May 2026 Updates

Velocity Legal (00:03.17)
So this is Tax Talks, Australia's Tax News Podcast for Accountants and Tax Practitioners. The podcast designed to help you grow your practice. Welcome to Tax Talks, episode two. I'm your co-host, Rajan Burma, joined by by my colleague Andrew Henshaw. Hey Rajan, how are you? Good, good, Andrew. Yourself? Very good. It's it's never been a site more exciting time in tax, I think. And you know, we've got a big episode for episode two covering covering May's updates.

That's right. Yeah. Look, in case you've been living under a rock, May was a huge month for tax, particularly with the federal budget. Yep. and to do so, we're joined by our first guest for Tax Talks two point z Anthony Tripolino from Tripolino Accountants. Welcome, Anthony. Thanks, gentlemen. How you going? Good. That's good. Do you feel excited to be the first the first guest? mate, I I must admit when when you reached out I thought to myself, Jesus.

Must have really scraped the bottom of the barrel for this one. We but no, I'm always always happy to oblige and happy to talk things tax. And you know what? There's I think as you adequately put Andrew, this is a bit spicy to say the least. Absolutely. Absolutely. I guess before we get into it, just a bit about your practice and you know what you do to keep busy. Yeah, well we are we're public accounts, we're based in Geelong.

Yeah, part of the long lineage of Triple Eno family members who who who perform in this space. So my father started the practice in eighty seven and I managed to get in through the father son rule back in two thousand and nine. Yeah, so I was yeah, number one draft pick. again, scraping the bottom of the barrel it seems. But no, I'm I I I'll be honest with you, it's it's it's been quite the journey and s and you know, been going

Geez, 17 years now. and a lot has changed, a lot of, you know, ups and downs and and you know, change is always inevitable. but I must say in the last 17 years I haven't seen as much as much change as what we have seen since the budget. I was gonna ask that question. Where do you where do you rank this of all the budgets? because I guess the main topic for this episode will be unpacking the budget. We've got some other things as well, but the main topic is unpacking the budget.

Velocity Legal (02:25.464)
Where would you rank this budget on all those budgets? it's you know, a bit like you picking me here, it's right at the bottom, mate. It's it's it's it's you know, maybe that's fitting for for for me being here, but I I I really think that the whole thing is it it's just been such a drain. and it's it's it's really disheartening. I mean, I've made my

thoughts public in terms of in terms how I felt about it. You can make it public too too. Well look at my my my thing is this and and you know you you peel it all back and it's and you know you look at the policies and and everything else and you always judge the policies on on how how you know you react to these sort of things. You never go by the individual. But the thing that really concerns me and I and I take myself back to to sort of year 11, 12

economics. And I was very lucky to have you know, an economics teacher who who, you know, was very wise. And and I vividly remember him saying that when you want to talk up an economy, you have those in power come up and talk up the economy because effectively it's like you're rallying the troops, you're getting the morale. when you want to peel back on spending and you want to get things down like inflation and stuff like

The rhetoric behind that is also equally important, as well as the action that is taken. now, insofar as you know, getting into the nitty-gritty of, you know, are you really better off? Have you looked at the mathematics, this, this, and this, and whatever it is, you peel it all back. And the and the fundamental message that really concerns me with this is the fact that you're sending a message to those having a go. that

It doesn't feel worth it. if I'm to put it as success succinctly as that. it very much, you know, says, and whether it's deliberate or, you know, indirect or whatever it is, you can take it which way you want. but the whole policy framework is based around the fact of if you're doing well, you know, taking all the risk, et cetera. Well, we're gonna take it from you. and I believe even just, you know, the

Velocity Legal (04:51.438)
I forget her name from Treasury actually came out. She made it quite clear that this is about redistribution of of wealth more than more than anything else. so when you look at it from that perspective, and again before you even get to nitty gritty, the messaging, and it comes back to that messaging, the messaging that we're getting is the fact that if you're out to have a go, this is not the budget for you. This is not the budget for you. and one of the things I made quite clear and it was funny, I, you know,

Because we're we're all tax nerds and we all have a a very, very sad life when we look at some of these things in detail. And one of the things I looked in detail was the treasurer's speech. And looking at the treasurer's speech, and and this is one of the points I made, the the word worker was mentioned seventeen times. Seventeen times. And the word small business was mentioned four. And that really contextualises where their heads at in terms of how they're trying to they're trying to pitch this budget.

and the thing that also gets lost too, and this is a super important point, is that when you especially you talk about businesses and small businesses, the the government either fails to see or fails to acknowledge or they fail to acknowledge and see a lot of things, but they forget the accountants like ourselves and everyone else. They're also in small business. So it's very, very hard to sell that.

to not only someone who's going to be impacted in their profession, but then you're also expecting them to to effectively help navigate clients through this through this landscape. it's it's a real double slap in the face. There's really good points because I I had the I had the pleasure of reading through the for these new changes over the weekend. And in the introductory comments, it often said that, you know, a big

Aspect of these changes was to ensure that capital was treated in a similar way or to the similar extent that employment income or workers' income is is taxed. And and it's said that multiple times throughout the the in introductory points. And I think that coming to your point that, you know, it's not the same thing. When you're an employee of a of a business, you don't take on the risk, you don't take on the the burden of of owning and starting a business.

