June 2026 Updates

Velocity Legal (00:03.224)
This is Tax Talks, Australia's tax news podcast for accountants and tax practitioners. The podcast designed to help you grow your practice.

Velocity Legal (00:15.15)
Welcome to Tax Talks episode three. I'm Rajan Verma. I'm Andrew Henshaw. Rajan, we've another jam-packed agenda here. so many updates in the last month, which excited to run through. Yeah, it's been a really good time to actually I guess take over tax talks because we've had an endless number of things to talk about. so today we're joined by our guest Nick Schaefer, his partner at PGP Consulting.

Nick, you routinely advise you know, high wealth individuals, private clients and businesses, startups, any other sort of particular areas or specialties that you you sort of have in practice? no, that pretty much covers it. We do yeah, a lot of work with private businesses, you know, emerging family offices and and wealthy families. That's sort of our bread and butter client. And you're absolutely right. There is I feel like for a while we had

Not too much happening on the tax landscape, but the last twelve or so months it's just been nonstop. yeah, absolutely. And I think the last three months has been absolutely turbocharged. We had budget speculation, budget fallout, and then like this is really sort of a continuation of that budget fallout plus a couple of big cases as well. Yeah, well that's right. And in in amongst the federal budget and all those changes, we finally got our high court decision in Bendel.

Which I think is probably a good starting point for today's episode. Absolutely. Let's get let's get stuck into Bendel and what it means. So I think it look I think everyone knows what Bendel was about, basically concerned UPEs that were from a trust to a to a related company. and those UPEs were obviously they weren't put on DIV 7A terms or they weren't compliant with what the ATO's position was at the time. this case went through the whole system, went through the AAT, federal court, full federal court.

High court in the end. And interestingly, the ATO lost every step of the way. But obviously, being such a big case, the ATO wanted to wanted to take it right to the very end. And as I think everyone knows, the the ATO ultimately lost. 5-2. 5-2. So pretty remarkable. We've sort of been laboring under the ATO's sort of position in their original practice statements from 2010 and tax ruling and then.

Velocity Legal (02:33.794)
the revised tax ruling in in twenty twenty two, only to discover sixteen years later that they were they were wrong all along. I'm trying to think of it. Can you think of any situation where this has happened before where there's been ATO has taken it through all of the courts and lost every step of the way. And if we add up the the tallies, I believe it was the AAT was two zero, the the the federal court was three zero, and and and the

High court was five two, so we've got ten ten two at the end of it. But c can either of you think of any example where we've had a case that's l literally lost every step of the way? 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. Pretty rare, isn't it? I mean, that 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

Guess you can't settle when it's it's been been your position for, you know, going on twenty years. And it's such a consequential 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 to lose every step of the way and lose by a lot, I think says a lot. Yeah, absolutely. really does, yeah.

Maybe we dive into a little bit of detail on on, you know, what the high courts actually said, and then we turn to, I guess, like what does it mean practically? I mean, for me, I spent, you know, we've we've both spoken and and and and spent a bit of time sort of trying to unpack some of the technical 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 to get a final position on that. I think I think it's clear.

Great for for Bendel. you know, Division 7A doesn't apply to those UPEs. But from my read of it, it's sort of like a very clear demarcation of does this mean that all UPEs are always out forever in time? Or, you know, is it really what does a trusted say? What does a minutes say, what's been done since? What what are your thoughts, Rajan? I mean it's interesting because, you know,

Velocity Legal (04:55.244)
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 in terms of the trusteed. I mean, especially like it's not just Div 7A, but the ATO has been quite active in 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. even things like Section 100A, which are specifically mentioned in the decision impact statement. So you're right, it's not, it's not like a clear pass with UPEs. It it really isn't. Yeah, so I mean they've essentially said in the in the they've they've now released the decision impact statement and they've said, right, okay, high courts decided that essentially if you've done nothing.

That's not going to be caught. Nick, we were chatting about this earlier. 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 belief in the law and have put them on division 7a turns, you're kind of stuck. 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 and taking the ATO on for all of those years and then through the courts, that's not really the way we operate with our clients generally. We do, and I think most practitioners have f tried to follow in the spirit of what the ATO have said. 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 they're not tax law loan agreements. They are

Commercial law loan agreements, which means they are what they are now. And the ATO, I do think it was a cheeky comment in there, or certainly one that made me flash red a little bit, was you know, it's 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.

Velocity Legal (07:20.768)
made EA somewhat irrelevant. They disputed that and they continued pursuing this this way forward. To now get to this point, it it is a little bit hard to swallow. I think it would have been nicer if they said something like, you know, we yeah, we've pushed this view for 15 years and, you know, we made everyone comply and you know, that's wrong, but you know, it is what it is. And you know, so be it.

Yeah. I guess the thing also is like it's how we got here. Like, I mean the ATO 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. I mean you I think started as a one on nine RB application. Yeah, so sort sort sort exercise the commissioner's discretion to disregard the dividend. I think there was even a potential settlement offers to look, we'll pay the tax if you if you release the penalties and interest.

And the HEO so dog-mindedly said, no, 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 so decisively, I I think a test case could have been run years ago. I think let's let's unpack this into I guess I guess I 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 you've changed it into a loan.

you know, the financials now book it as a loan and you've you've traded on Division Seven A. I I think interesting your thoughts. It's really sort of business as usual, really, for that category, right? For that category, I I'm not sure we have a choice. you know, it's it's business as usual. And, you know, in in some senses, the the way we administer a lot of our private groups, often the cash is flowing to those corporate beneficiaries anyway.

