trustee of the Fund.  Think if you will, of all the Trusts that the Queen Elizabeth II of England has, and there are many.  If something happens to her such as death or disability, there can be no indecision, no insecurity and no uncertainty.  If something happens to the Queen the Leading Membership of the Trusts passes to the next in line for the Crown – currently Prince Charles then Prince William.

With a Leading Member Discretionary Trust, once the first Leading Member Appointor is appointed, the Leading Member:

• Controls who can be the Trustee, including the appointment and removal of the Trustee;

• Has the capacity to veto many of the decisions of the Trustee, much the same as the Queen has power to veto decisions of the English Parliament;

• Can determine when the Trust is to be wound up and also through their veto power, which beneficiaries are to benefit from the Trust and in what case;

• Importantly limit the beneficiaries to lineage of the Leading Member or those persons or entities at the discretion of the Leading Member.

6.       Leading Member Succession – the Royal Key

The succession in the monarchy in England and many countries where there is a monarchy is well settled.  Likewise, the Leading Member Family Discretionary Trust provides for a pre-determined succession plan going down one, two or more generations.  It is an important decision to be made up front as a families wealth and control is in the hands of the Leading Member.

In planning for a Leading Member Family Discretionary Trust, as a protection for all the family’s wealth in the Trust, the only question that needs to be asked is:  Who is the next Leading Member? Who then?  Who then?  Who then?

7.       The How To?

If you already have a Discretionary Trust it will need to be carefully upgraded to ensure that the benefits of Leading Membership are embedded into the Trust and that a new Trust is not created.  This would result in a closure of the old Trust and potential capital gains tax and stamp duty issues with the transfer of existing assets of the Trust shifted to the new Trust. 

However the Commissioner of Taxation has released a tax ruling on resettlements and provided the upgrade of the deed is completed in accordance with the variation or deed amendment clause then there should be no resettlement and no capital gains tax or stamp duty issues.  The Commissioners ruling is TD2012/21 and a must for all accountants to read to put to bed the myth that a minor change to a trust deed is a resettlement.  In the Commissioner’s view a trust can change beneficiaries, trustee, appointor, vesting date and powers and still not give rise to a new trust.  So upgrading from a discretionary trust to a Leading Member Discretionary Trust can be achieved without resettlement. Upgrading can be completed on the LightYear Docs portal at www.lightyeardocs.com.au

Now if it is a new Leading Member Trust then there are a number of important tasks to be completed by us:

1. Determine the Leading Member and successor Leading Members;

2. Determine who is the Trustee – this is the Leading Members decision and generally is a company;

3. Place any limitations on who can be a beneficiary such as only “lineage of any Leading Member or the former Leading Member”

4. Determine who is the settlor of the Trust – a task we will do for you as the Settlor contributes $10 to set up the Trust at law but has no further active control and is prevented from being a Trustee, Leading Member or beneficiary;

5. Build the Leading Member Trust Deed on the LightYear Docs portal;

6. Apply for an Australian Business Number and Tax File Number;

7. Set up a bank account for the Trust

8. Get into the business of being a Trustee and investing the monies of the Trust or running a business.