Velocity Legal (07:15.02)
So why should it be taxed the same way? But apparently that's that's the government's policy. They want it to be taxed the same way. And that's what these changes are about. And that and that's also very valid, and and it's been pointed out you know, lately, where a a fundamental thing that people forget too is that you've already paid tax on the money that you use to invest in capital anyway. So you're taking another step to

to effectively take a risk that you're going to do something with that. And with that risk, it is not as sure as turning up to work and getting paid. Okay. And, you know, there's there's been some some you know comments about, well, you know, there's we might not get paid. And it's like, well, the worst case scenario is you've got Feg who will underwrite your wages in some way, shape or form. We don't have the equivalent of someone underwriting us if something happens with our investment.

at best you get a capital loss. You know what I mean? and I think that's a very important point because when you talk about leveling and and I hate when they talk about leveling the playing field, because the playing field is not level. That is not the the, you know, certainly the Australia that that we know. and the problem is too, is that when you start talking about leveling the playing field and you start talking about, you know, we we we're just trying to, you know, go after these perceived rich people.

I say quite openly because some who are very vocal and very, you know, very angry with the status quo because they're frustrated. And I I sympathize with those people, I really do. but the problem is that their their anger and frustration is not impacting the people they think it is. And I and I say to people all the time, I'm like.

Whatever your thoughts are in terms of this budget, in terms of what you think is going to happen, go to your local coffee shop, go to your local restaurant, go to somewhere local, and I want you to say what is on your mind to them and see what the reaction is. because I can guarantee you you'll upset a lot of people because of the fact they'll give you a quick reality check. And that's you know, it's it's very, very disheartening. And the thing is too, and I I was using this no.

Velocity Legal (09:35.2)
Andrew, you I'm an analogy guy. the analogy that you know, that that I sort of described with this and and the comparison is during COVID and you know, those who were in Victoria and those who were in Melbourne and those who were in Geelong, there was this animosity between people from Melbourne and Geelong and the regions because of the fact it was the haves and the had nots. And we were pitted against each other. it was a very, very horrible time. Now it seems like a distant memory, but that was a very, very horrible time.

Not trying to compare the budget to COVID, but I'm trying to compare the fact that you've got the same sort of mentality happening now. Yeah. Which is that you've got they're they're and whether it's deliberate or not, but effectively you've got employees being pitted against the employers to drive that wedge. And they're counting in my opinion, they're counting on that to try and disillusion people just to ram their policies through. And you want proof of that? That's why they're trying to get it through this month. I think that's a probably a good segue into

sort of unpacking some of the some of the budget measures in in a bit of detail and and and we'll spend I guess the majority of this episode talking about the the budget measures. let's start with that one. Yeah as you said, the CGT, the CGT reforms and not only do we have now have the budget led announcement, explainer material, but we've also got draft legislation as well. Rajan, do you want to sort of

Walk through the high level points and of what you've seen in the CGT announcements? Yeah, absolutely. Well, I think I guess the obvious starting point is a removal of the 50% discount. it's probably as good as a place as any to begin. so as we all know, there's a line in the sand that's been drawn 1 July 2027, from which point the CGT discount will no longer be available. up until gains up until the first of July will still be eligible for the discount. but any growth

after one July will be eligible for indexation, but only for individuals and trusts, not companies. so it's it's going to mean that well, it's gonna it's gonna make for a far more complex future, I think, for everyone. I I mentioned that I I had the the distinctive pleasure of reading through the explanatory materials over the weekend and the method statement for working out what your capital gain is is now incredibly

Velocity Legal (12:02.798)
Incredibly complicated. It's seven steps now. It's far from four. Yeah, so additional three or four steps. What the legislation effectively does is it deems everyone to have disposed of their CGT assets on the 30th of June 2027 and then immediately reacquired it. So the impact of that is that you've got effectively a capital gain on the 30th of June, but it's deferred until you've got a subsequent realization event.

And it impacts all capital assets and also pre-CGT assets. So even pre-CGT assets are now brought into the net. But then when it comes to actually working out your capital gain, you've got this new concept of a of a deferred capital gain amount, which is basically your gain up until 30 June 2027, which is then calculated in a certain way using the discount.

And then you've got gains after that point, which is then calculated again in a different way using the indexation method. And then you add them all up and you know, and if you're going through a trust, that gets even more complicated because you you've got potential gross-ups and I looked at I looked at I remember looking at those provisions around the trust and I sort of was wonder I was scratching my head initially thinking, well, does that mean that the distributions are relevant for FY26 for who actually pays tax? But no, it seems that.