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 or something like that. So again, it's I I'm not sure we have a choice and unless you guys know something I don't, but but ultimately it is. I think it's business as usual. Yeah. Yeah. And then I think the next category is i is really that do nothing type situation, like the Bendel type situation that

Velocity Legal (09:45.75)
You know, what's your minutes say? But but basically you haven't done anything at all. Now, Rajam how many clients are like that. It's it's it's it's very small, the the amount that that have literally done done nothing. But I mean, it's your view that I mean, as as close as you can to rely on Bendel that you know, you'd think that that category is 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.

Then it falls within within Bendel. And the really interesting thing, that the timing of this decision and even the decision impact statement, which came out just before 30 June, you know, you could have, like people had to make their resolutions for 30 June 2026, which means it could have been your 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, which is, you know, due to come in on the first of July 2028. So Bendel may not have significant consequences in the long term. but certainly for this year, or at least the year just past, you know, you could you, you know, on the strength of Bendel, you could have made a company po presently entitled and then done nothing else. 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? Like that. Something like that. We had some due dates that were the 12th of June. Now, I can none none of our clients are sort of pushing that. I think for those UPEs, it takes a certain obviously Bender was on foot and it had lost twice by then. So there there are a number of particularly savvy clients who who said, I'd prefer to wait.

but for the vast majority of clients, it 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 UPEs are on Division 7A terms. And then then you look to 26, and 26 will be an interesting one. And and I imagine we'll see a lot more guidance come out over the next.

Velocity Legal (12:08.184)
piece of time between now and lodgement date for the 26 tax returns, as to exactly how practitioners are going to handle that. I agree. so I guess on that on that category two, you know, yes, not 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 the probably the most interesting category is what I sort of call category three, where hasn't been converted to a loan.

But we haven't quite done nothing. Perhaps, you know, it's a subtrust arrangement, or they've, you know, they've 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? I I think no one really knows. Yeah. I mean the the ATO decision impact statement makes it clear that you should I think to be on all four with Bendel, you had to have been the UP and nothing else. So not even a subtrust.

Well, I think with Subtrust they said that if it if it comes off the subtrust, then you're potentially in Bendel territory at that point in time. That that was my understanding that it sort of goes into subtrust and then comes out after seven years and and is theoretically still a UPE unless you do something with it that end that UP. Yeah. I I I think that's that's my sort of view. And reading that n 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, subtrust arrangement, things like that, that that you you you're probably still in that in that even that's got a limited lifespan though, because we don't have subtrust concept really anymore. So was it twenty eighteen subtrusts popped out last year? Yeah. And and it'll be twenty nineteen, and then you've got up to twenty twenty three if you if you did subtrusts all the way through. Yeah. I think what you'll find and be interested to get your view on this, Nick, is that

I 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 even if you wanted to run that that argument, well, you'd have an EA issue anyway. I suspect for a lot of taxpayers and a lot of advisors, they'd probably just want to keep it as per the status quo anyway, right? Well that to date, that's been our firm's approach is keep it per the status quo. So where we had used subtrusts in the past.

Velocity Legal (14:35.998)
we've been managing division sorry, subdivision EA of Division 7A. 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. where we've converted or where the cash has gone out, we may have made the diff decision to convert those to Division 7A loans to to still stay within all the all of the rules. So as it stands right now, you know, I my view.

from from a non-tax lawyer point of view is that there is sufficient uncertainty about how 100A, we know how EA applies, but how 100A will apply reimbursement agreements that we are likely to go forward, keeping a a keen ear out for the interpretations and advice that comes out over the next three to six months. but we're but we're pushing forward, you know, with as status quo.

to make sure clients have certainty. And I think that's a really important thing. We'd we don't want to there we have some clients who are particularly savvy and can make informed decisions about what we do, but 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 to apply the status quo. Yeah. I think there's there's one other sort of interesting category to think about, and those people that got got done under Dipp7As, under the under the Commissioner's rules.

So they didn't get 109 RB relief. They didn't put it on Div Seven A loan terms. They literally just had a UPA and they were assessed as a as a deemed dividend. And what the ATO said about that under the dis decision impact statement is they've said, well, you could you could basically apply for 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.

So that'll be interesting. I don't know how many people this will affect because I think most most accountants pretty savvy and they they sort of you know followed the ATO rules to avoid deemed dividends, but there there'll be a few, I suspect, that I think there'll be massive backlog. I mean, I know that there's backlog of of of audits and reviews that this this issue turns that you know, that they've been paused because of this. So I mean there's that backlog, but then if there's all these other taxpayers.

Velocity Legal (16:57.166)
Coming forward and saying, you know, this assessment was wrong essentially. imagine there's a bit it'd be a fair bit of work there to well, and it goes back it goes back to 2010, like it 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. Yeah, that's right. I'm still angry. Still angry and I want my money back. Yeah. Yeah. I think the interesting thing will come about, you know, the Section Hundred A stuff to your point, Nick, about, you know, will there be

I'm not I'm not hopeful that there will be and I'm not optimistic that there will be anything further because I think I think 100 A has been sort of done to death. but there's still going to be that risk that look, if the money's not paid, w 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 it's sort of like, well

If your long term play isn't actually to put the money in the company, you you're probably in risky territory anyway. Yeah. And I I know a hundred A has been done to death, but I as a as a non-legal practitioner, I still feel like there's a lot of uncertainty about the specifics and it's 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?

That that is unclear to me still. I agree. unfortunately, if the the the time period on on Bendel and UPEs is anything to go by, you know, it may be a very, very long time before we get anything like that. I I guess the other thing too, overlaying all this, the recent budget announcement with you know the trustee minimum tax thirty percent. I 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 whether it will even come in. But assuming it does, I wonder that some of these integrity measures, they might lose their sting, you know. They might not need them anymore. Well, I I don't I don't love it. It is somewhat elegant in the way it's just

Velocity Legal (19:18.306)
destroyed all of these different aspects that caused a lot of complexity for trusts. 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 and deal with a bit redundant because you've got this 30% tax, no more distributions to corporates. There's there's something

Elegant in 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. Flips the board up. Exactly. Well, they're all queens, just so you got nowhere to go. well, I guess that's probably a good, a good segue into I guess sort of government announcements and and and legislative changes. And it's a bit interesting because you know, episode two, we

We unpacked the budget and there was a lot there, but but somehow we have a whole round of additional things now to unpack. It's really interesting. I mean, obviously there's been so much so many questions, political blowback from the announcements, particularly the startup or the memes of Albanese being the 47% equity owner. I think it's prompted a bit of a rethink on you know, some of these measures. Damage control might be another word as well. Yes, yeah, yeah.