Thankfully, when you read the the explanatory memorandum, it does make a little bit more sense in that it's it's going to be pushed, I think, for trusts until the the realization time, essentially. So it sounds like the the whole process of that is reminiscent of the transfer balance cap rules when the superannuation laws changed in 2017, where you had that deemed disposal and acquisition to try and reset your your cost base in a in a super fund environment. it sounds very

Very reminiscent of that. It is conceptually very similar to that. Absolutely it is. I suppose the difference is that because it's all CGT assets, it's this this hits everyone. It's it's far broader than the superannuation changes in terms of the their their scope and ambit. But you're right, it it is very reminiscent of that. Let's get into the transitional rules then, because I think that's a that's a big point on how this is actually going to work for an asset that's already held and

Velocity Legal (14:20.694)
And how it's going to be treated under these new provisions. I guess we know that if we've got a disposal before one July 2027, we're in the current rules. and I think there will be, at least what I've heard anecdotally of clients and things like that, a big rush to to sell before one July 2027. And then if it's an acquisition after one July 2027, we're just in the the new rules. But, you know, there's gonna be so many that are

Acquired pre one July 2027 with a gain sometime, sometime after. I guess what I wanted to talk about is I guess just valuations. it's gonna be a massive, massive part of this. And I think it's easy enough for some asset classes, you know, listed shares, residential property, even commercial property that's not too unique. But then outside of that, what about businesses?

This is the real thing, isn't it? Like, I mean, okay, you can get a property valuation easily enough. you can get you can get listed shares as you say, very easy. But, you know, I mean, you're a business owner, Anthony. I mean, do you relish the idea of having to get a valuation of, you know, your your business as at one July twenty twenty seven to work out I don't know. I don't know. I was thinking about this. I don't know what's worse is the fact of so much relishing the idea, but then trying to explain to the client that that's what needs to happen.

And and last time I was checked, I don't know do you guys know any valuers that work for nothing? I don't I don't I Google I jumped on there and and look I know AI is good, but I d I don't think you know and so isn't that the thing, right? Is that the knock on effect is the fact that there seems to be this never ending pit of costs, you know, that's involved with this. So you know, do I relish it? No, I don't.

You know, but you know, it if it needs to be done, you know, what choice do you do you have? And clients are gonna want to have the highest possible valuation and they're gonna be pressuring, you know, you. perhaps you don't have a say in it, but they're gonna they're gonna be talking to you about it that they want to lock in highest possible valuation under the fifty percent discount. A hundred percent. And to your point about, you know, Resi Resi will is interesting at the moment because of the fact of

Velocity Legal (16:47.682)
There's obviously uncertainty and that's distorting the market at the moment. And this is the thing that I think needs to take into consideration is that you're asking it to happen during a time where there's there's tectonic movement in the market. And also too, even if there wasn't, you look at a commercial property and majority of the time it's based on a capitalization rate of their rent. Now, if you've got a client who hasn't been able to rent their premises, because ironically

Someone's gone out of business, then how do you convince a valuer to say, well, you know what, in good times though, this is what it would rent for. So you should value it based on this. But you know, the market's saying it's actually worth this. So it's a double, it's a double negative. Yeah. And I think you can also sort of see the issues it's going to create in the future that, you know, at some point in the future, when you do eventually liquidate the asset, realize a capital gain, is every likelihood you get into a fight with the ATO about

your valuation on one July twenty twenty seven. You know, was it 'cause that valuation's gonna in in in fact affect indexation as well because that that valuation is the thing you're gonna be indexing. So you're absolutely right. There we could be disputes in there will be disputes in the future about what's the value as at one July twenty seven. Well that's right. And if your valuation's a little bit too friendly, then you know the ATO could get it, you know, get involved and question your valuation and then

The ATO of course has the benefit of hindsight when it does its reviews. you've got to get it at the time. but yeah, I could see enormous scope for disputes. I the ATO questions valuations all the time, even in tax matters at the moment. Just imagine when you're doing that for everyone. Well, there was that, and I know this is more a GST matter, but to your point about them questioning it, there was that case about the what was it, the margin scheme or where it was a pre pre GST asset where they used like a discounted

you know, present value valuation as opposed to what the ATO would have preferred. And I've already had that question. Do I need to go get a valuation on one July or could I do it later on? 100%. What do you say? Yeah. What yeah, well that is the thing. You know, what do you say? And and I think there's there's always going to be that underlying theme of what do you say at this point in time? Because right now we're we're teasing at the rules as they are and as they're going through. you know, and I think what what would be

Velocity Legal (19:11.596)
be remiss of us not to not to at least acknowledge this fact is that you've got the opposition firmly saying that if they were to come in because a lot of this stuff comes in too you know transitionary to when the next election is if I'm if you one July thing one July twenty seventh things, absolutely. So now you've got the opposition who've basically come out and said, we're gonna scrap the whole thing if we get in.

So could you imagine we're gonna go through this dance and we're gonna do what we're gonna do. We're gonna incur all these costs and we're gonna we're gonna say this to the to the clients and and we're gonna do everything and and this is just for the budget as a whole, not just this issue. Only for it to be potentially undone. Unwound you know, undone at the very end and it's like, that was a that was a fun ride. Yeah, that's cool. okay, yeah, no.