Government calls a consultation, but let's be let's be honest, you you you consult before you do things, not after. But in any event, what's happened since we last spoke about these measures is legislation's gone through now. So this is in respect of the CGT and negative gearing changes. but they didn't go through that smoothly. obviously some deals were deals were done to get it across the line.

I think one one of those things was about the sort of LRBAs, the limited recourse borrowing arrangements for SMSFs. there was also the issue around 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 and how they might sort of soften the CGT blow for them.

Velocity Legal (21:34.156)
Yeah. So well those are three three points exactly. That I mean the but the the we talked about last time that the 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. but let's unpack those three those three issues to a two are CGT related and and one is the the the L RBAs. Perhaps we'll start with the L R BAs because that's a sort of a bit more of a standalone topic.

Yeah. So I must admit, I think I was I was I was when I first heard the announcement in 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 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.

But it's just residential property. You can't use LIBAs anymore. 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. That's a good point. One of, you know, I there's essentially a whole industry built on or a whole subsection of

Accounting, wealth advisory, and you know, buyers advocates built on selling new residential apartments normally off the plan to SMSFs using LRBAs. Well their industry just died overnight. I couldn't agree. More the the Australian had a stat that 25% of off-the-plan sales were to SMSFs. maybe not all of them use LRBAs, but that's to me that goes almost directly against the stated policy agenda.

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 the new residential builds have this choice whether to apply indexation or fifty percent discount, carve out from negative gearing as well, but but when we come to the LRBAs, there's not a there's not a carve 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.

Velocity Legal (23:59.224)
So it it's just an interesting element of that policy. The the interesting thing is that this wasn't something that was announced previously. So at least, you know, that feedback could have been provided. It's it's already in the in the legislation. so I'm not sure how easy it's going to be. Because I I mean it makes complete sense. I I was sort of thinking when I when I saw that announcement that I don't get many clients approaching me asking me about, you know, LRBAs for.

residential property. But it 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 super self-managed super fund. Because the problem is once you do that, you can't use it yourself. Yes, yeah. It kind of doesn't there's an element of of yeah, misleading the or you don't get what you want out of it. That's right. So people to so it tends to be more limited to like business real property. You know, 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. It's such a good wealth building strategy. Cause then, you know, 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 fifteen or twenty years. And if you are retired and in retirement phase, the gains for the entire period on that property are tax free. So thank thankfully that's still a strategy. you can s you can do that. But

Yeah, I I guess I hadn't appreciated that a lot of off-the-plant sales were being made to SMSFs. Yeah. Which I think is is probably not, you know, I don't think necessarily the business clients are the ones that are going into that. It it is more of a retail product that gets that gets pushed on people. Yeah. Yeah. Yeah. Yep. Well that's so that's number one. number two, small business.

CGT concessions. Okay. So this one I can have a good old rant about. I'm sure we all will. But basically, you know, I guess some of the some of the feedback was you know, these these measures are going to completely destroy small business, you know, especially if you don't have cot 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 you've got no cost based in your goodwill, which is where your main capital gain comes from. So

Velocity Legal (26:16.116)
to sort of soften the blow on that, the government then said, Okay, well what we're going to do is we're going to increase the turnover threshold for access to the active asset reduction. So the the extra 50%. I say extra. Now the 50%. So ordinarily it's two million dollars to get into the concessions. And I I might say also that that turnover threshold hasn't changed in a very long time. Like

What, 10, 15 years for as long as I practice? 2007, I believe. 2007, right? Yeah. It's like two million dollars in 2007. It's not 20 years. It's not $2 million in t 2026. So that's that's something that should have changed anyway. so they've lifted that to 10 million, but only for that concession, only for the the 50% reduction, not for any of the other concessions. 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 particularly helpful. passable reasons, I'll let you explain, Andrew. Yeah, well, I mean, I I yeah, I guess to that point that that so we've got the small business concessions at the moment. We've got the they've got two different entry paths. One is the two million turnover, which also requires you be carrying on a business. And then on the other side we've got the the six million net asset value.

I guess for me, first point is that so so really we're talking about businesses. So so we're talking about situations where you're carrying on a business, which typically means it's the is a business sale, not a share sale. Not always, but typically. And you've got turnover between two and nine point nine nine nine million. Now I I think look, I'll ask you this as well, Nick, but

Velocity Legal (28:36.078)
Typically in that situation where there's revenue between 2 million and 9.99, you you you're probably meeting the six million net asset value test, unless you've got a lot of other wealth that's unrelated to the you do if you're talking about a business valuation, you're saying your your value's below six most of the time in that situation anyway, right? You'd think so. You know, if you're turning over $10 million and you get even 20% out the back, that's two million dollars at a three multiple is six. Maybe.

Yeah. You're kind of maybe there or thereabouts. 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. You know, the 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. and we'll get to the next bit of the announcement or the 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. so they may not end up owning even twenty percent. They th they have trouble meeting the the first set of criteria.

Yes. whether it's yeah, be 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 of those more sort of startups or innovative businesses, a lot of them just fall straight without out of this anyway. it's yeah, it's it's gonna be very niche this particular

I'll take an example just to explain like even where it is relevant. Let's say you got, okay, company carries on a business, turnover is $5 million. There's a business sale, makes them makes, let's say, a million dollar capital gain. And let's just assume that, you know, the the stakeholder tests are met and they can't meet the six million test. so they've got the one million dollar capital gain, no discount, no other concessions other than the active asset reduction.

Velocity Legal (31:03.884)
So the the $1 million capital gain goes to $500,000. you pay tax the corporate rate on the $500,000. But what happens to the untaxed amount? I think you know the answer to this, Rajan. It's stuck. the problem is that how do you get it out of the company? you know, if you're gonna 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 ranking credits because it's untaxed.

So it comes out as an unfranked dividend, and then the shareholder ends up paying full tax on it anyway. So effectively you've lost the benefit of the fifth 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 that helps, but it doesn't, even that is not a tax-free exit.

There is still tax on that. And that shouldn't be the standard path that we're expected to follow necessarily either. That that's a relatively complex path. Absolutely. 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. So that 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. and then two.

It's really it's really like an instant asset write-off type sugar hit to the company, but the second the money wants to come out, you're gonna have the you're gonna pay the tax basically at that at that time. Probably. probably at that time. That's right. 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 it's not subject to assessment in the trust. And the

Carve-outs that they have to CGT event E4, which 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 were adjustments for that. 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.

Velocity Legal (33:26.626)
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 is the best. And if you can't get that, then maybe you use the retirement exemption. Yeah. Because they let you get the money out a lot more easily. and we just completely try we we tend to sidestep the 50% reduction. So making it easy to claim, as you've said, I think it's a bit niche. I think it will work for some people, but not for not for many that we deal with. And importantly, it sounds good.

as a media grab. Yeah. It sounds really good if you don't understand the technicality. Right. It sounds good when you announce it. the practicalities can come later. Yeah. And to me, like, you know, there's all these kind of weird loophole y type niche type situations where okay, you say we say that you generally can't apply the turnover test to a to an equity sale, but there are situations where the taxpayer, the sh the the shareholder is carrying on a business, 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. but yeah, to it it's completely hotchpotch. It hasn't been thought out well. but here we are. Yeah. And I don't and I don't think it will actually benefit that many people in the end. No, I don't think so. Yeah. Would it be far more benefit to just look at the

original thresholds that haven't been indexed for twenty years. Just index those. That's all you needed to do. That's right. But no. Yep. Said we've made it more complex now because we've got a separate threshold for one of the concessions, but not the other one. Yes. Yeah. Yeah. But all the other basic conditions still apply, as you mentioned. So you know, you've still got to work through those to even get to the active asset reduction. Yep. Well, let's move on to the to to to the last one, which is perhaps well it's possibly the most

intriguing one I think and and and it's this innovative business CGT concession. Now so to the points we've we've 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

Velocity Legal (35:52.64)
And then, you know, we had the forty seven percent memes and all this other stuff as a result of that. So this appears to be a bit of an attempt to sort of

Put a bit of ground back on on that and and give some s sort of basically a 50% discount in those type of in in certain situations where this this innovative business threshold is met. yeah. Thought thoughts on it just at a high level before we go into the the details? Kind of felt like a bit like reinventing the wheel. I think that.

You know, there are conditions to get this, you know. And again, this is still at proposal stage. So I think the consultation period closes on the 10th of July, from memory. so at least on this one, at least they're doing the right thing of actually asking asking the industry before they go ahead and legislate it. but basically the what what what's been proposed by Treasury is that, you know, effectively there's gotta be you know.

Company that's less than 10 years old, $50 million turnover cap. There's a potential extension to 15 years for certain biotech companies and whatnot that might need a bit longer to commercialize their products. The interesting thing is the the like the employer share scheme rules. Like they have provisions that deal with startups. And they were, you know, you you 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 like a bit of reinventing the wheel. To me, it's like you got a pot of boiling water on the stove, and you're gonna get a few spices off the rack. you're gonna put a bit of EsIC, early stage innovation company flavor, you put that in. 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

Velocity Legal (37:53.022)
R and D. R and D, yeah. Put that in that flavor it gives Mix it all together. That's the flavor it gives me is is a bit of R and D because you 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 it again, it's another layer of complexity over what is a really complex area in any case. Yeah.

Yeah, it's yeah, look, there's I mean, there's there's a number of things in this in this consultation paper. This is actually a pretty short consultation paper. so I'm not really sure it's that much of a consultation, but essentially it's it's sort of looking at equity issues. So so that's the first point. It's gonna be an equity issue. there's this l this cap of a of a $10 million capital gain. And so that's sort of the maximum amount that this can apply to.

10 years, company can't be more than 10 years old generally, 50 million revenue. and and then this kind of unknown about innovative business. And, you know, what does that mean? Yeah, it's hard. You 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 leave anything that

Can pass some sort of active asset criteria in the old system. Well, that's I mean, it's to your point, Nick, about the the you know, the small business concessions. They only can 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 chip over 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. We've 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 we genuinely had conversations with the per the purchaser about buying for a lower price. Because does that like it? You get a better after tax outcome. And neither of them ended up going ahead for various other reasons, but that

Velocity Legal (40:19.276)
That should never happen in a functioning tax system. Yeah. Yeah. I'll be better off if I take less money. I'm I'm genuinely better off if I take less money. And that now you don't want to be in that kind of situation because that's not commercial. It it's a very it's an awkward place to find yourself in a functioning tax system. And it also doesn't encourage I guess if when you set these type of rules and and and you know, there's things around this innovative business concept as well that it it

Will discourage certain things. It'll discourage growth beyond a certain number or all this type of stuff that that, you know, that's not what the system should do. So I mean, they've ar they've they've issued a consultation paper. There's seven questions on it, and they're they're each pretty targeted and limited. 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 rationalise all of them together? That's not that's definitely not a consultation question. it's more like, is this number the right number? type questions. Yeah. Seems like the framework's already set. So Well that that to my yeah, I 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. you know, yeah, it's a consultation paper, there's no legislation. I think the really interesting thing is the interaction between this, the SIC 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. 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. it's almost not worth, you know, the it well, the the effectiveness of that has completely diminished now as well. Yeah. Well, I mean, it will only work if you meet these, these, you know, these conditions essentially. So that's kind of like really these innovative steps.