Couple other points I thought I'd raise with these from the from the legislation and the budget announcement. as you mentioned, Rajan, pre-CGT assets are in. They will have again that deemed acquisition on one July 2027, making the the valuation piece ever so important. there was it's clear that companies cannot index. interestingly enough, prior to 1999, companies could index.

They can't under these rules. Also, foreign residents, temporary residents, non-residents also cannot index. and to index, you also have to have the held the asset for 12 months. And of course it needs to be on capital account in the first place. but those are the sort of the main things that I saw from from the legislation. Do you have any any other points to add? Yeah, a few points. I mean, when you when you go into the details of it, there's some some really interesting things there. So

I I'm not even sure where to begin. All right, let's start with indexation, right? So as you mentioned, Andrew, pre ninety nine you could index. What the government said is that if you have a disposal that occurs before one July twenty seven, you've you still got the option of using indexation for those pre ninety nine frozen at nineteen ninety nine. Yeah, yeah, those pre ninety nine gains. So just to recap, you know, taxpayers who have assets that are pre nineteen ninety nine had a choice of indexing up to nineteen ninety nine, then you know, using the discount. They could elect one or the other.

Velocity Legal (21:33.822)
if they dispose prior to one July, they still have that option. If they dispose after one July, they lose the option of indexing pre ninety nine gains. You wonder why. You also wonder why don't you just allow indexation all the way through? If it's about indexing why don't we just index all the way through? Like just don't worry about the fact that we froze indexation nineteen ninety nine. Let's just keep indexing. I I reckon it's probably because they'll cost too much. Yeah. They'll they'll be in a much better tax outcome if they'd be better than the fifty percent discount if that happened.

Yep. so there's that. so again, it's just gonna make it really, really difficult to actually do your cal your capital gain calculation if you've got those pre ninety nine assets. So there's there's that aspect to it. the other sort of thing that I noticed was CGT of N K six. Yes. Yes. So K six at the best of times is complicated. I was gonna say

It's harder than Chinese algebra last time I checked. Yeah, it's it's not it's not easy. so I suppose just a recap: K6 is basically it's an integrity measure where effectively pre-CGT assets or pre-CGT equity in companies or trusts effectively become taxable if 75% or more of the underlying assets of that company are trusted post-CGT. So it's effectively an anti-stuffing rule. So you've got a pre-CGT company, and to get the benefit of that pre-CGT,

pre CGT stu status, you stuff it with post CGT assets. So you've got this integrity measure. Now the issue is because of the deemed disposal that happens on one July, everything becomes post CGT. Yeah. Which means you have an automatic K six sort of issue that comes up. And I think that the EEMs actually acknowledge that everyone's everyone with pre CGT assets is going to have a K six issue that they're going to have to then calculate as part of their capital gains mix when they have a future realization.

I think the trouble with that then is, yeah, you've got this realization on the pre CGT shares, but you might actually just sell those pre CGT assets in the future. So the integrity measure would have never even come into play. The integrity measure was only ever going to come into play if you said, all right, I'll sell someone the pre CGT stuff. If you're never going to do that and you never did that, why should we have a taxing point on one July 27? I think that needs to be addressed. It's not going to affect a

Velocity Legal (23:56.45)
hell of a lot of people, but it will affect some and where it does affect it, it'll be a massive effect. There's there's an interesting sting in the tail with that too, because my understanding with K six, there's no capital loss that can come in as well too. Yeah. So if your hand's been forced, yeah, yeah. and look, I don't know what the what's the odds of of getting a capital loss is, but I think it more just talks to the point of this is happening. Yeah. It's an integrity rule. It's not it's not as intended to be sort of a separate taxing event.

But yeah, it is a separate taxi event, but it's ultimately integrity rule. That's right. Yeah, absolutely. But it's an integrity rule that's been forced because of a change in the not because of anything the taxpayer's done. So there's there's that. And there was one other thing I wanted to mention, and this was about like the temporary residence and and non residence. yes. Yes. Yeah. There's this what what the legislation is currently saying is that if unless you've been a res a resident for the entire period of ownership, you don't get the benefit of

of indexation. Yeah. Any period as a temporary resident or foreign resident is is is enough to disqualify you forever. That's right. Yeah. Any period. Yeah. So I don't know if like six months away. I think probably don't become a non resident, but I get or or maybe you you you you buy something six months before you move to Australia. Yeah. yeah and that that first period or or you're on a visa that's a that's a temporary visa and then it converts to a yeah full residency. Yeah, absolutely.

But then there's some curious comments in the that says that, well, the government's still thinking about that aspect. There might be further consultation and changes, which is just bizarre. Like do you do you you seem to have a very clear position on it, but you're also sort of flagging that we might change it. I think it was I I think my my my guess is that it was too hard, too much work for right now. We want to ram this legislation through as quickly as possible, and we'll worry about all that later on. We'll think about it later. It's kind like have you guys ever booked a holiday?