Velocity Legal (42:43.278)
arrangements are for ESS and potentially founders where they probably weren't looking at ESS in the first place. Those two categories. I've had one one client in particular mention to me, and it's commonly known, New Zealand has zero percent C CGT. it's a four hour flight away. It pretty much feels like Australia when you're over there. Yep. 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 as opposed to doing it in Australia. You know, it's it it's pretty practical. It's not far away. It as a lot of stuff is quite familiar. I think that's it's probably not a huge risk that we're gonna have this exodus, but but I think it has to be put in place. I think there is some there. I mean I've seen those conversations too that, you know, they're either Australian and New Zealand dual citizens or even if they're not, you know, the the nature of the reciprocal visa arrangements are that

You know, y there's no impediment really to moving. It's funny, I went to a I went to a conference after the budget was released in New Zealand and you know so it was a New Zealand tax specialist speaking to an Australian audience and said, Okay, I never thought say this, but apparently we're a tax haven to Australians. And it was met with, you know, laughs and and and and and and nodding heads. So look, I mean.

Would there be that many? I don't know, but it it it at least I've ha I've seen I've seen the conversations already around it. Yeah. I think that's perhaps that's a good point to to move on from the federal announcements and move into some state-based ones. Yeah. Or at least one. so we're in Victoria and the Victorian State Revenue Office has updated its guidance on its website regarding

When a discretionary trust variation will trigger duty. So a bit of bit of context on this one. So it's been an issue for a while that when you're varying a trusteed, you know, the variations to the deeds might be so extreme that they effectively cause what's called a resettlement of the trust. And there were some cases at the federal level, Clark's case being the most noticeable one, notable one, sorry, that basically said: look, as long as it's in the power of the deed.

Velocity Legal (45:07.198)
any changes you make, it's not going to cause a resettlement. So at least then your CGT, you you know, you can make most changes that you need to with the trusted and it's not an issue. State revenue's never really fallen in line with that. and in fact, there was a there was a ruling or a 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 to state-based taxes compared to federal ones. But in any event, every state revenue office in Victoria has a slightly different approach. Some jurisdictions have specific rules around trust variations that are codified in statute. others are more by way of you know, rulings or website guidance. in Victoria, it's by website guidance.

And they've got this this particular web page which they decided to update on the third of June twenty twenty six that s sort of spoke to the circumstances in which they felt a trust variation would either cause a resettlement or would change a cause a change in beneficial ownership of jutable property in the trust. Yeah. I I I I I we included this is because I th I I think it's a bit of a sleeper issue, particularly in Victoria. Now,

Rajan's right that that there's there's been a history on this. And it was what you'd what you'd normally say in the past was you'd think about resettlement, and that would be those like the kind of concept you'd talk about. But the states have changed their legislation since then and they've they've put much more expansive deeming provisions in about essentially what what rights beneficiaries have in trusts. And that's the way that they've kind of

you know, sharpen their claws, so to speak. most of my work is is either Victoria or New South Wales. And both Victoria and New South Wales have done this. 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 you pull out the trustee, it's got some properties and then you know, the primary beneficiaries, the stated beneficiaries, aren't

Velocity Legal (47:28.568)
Who the client might think they were. There might be that it's their children or there's a spouse or something else that their parents, et cetera. And then you tell them, well, based on OE's case and you know, other cases about disputes in discretionary trusts, 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 those primary beneficiaries or take us in default? And in Victoria, until this, there was some previous guidance, but it was a lot more vague in the the situations in which a variation might trigger stamp duty.

This 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 or if you do it, you're going to pay, you're going to pay some degree of stamp duty on it.

Do you see that issue in commonly in practice, noting that it's a state tax issue? Yeah, no, well, we s we certainly deal with trustees all the time, particularly leading up to 30 June and doing all of our resolutions. Obviously, whenever it comes to variation, we are in contact with with lawyers about that. to be honest, we haven't seen it too much in terms of you know removing certain primary beneficiaries.

We obviously went through a a big stage of varying income clauses. We also have been through a stage of excluding foreign beneficiaries. Yes. But that's now kind of baked into our baked into our trust setup structure as well. and then the only other time we really do it is is around estate planning and and intergenerational wealth. Yep. And usually that's around.

Velocity Legal (49:49.312)
appointors and trustees and you know potentially putting in corporate appointors and things like that. Yeah. Yeah. I mean I've I've I've got, you know, I I I think that's right, Nick, that that it really like I've seen this conversation. It's almost always in the context of the estate planning. you know, one one one hypothetical scenario that that's based on a real one is, you know, number of properties, controller, and then the trusteed says the primary beneficiaries are their their two children.

But the estate plan is not that those people will benefit for various reasons, but they're the primary beneficiaries of the trust. What what do you do? okay, yeah, maybe you vary the trustee, but but you're running right into a risk of of stamp duty or transfer duty on the variation. Yeah, absolutely. Or I mean you could have a situation where you've got a

Perhaps a liability for absentee owner surcharge, you 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 cut take them out to avoid an absentee owner surcharge. You trigger another you trigger you trigger another problem potentially. Yeah. and you know, the it's it's interesting because again, there's there's a lot of inconsistency in how the states do 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 or a name beneficiary in the deed, that triggers duty. That's like a trust acquisition or a trust disposal. So it's dutable. Victoria and New South Wales are a little bit more cagey on it. Yep. They're not saying it will. I think if you took the position, you changed all of them. Yeah. It almost certainly would. If you changed one. Well what used to happen in New South Wales, so New South Wales is sort of similar to Victoria, that you've got a

You've got a you've got a sort of a a a s surcharge rates essentially that apply to discretionary trusts. But if the if the property is held in a fixed trust, you 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 and and that would work for land tax and would also not result in a a a transfer duty issue. unfortunately the law's changed since then. There's been a number of cases that have

Velocity Legal (52:08.258)
the where people have tried it still and the the courts said no that that triggers it's effective for land tax but it triggers 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 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 you you're thinking about major changes to to trust and particularly through your state planning process. Yeah. I think another situation I can see it come up, which is I suppose is the inevitable destiny of every every trust, is when it comes to an end. because you might recall a couple of years ago the ATO had this

This, I think it was a ruling or a practice statement or something that talked about what happens when a trust effectively vests. and essentially they say it goes to effectively turns into a fixed trust for the 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. That's a good point. 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.

interesting. Yeah. Well, I mean, 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 clients definitely don't want to do that. 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've wanted to get properties out of trusts. there are some duty exemptions that let you pull properties out of trusts. The CGT is often the problem, of course, because there's no equivalent CGT exemption. But I must say we've had a very, very steady stream of inquiries.

It's funny, when we're structuring, so particularly since the 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 and ultimately deal with the draw drawings from the company and the division seven A and the top up tax? Or do you put it but you get the CGT discount or you got the CGT discount?

Velocity Legal (54:29.918)
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 and created a couple of internal models that show the 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. Yeah. Cause you'd have to assume what's the indexation rate as well. 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. the range of scenarios in which a company is a better holding structure, not to mention simpler for all of these reasons that we're talking about, has grown substantially, particularly where you are funding that from business profits. Yeah. That's a good point. Cause I mean it was something even even when they had the discount, it's kind of like, well

If want an easy road. And if your time horizon was long enough, it you know, the the low attacks 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 has sort of become a bit more equal. And and as I said, that the number of scenarios is just has grown so much.

Yeah, so I I suppose one concluding comment on the on the sort of the website changes on the on resettlements. So why the SRO has decided to do this now. and it makes me think that perhaps perhaps there's more state revenue shenanigans afoot, more compliance activity, perhaps more cases that are coming through the system. So it'll be interesting to see how this plays out. I I I agree. They do say

you can seek a ruling if in doubt. I haven't had great success seeking rulings from the revenue offices as opposed to the ATO, but it is something to consider if it is a quite a major change, particularly if it's something that you don't need to do. Look, it's a it's an optional choice and essentially something to think about whether you do a ruling to the to the state revenue office. Thing is though that like oftentimes you're making trust changes, you there's there tends to be a degree of urgency.

Velocity Legal (56:54.71)
about them. Like you need to do them because there's some there's some reason why. Yeah. unfortunately s the ruling process isn't quite as yeah quite as fast. Yeah. well let's move on to I guess cases for for June. now we've got we've picked out three interesting cases. They're all two of them are ART decisions and one's a NCAT New South Wales decision.

so the the cases are Bewley and the Commissioner of Taxation, Prasser and the Commissioner of Taxation, and Winya Indigenous Office Furniture, PTY L T D, and the Commissioner, Chief Commissioner of State Revenue. So I'll I'll introduce the first one, which was a a taxpayer, actually the all taxpayer wins. but the first one is is Buley. And this is a this is a residency matter.

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. now this is not one of those cases. firstly, on those cases, they they're typically sort of people trying to leave Australia, the exit the Australian orbit and

You know, more often than not that they're they're still a resident is the flavor of those cases generally. Now, in this case, the taxpayer, Mr. Bewley, was an Australian resident for domestic law purposes. He was also a tax resident of Singapore. and we've got these double tax agreements applied between countries, and they in certain situations they will allocate taxing rights. Now

This was relevant in Mr. Buley's situation. And essentially he was earning employment income in Singapore. 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 we've got this tiebreaker test. It doesn't leave you in a position where you've can you can be resident of two places. It always has to

Velocity Legal (59:20.182)
It always has to be resolved. so so that was what's relevant in in this case. I'll briefly run through a few of the facts. Mr. Bewley was he had a spouse and 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, and

Yeah, super private health cover bank accounts in Australia. So so clearly an Australian resident for domestic law. It was about $1.7 million, I think. Correct. Correct. Yes. so that was sort of on the on the Australian side. On the on the 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, and and had you know various sort of connections to Singapore friends, you know, 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. Commissioner assessed on the basis that he was a resident, income tax and DIV 293 assessments. And the argument by Mr. Buley was: okay, yep, that's fine on the domestic law position, but there's a 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. And imagine the tax is far, far, far less than the tax that that'd be payable in Australia. maybe I'll go to you, Rajan, first. I mean, what what are your thoughts? Without giving away what actually happened in the case, you know, w where where's your personal and economic relations closer to? I think like if I didn't know the outcome, like I I would say that it would be Australia.

Velocity Legal (01:01:39.566)
For the simple reason that I've I've dealt with a few residency cases in the past and I've I've sort of argued with the ATO in the past and 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 that's it. Because I mean, what who who can be closer to your to your spouse and child and you own a family home in Australia that you regularly come back to?

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? There's that old rule of rule of thumb, it's probably not quite that of where is the dog? Yeah. Where where where does the dog live? That's probably where you reside. Yeah. And and 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. but there wasn't there were some connections still to see. It wasn't sort of like 100%, zero percent, but it was definitely accepted that it was closer to

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. but on and 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 are actually closer to Singapore. And I guess the real challenge is, well, how do you weigh up which one of those is stronger at the end of the day?