And you're going, all right, here's what we're gonna do. We're gonna book a a return ticket here. And then you get there with your wife and kids and your bags and you go, Well, let's book some accommodation while we're here. It's like, well, hang on, shouldn't you have done that before? This is the whole consultation thing, right? It's like we'll get there, get the destination. Well, hopefully there'll be some accommodation and and you know, we can just sort it out then only to find out everywhere's booked out, and you go, we've got problem here. All right, yeah, you know, it's like, you know, no, we will be staying here. So, no, no, no.

Velocity Legal (26:22.74)
we we've gotta we've gotta try and plan this out. Like the whole consultation thing doesn't make you know it doesn't make any sense. You would have think, you know, that a lot of this stuff would have been done beforehand. Maybe you maybe it's if you book a one way flight without a visa and and you maybe you forgot to bring your passport or it's a time. Yeah, yeah, correct. Yeah, it's I I was having a look at this and and what I think is going to be very interesting and and and and I was chatting to

To Andrew about this is that when you look at property developers, where you have like a K4 event, okay, whether it's a pre-CGT asset or whether it's a pre, you know, pre-99, or where you have an is an isolated profit making venture where you have a mixture of capital and income. I I don't have it clear in terms of how those things are going to tie into these new rules. And they were complex already to begin with.

you know, so for the the the folks at, you know, home listening to this who you know, I've got clients that are property developers, that's very much a watch this space because how do you how do you tease that out in amongst all this other rigmarole? Yeah. I I think that's a a very interesting thing because then it ties into the fact of well, hang on a second, how does that tie into the transitional rules? how does it tie into, you know, touching on the negative gearing side of things, et cetera, et cetera.

There's there's very, very yeah, it's a it's a very unknown, you know, area that I don't think again has really been been thought through. Well, we could spend all day talking about the the the CGT, but but it it it's perhaps not even the the biggest one on the on the budget list. but I think just to round out before we move on to the next part, there's a 30% minimum tax on capital gains. So

regardless of what your marginal tax rate is, it's proposed that there'll be a 30% minimum tax. and the other point I wanted to make is the importance of the small business concessions. they were already extremely important, but this will make them even, even more important because business owner, what are you indexing? $1, $10, $100? so you know, the small businesses concessions were.

Velocity Legal (28:51.714)
Sometimes the difference between a a twenty three and a half percent rate and a eleven or or even zero, somewhere between those. Now it might be the difference between zero and forty seven. A hundred percent. And and I think the you know, just on that point, Andrew, because I know the government is trying to hang their hat on the fact that small businesses still have concessions here. and I think, you know, you have to be realistic. First of all, the

$2 million and $6 million threshold hasn't been touched in 19 years. That's the first thing. The second thing is the fact that when you get to that point, what's the incentive to continue to expand? Yeah. Versus, well, if we don't eject now, then the tax impost is going to be horrendous. Yep. that's a really, a really, really big thing. I think the just on a quick point before.

Bowing into the next thing. And this is a question for both of you, is we we recall when the Bamford decision happened that a lot of accountants basically grabbed all their deeds and said, Have we got an issue here? And I know for ourselves, we we actually grabbed all our deeds and we had to look at it and go, hang on a second, is do we have an issue in regards to how income is defined, et cetera, et cetera? I wonder if if

there is, you know, potential issues in regards to deeds and how they're framed so that way we can deal with CGT issues and streaming, et cetera, et cetera, in light of what's talking about here. which would be great for the legal fraternity, don't get me wrong, if if that's the case. But but again, it's it's sort of bit like Bamford's paper shuffling, just to get back to the same position. Like there's nothing fundamentally that's changed, you know. So I think that's that's that's right.

And the the interesting thing about the the thirty percent minimum tax also was that, you know, again, it was about making sure that people with capital gains weren't, you know, timing those gains to years when they had lower taxes so that they could minimise their tax on on on this on on the capital gain itself. And and that's sort of mentioned throughout the but the the but then you've got people like retirees, for example, who are, you know, they're not working, they're they're on lower rates and you know, they'll end up

Velocity Legal (31:13.358)
I'll end up paying more. That's the reality of it. Another thing we haven't even talked of but but I'll just mention before we move on is that that the we still have a discount as a concept, super funds, new residential, sorry, I should say eligible new builds, that will have a choice between indexation and the discount. so I mean, the point is, I guess, it's it's becoming a more and more complicated system. But let's let's move on to negative gearing as a next

the the next big big topic. Rajan, I I've been told not to say negative gearing is banned. but but it but it's effectively quarantined. That that's right. So negative gearing, look, I I suppose it's been a bit of a bugbear and there's been so much media about it in the context of the housing crisis that, you know, investors have an advantage in that they can effectively purchase properties and, you know, to the extent that they are

cash flow negative because the interest exceeds the sorry the holding costs I should say exceed the rental income the coming from it they can offset that against their other income. So from from 1 July sorry not 1 July from budget night I should say. Yes. Yep. basically properties that are acquired after budget night no longer can be negatively geared. I should say residential properties. It doesn't extend to other types of properties like

Commercial properties or shares or other types of assets. So residential properties only purchased after budget night can no longer be negatively geared. If you owned it before budget night, you can still negatively gear it and apparently do so indefinitely. Interestingly, if you owned a property that wasn't an investment property, but you turn it into one and you decide and you start negatively gearing it at that point, you can.