Tribunal said that essentially it's a it's a holistic assessment and they've they've they've 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. You could have easily seen it go the other way. Yeah. And you wouldn't be surprised. absolutely. I I'm not surprised at all the ATO litigated this matter. In fact, the interesting thing about this case is that I had a c 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.

Velocity Legal (01:04:00.568)
But wife and children in in Australia. And we didn't end up litigating that in 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. and so I know exactly how the ATO would see something like this because I've I've I've been through it. I would not be surprised in the slightest if this gets appealed.

Yeah. I mean th there was yeah, I I I agree with Adam. Nick, I g 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. What's your and they say they're adamant they want they they want to they want to not be taxed in Australia. What what do you do in this situation? I mean for me that's on honestly, it's that's not international tax probably

Holistically is not something that I consider myself a specialist in. you know, it most accountants and and probably a lot of people listening to this are 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 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.

Or or one, you know, certainly engaging a tax lawyer and then we we take the advice of where we go from there. Or moving the dog and the, you know, the the family and selling selling everything. You it's I always approach this as substance over form. I d 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 gonna be ties here. Yeah. Yeah. I mean, with the with the in light of that whole discussion we had earlier about the movement, y you can see people

You know, the this case sort of perhaps people applying these rules somewhat naively or not fully considered and say, well, you know, Mr. Beulli was fine for, so it's good enough for me. I mean, there's but there are some some facts that are a bit more unique in this case. And you do get you know, with the AI models around, we we get clients who put their factual scenario with cherry-picked facts.

Velocity Legal (01:06:16.65)
into one of the models and and I can guarantee that the model spits out. Yeah, yeah, you should be fine on this, this and this basis. Yeah. But then you you know you look at it more holistically and you you dig in a bit and you know sometimes it may be the case, but but often it's not or or it certainly needs a lot more work to with withstand an ATO audit or or a review. And particularly into being aware of the risks of getting it wrong as well, penalties. Absolutely. And to be honest, to that point, I think that the the 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 the and they're up for taxes going back the entire period because they never started the the amendment period never closed off. At least if you lodge even a nil return, and you do that on the on the genuinely 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. Well, I mean, that's a good point. And and to to that point, there's 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 is trying to open up the door on fraud and evasion on a on a tax residency and finding it difficult to do so. 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 it's a it's a it's much harder for them to do that. It's fraud and evasion's not quite as easy as

assuming that you've been reckless or failure fa failing to take reasonable care. It's it's a much higher threshold. Well, let's move on, I guess over to you, Raj, and for the for the for Prasser and what I'm Yeah, so pr Prasser's case is an interesting one. So this is a case that concerned like serious hardship. So this particular taxpayer had a fairly sizable tax debt that related to periods of work around the pandemic period.

Velocity Legal (01:08:35.552)
this taxpayer was in a bit of a dispute with the ATO because he was essentially working for a foreign organization and his plan and intention was to actually relocate overseas to to do the work. 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 remotely.

And so the ATO's position was, well, we're gonna that's gonna be accessible in Australia because you're doing the work here. So he obviously he didn't have a choice, so he you know he had to earn a living, he did the work, he declared it for income and received an assessment, 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, or even just putting the time to put 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

Dealing with these sort of cases is that like, unless you're like terminal, or you like, you know, you've like serious health issues, you know, possibly even terminal, the ATO won't really consider 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 this family was financially constrained. I think their disposable income was around six hundred dollars a month, you know, after their necessary expenditure. and the tribunal basically concluded that yes, if if this taxpayer was forced to pay this tax debt, they they're already under hardship, they would face serious hardship. So Nick, have you had have you had any experience doing hardship? Not with not with hardship in in terms of setting aside a tax debt.

Velocity Legal (01:10:52.59)
But this w when I read this case, it it probably reminded me more of the the levels we have to go to around applying for GIC remissions and things at the moment. which comes a comes across our desk every single day. Yes. so it's it's not quite to the level here, but I mean every practitioner knows the the ATO has more or less closed the door on GIC remissions outside of the most exceptional cases. And so

You know, where where clients come to us sort of and one of the 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. Yeah. where, you know, to put it bluntly, we would get the grads to call up for GIC remissions and that that'd be, you know, just something that would be done at a graduate level. Yeah. Now for a you know, a five hundred dollar 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. and even those, often you'll submit them, you'll spend all the time, and you get a one-line answer back on on the tax agent portal saying, no, sorry, we we don't agree. so the lesson out of all of that is the first conversation we have with clients is, well, one, is it material enough to warrant the work we're going to have to do? Two, you have

evidence of some factors outside of your control that have had contributed to 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, th 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, they're

The threshold is so high now. So part of me is surprised that this got through. Yeah. Yeah. I think it's it's sort of set like, you know, again to to Raj's point, it's not something that that that we typically deal with and the the jik is is much more common. But 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 jik, the tax liability, if they're satisfied that that the individual suffers serious hardship.

Velocity Legal (01:13:20.402)
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. I think the more practical point is that often if you're in this type of situation, y you might be better served speaking to an insolvency practitioner than than trying to run this course though, because it's a whole different conversation.

when when you're talking about you know those those sort of bankruptcy or bankruptcy light type options. yeah there's a lot more of that we're seeing these days with with director penalty notices and that sort of thing as well. So it is a little bit of an unusual one. I don't don't think it's gonna be a a trend, but but it was notable enough to to warrant an inclusion. Yeah. I guess the thing with these hardship cases they 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 net will the ATO necessarily change its approach? I don't think so. my hope for for Prasser is that this doesn't get appealed because if it if it did, you can imagine the the continuing sort of accumulation of GIC.

interest, paying the tax and then potentially paying the ATO's legal costs if you if you lose. So if there is hardship, it w that will only be compounded 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. I think so. I mean it it they're so factual dispens dependent, it really be surprised. You'd be surprised. Yeah. Yeah. Yeah. Anyway. And it's an interesting case nonetheless. And then we've got

Winya, which was a winya for the for the taxpayer. Very aptly named taxpayer in this case. So this is a payroll tax case. And very timely, I must say, because we are seeing a lot of payroll tax activity, audit activity. It's been going on for a little while. it there was it's sort of there was a brief lull and then it's kind of picked up again recently. but this concerned grouping. so the payroll tax rules basically have grouping provisions in them that

Velocity Legal (01:15:36.492)
you know, basically say that if you've got common controls, so 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 f 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.

That's really the consequence of grouping. And the consequences have gone up, I guess, as well, because those payroll tax thresholds have also gone up over years. you know, most of the states are over the million. I think Victoria's nine hundred thousand, but a lot of the other states are well over a million. So you know, it can cost fifty, sixty, seventy thousand per entity per year for whether it's grouped or not. And that could be the difference between profitable businesses and unprofitable businesses.

absolutely. I mean, in 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. and that's typically what happens, actually. That's what I often see. and then of course, these things, they never then they never really come in a timely manner. by the time the SRO catches it, their their typical 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 if that plays out. Now, in the case of Winya, there were factors. So Winya was a furniture company, and it was 49% owned by another business and referred to as Vibe, but that was in turn owned by another group of companies that they were also in furniture to. So 49% ownership there, and then the other 51% was an individual. Now

What happened in this particular case is that the the I mean the the OSR attempted to group Winya with that 49% shareholder on the basis that you know there was common control and and and whatnot. And they that would have obviously led to a fairly sizable payroll tax liability for Winya. Now, what happened is when this was considered by NCAT.

Velocity Legal (01:17:59.798)
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, common shareholdings, that's enough. So it doesn't take much. But where it kind of where the battle tends to ha 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,

Say that I own a law firm, but I also own a cafe. Okay, yes, they they'd be grouped because I own both of them, but the businesses are so distinct and different that you it'd be foolish to group them. Like it's just not sensible. So it's a similar sort of thing here. They they tried to argue that, well, we ought to be de-grouped if we are, if we are grouped, which was a position that the that NCAT ultimately accepted. The really interesting thing about this case, though, is that they had a number of

there were a number of factors that sort of trended against deg degrouping. So normally, like if you can demonstrate that there's there's no financial dependencies, there's no trading, you know, the the decisions are being made independently, you're operating in different market segments, you know, you you need to sort of demonstrate all of those factors in order to get successful degrouping. The interesting thing here is the in this case.

Both companies were in the furniture, furniture business. But there was a difference. The the NCAT basically said that Winya was more in the sale of furniture to a particular market, whereas the other entity, Vibe, was more in sort of manufacturing and distribution. 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 Winya was acting in its own in its own interest. So I think at one point they were subleasing

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 that was happening. But on the other hand, there was evidence to show that there was a bit of like there was some shared head office functions. And that tends to sort of sort of tend away from exercise of degrouping. So

Velocity Legal (01:20:23.926)
It's a really interesting case because I've seen lately that State Revenue Officers have been quite strict on it. Like we've got one with with NCAT at the moment. And you know, 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 from grouping in this situation. I think the really interesting thing here with this one is that

You know, it's a fifty one forty nine type arrangement. And and 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 y they really needed that forty nine and the the the the the services and sort of yeah, there were forty nine, but perhaps they were forty nine, they're a bit more than forty nine. and

And and as you said, you know, that there was significant connections, but they still were degrouped. So I mean, I think I think it it it you know does provide some hope. It's it the these payroll tax degrouping cases are very fact specific. but you know, when whenever I've been doing payroll tax degrouping applications, I'm I'm I'm definitely highlighting the cases where, you know, the the the commissioners exercised the discretion or the tribunals exercised it, you know, in the shoes of the

Of the Commissioner. As I mentioned at the beginning, it is somewhat timely because we're seeing a lot of payroll tax activity at the moment, 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 other states. just because the payroll tax rules are largely, largely the same. They've been harmonised. So

Definitely helpful and certainly one that I'll be I'll be quoting in my next payroll tax review. I guess to sum up, you know, we've covered quite a bit of ground. I guess just wanted to I guess hear from from 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, to start looking forward to what what you expect. Well what what do you expect to see or what do you think is gonna keep you busy in in this new financial year? Yeah, I mean definitely.

Velocity Legal (01:22:50.892)
the, you know, hangover from the budget announcements. 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 30% tax on trusts and and the way that's going to play out over the next six months.

I imagine that we'll see some further, you know, guidance, commentary or or practical ways forward for Bendel and and Division Seven A and UPEs. so there's there's certainly no shortage of of things that are happening, but I think planning planning for that the CGT budget changes to kick in.

you know, starting to think about valuations and and what happens there. Do we get one? How do we how do we navigate all of that? Do we need any restructures within our within our client group? Our our advice to clients so far has really been to, you know, with with a few exceptions, hold tight and and let's see how this plays out. but yeah, there there will be no shortage of things. Definitely an interesting and busy. Yeah. Busy time for everyone in

In tax. Absolutely. Yeah. Never never been a better time to be a tax lawyer if you tax tax advisor, really. I particularly in the budget, there I don't know how many times simplicity would have been mentioned, but it's anything but, isn't it? The even just the things we've covered today generate so much more complexity, whether it's definitional steps in processes or otherwise.

Yeah, it it is a an interesting time to be a tax practitioner. the complexity seems to be increasing all the time. 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 you know, approaching F D T and family trust elections in a a way that they haven't necessarily in the past. And it's it's an interesting time to be a practitioner. I think that's that's a great

Velocity Legal (01:25:12.212)
summation and also a great affirmation of why it's important to tune into tax talks. yeah I guess I just wanted to thank you Nick for being part of this episode. really valued your your insights. and yeah thanks again for for being on. Thank you, Andrew and Raj for having me. It's been good.