You know, you can still get the benefits of of negative gearing moving forward. Then that's typically a homeowner who's lived in their primary residence and they convert it to a to an investment property, really is what we're talking about. Exactly. Yeah, that's exactly right. Yeah. so it's interesting because obviously for pro people who already own properties, it's a very valuable benefit. and one that obviously won't be afforded to new investors coming in. The important exception to that though is new builds. Yep.

Velocity Legal (33:33.182)
so the government has made it clear there's a they don't want to discourage new investment and anything that increases the supply of housing. Yeah. So they're saying, look, if you if you increase the supply of housing by turning building on vacant land or turning a single house into a duplex or more, then they'll let you they'll let you negatively gear that. There's a there's an important point in that too, that I noticed, which is that if you have an old home and you've knocked it down.

And you've rebuilt it and you've built a new residential premises for GST purposes. Well, for GSP, for GST purposes. because you're not adding to the supply because you're just replacing one with the other, that's not considered new residential premises for the purposes of negative gearing. Yeah. Which I think is a very important thing to to convey to to people because that's you know, for anyone who's thinking, well, you know, you know, we had that house and we'll

delaying knocking it down and building something else. Well, we'll just do it now to try and, you know, to try and adhere to the new rules. But that's not going to help. No, I think I think the concept essentially is it is does it add to the housing supply? So I think your knockdown and build two or more would qualify. but yeah, knockdown and rebuild isn't going to qualify. That's why we have a new that new concept in the legislation. But again, it's it's more complexity. It's what's an eligible new build.

is it before the measures or after? I mean you could make a case, why grandfather at all? What's the what's the fairness in having two different systems? but yeah, if this goes through then then we've got we've got that that date being the twelfth of May twenty twenty six is the date for that. See the the interesting thing, and just a couple of points on this, and I don't think I'm giving any spoiler alerts here in terms of in terms of what's going on, because for for most it took

Five minutes to try and realize that you could still negatively gear an old property under the new rules, right? and before people start listening to this and go, geezy, I hope he doesn't let the cat out of the bag. It's not that hard of a concept, right? And I was explaining this to a client and I and you know, clients obviously bring in quite nervous with what's going on. And it's like, well, have a look at what negative gearing is impacting. And you look at the

Velocity Legal (35:54.924)
the idea of the fact that it's, you know, existing for for by large and part existing residential premises. But everything else is okay. So you say to yourself, what's stopping someone from incorporating a company and issuing the shares and borrowing to buy the shares or issuing units and unit trusts and borrowing to buy the units and the unit trust. to me, the the whole concept and you know,

People listening is going, shut up, Anthony, they're gonna probably plug that one as well, too. I don't know. Like I'm I I think, you know, I think it's safe to say we we know that there's some things that they they might not be attuned to, but I'd say that they would have you would think they would have thought of that if it took most of the you know five minutes to do so. And you look at that and you go, well, why? Like if someone really wanted to, they could do it that way if they wanted to. What have you achieved? the other thing too is and

I don't know the ruling or the determination off the top of my head, but there's that company ruling or determination which says that the ATO deem anyone who's operating in a company to effectively be trading. Companies have a presumption that they're carrying on business. Yeah, correct. Yep. So does that presumption and that that that position become more important now in light of what we're talking about? Because of the fact it's like, well, hang on, it's no, it's not

It's not capital. It's Yeah, yeah, yeah, yeah. It's not on a capital account. Therefore, therefore, yeah. So but anyway. The other the other point to make about the negative gearing is that obviously if you buy bought property after budget night and you you can't negatively gear it against your income, you don't necessarily lose the benefit of those deductions forever. you can offset that against future property income. So if you've got a portfolio of residential property, some which are positive, you can still offset them that way. There's no issue.

Or if you hold the residential property long enough and it becomes positive, then you can start getting the benefit of those those excess deductions in the future. Failing all of that, and this is where C G T becomes even more complicated, if you do sell the property, then those excess deductions can be used to offset your capital gain. but again, it feeds into the C G T rules, which have already been modified. Yes. But the discount. So yeah

Velocity Legal (38:20.258)
They're it they're they're sort of intermeshed somewhat, but they're i it's just even more complicated now if you've got a negatively geared residential property. Well, I want to turn to the one that's the most complicated of all now, because CGT and and the negative gearing, they're just entrees. there's more complicated than was there more complicated than this? geez, I wow, that doesn't sound right. Well, let's have a look here.

So as part of the budget, I think this is the one that sort of took everyone a little bit by surprise, at least at least from my perspective, that the government has announced that discretionary trusts, the trustees will be subject to a minimum 30% rate on on income of a discretionary trust. that's proposed that that would apply from one July 2028. and that is, to be clear, not

We do not have any legislation about that. it is not in the bill that covers the CGT reform. so the CGT changes. and I think that there it's going to be really hard. really, really hard to to actually work out how to do that in practice. Essentially what it's doing is it's saying that you know, with trusts, trusts typically don't pay tax themselves.

Trustee doesn't pay tax themselves unless the trustee chooses to retain income, which it would pay at 47%. it's the beneficiaries that pay the tax. And they pay the tax at the marginal rates. And the beneficiaries may have the tax-free threshold and so on and so forth, all those rates. What this is saying is essentially, firstly, that it doesn't matter what rate the beneficiary is essentially on to some extent, the trustee is going to pay 30% regardless. Now, the beneficiaries

Other than companies, beneficiaries other than companies will get a credit, a non-refundable credit for that tax paid. So essentially, if the beneficiary is on a 30% tax rate, then the beneficiary will pay zero tax. If they're on a 47% rate, they'll pay the 17% extra tax. They've said with companies, these are non-refundable. so perhaps I'll throw to you, Rajan, to explain what that what that means and how.

Velocity Legal (40:42.156)
bad and how seismic a change that actually is. Yeah, so it it's been sort of regular and routine practice, I think, that, you know, for the largely to manage taxes, sometimes it's done for asset protection, of course, that a trust will distribute excess or surplus profits to a bucket company or corporate beneficiary. As a corporate beneficiary will typically pay tax of thirty percent. And now of course that can give rise to a whole host of issues with Division 7A and whatnot, which are currently being litigated in Bendel's case, which

We'll come back to later. But what these changes basically say is that the non-refundable credit that the trustee can pass on to beneficiaries for paying the tax, they can't pass that on to corporate beneficiaries. So the company does not get that, got get that benefit. And the government says that, well, it's to ensure that the non-refundable tax offset is not converted into a refundable one via franking credits.

But what that practically means for corporate beneficiaries is double tax. So the trustee pays tax of thirty percent. the money then goes to the corporate beneficiary, and the corporate beneficiary doesn't get any benefit for the tax paid by the trustee, it pays tax again.

And some commentators, it there's been some confusion around how you work it out, but some have said it it's about sixty-two percent effective tax. Sixty two point nine, I think. Sixty is the is the magic number that's Anthony. I'll give you an example and then ask you a question. Let's just use some numbers for this. A trust generates a hundred dollars of income, makes a corporate beneficiary presently entitled to that hundred dollars. Yep. So the trustee pays under these rules if they go through.

The trustee would pay $30, 30%. So then we're left with $70. Now the corporate beneficiary will pay tax on something, whether it's 70 or 100. Yep. It'll pay tax on something and it'll pay tax at either 25% or 30%. But in the best scenario, I think the calculation is it's 51% tax. And that's not even considering.

Velocity Legal (42:50.114)
declaring a dividend out of the company. How many of your clients are you going recommend to make distributions to our companies? zero out of zero, I think. this one was just mind boggling. I I don't know what mischief they were trying to to resolve, to be honest with you. and as you said, there's already enough anti avoidance provisions to

prevent this perceived mischief that this is trying to curtail. I mean you've got, as you said, you've got Division Seven A, you've got Section 100A, which we saw in the Guardian case as well, too. it's

It makes you wonder why why this is come up to be honest with you. I can't make heads or tails. I think I I think I've I've reflected on and I think I can I think I've got an answer for what well, I've got an answer for something. but if we take that example and we say the trust distributes a hundred dollars to the to the corporate and let's say the trustee pays thirty percent tax, but the corporate gets the credit.

And then let's say that corporate then has individual shareholders declare or some, you know, dis dividend access shares or something. Then the corporate declares a dividend to a shareholder who's now who's on the tax-free threshold, let's say, refund. So the 30%'s not actually paid anywhere in that scenario. And I think that's where this has all come from. But what it does is effectively it entirely

Maybe I'm giving credit here, but may maybe it was that. I mean, you could deal with that in other ways, I guess. Well but yeah. Yeah, I I understand what you're saying and and it was funny, I was reflecting on this too. And the thing that throws the whole thing out the window, so to speak, is the fact that and this is where they they don't make any sense, right? and again, I'm an analogy guy. What they're saying and what they're doing in terms of policy

Velocity Legal (44:58.802)
a so polar opposite, right? and you know, if I was a health minister and I came out and said, look, we've got an obesity epidemic, okay. And the way we're gonna deal with it is like this. We're gonna cut out all your chocolate cake, okay? And we're gonna cut out some high sugar foods and all that sort of stuff. but you can have some ice cream, you can have some chocolate.

You can have this, you can have that. and if you want some KFC, you can have that as well too. You can have all this sort of stuff. And it's like, hang on, are we are we dealing with the problem or are we are we not? Because and to sort of tie that into this whole corporate beneficiary thing.

I could understand it but say for the fact that they're allowing people to restructure into more suitable entities. So in my mind it's like, well, hang on a second. If that's the mischief, people would just go into a company anyway and retain the profits and then pay the dividend out anyway. So what's the all you've done is just is just shuffle Just moving. Yeah, shuffle the deck chairs, so to speak. I I and that's what I'm saying, I I I there's something unless it's a case of

literally at face value, they've taken it at face value, which is that you've gone to a corporate beneficiary, you've capped your tax rate, that's not on. Like we're just that's mischief to us. We we just don't like it. And they've and they haven't seen that thought process all the way through to the very end. that's what I feel or certainly looks to me what they've done in terms of that they've just gone, no, we just don't like that. We just don't like it at all. If if it was just about capping taxes at corporate rates, I mean the reality is the high wealth individuals tend to cap it.

at corporate rates anyway. And you could just restructure into a company. In fact, the government will even help you do that under under the proposed rollover measures. So there's that. I I think it sort of bring to to take the point that you raised earlier about well we've got integrity measures of, you know, 100 A and and Div 7A, they're very hard and complicated and perhaps a lot less certain than just having a flat minimum 30% tax.

Velocity Legal (47:08.472)
But I think the other side of it is that if you have a flat minimum of thirty percent tax, then we can do away with Div Seven A, perhaps, or at least the part that deals with UPEs to corporate beneficiaries. We could, you know, the the sting out of one hundred A kind suddenly comes off. interestingly, on Div seven A, we have the High Court decision in Bendel, which is coming out anytime soon. I mean, correct me if I'm wrong, I don't think it's going to have much relevance in light of these changes. Well, if this gets up, it's a bit of a check mate.

you know, we were all playing a different game. But and and and I for one thought that that outcome would probably result in some sort of legislation to essentially if if if Bendel wins in the High Court, the the government would then come out with some legislation and say, Yeah, I know that this was the High Court outcome, but we're gonna change the law. probably going forward, but we're gonna change the law. But if this gets up,

They don't need to do that because people won't be distributing in the first place. A hundred percent. I think it's worth noting too that Howard and Costello have been mooting the whole minimum tax on trust for a very long time. Yes. And they were in power for a very long time. The reason why they didn't go ahead with it, and let's be honest, if anyone was going to have a crack at it for the amount of time that they were in in government, it would have been them. And they had the power to do so.

the reason why they abandoned it is because no matter which way you twisted and turned it, it became incredibly too hard. Yep. Like inc incredibly hard. And and I think it's there's a little bit of back to the future here in terms of the fact that there's there's got to be some lessons in, you know, why didn't they do it? And that was a, you know, for all intent purposes, a liberal government. And there's so many things that jump out. I mean I'll I'll I'll I'll rattle off a list. Primary production is excluded.

What is a just what is a fixed trust? because fixed trusts are excluded. What is a fixed trust, by the way? That's look, it's it's really it's really a very small portion of unit trusts that have that have ordinary units and nothing else. what is a fixed trust? they've proposed that distributions to persons with qualifying disabilities are not covered. what happens to trust losses?

Velocity Legal (49:30.922)
and and testamentary trusts and you know, there's gonna be rules for existing testamentary trusts versus new ones. There's there's just so many issues and and actually picking up division six of the nineteen thirty-six act, it's it's so hard anyway. I don't even know how you'd put this on top of it. It's like putting a band-aid over a band-aid over a band aid. You need to rewrite it. Yeah. Like the the whole idea of the present entitlement proportioned approach that comes out of section ninety seven doesn't work with this.

You'd have to You just said you you need to rewrite it, did you say? I think you would need to. Did you would you agree that the whole thing needs to be rewritten in terms of it should anyway. So that's an important segue, guys, because what's the thing that accountants and tax lawyers have been screaming for a long time? In amongst all this sort of stuff. What's the one thing that we're yearning for in regards to everything? We want simpler system and tax Tax reform. Yeah. Well, this is what's in the bag.

Look what I got here. I've had the the guys at on the go safety whip these up in twenty-four hours. There you go. Bit of bit of product placement there, guys. There we go. Tax reforms. All right, this is the I've got to adjust this is the

This is what what was in the what was in the bag with that? This is my I was gonna go the Bushman's hat with the you know, with the with the corkscrews and stuff, but at the end of the day, isn't this what we're all chasing here? We need to rewrite the whole the whole system. Tax reform. And and the thing is some would say, Well, this budget is is reform and it is reform, but y you need to reform the whole thing, not just part of it. Like

You know, if you're going to play around with capital and trusts and whatnot, you needed to deal with the income side of things too. But they left all that untouched.

Velocity Legal (51:20.876)
I love how you're just looking at me like no you ain't gonna see it's business downstairs and then we've got party at the top here. Party at the top here. Well I've just I'm just totally totally throwing it at We're gonna run through we're gonna keep them on for the rest of the episode now. We have to. they're just too good. What I will do is I'll loosen one up. You've got to make it loose, my head's about to explode. I had to adjust it all the way to the back. I I wanted to pick up on something that you raised, Andrew, like in all the issues with the trust, and this is the thing about trust losses. Yes.

So it's it's like you've got a lost trust, right? And if it's within your broader family group, it would be normal, like sensible behavior that you would distribute from a profit trust into a lost trust. And provided you've made your family trust elections and you've you've done all that, that's generally not a problem. I think that that's that just can't work anymore because you know your your profit trust is going to pay tax at 30%.

It's a non-refundable offset. So when it distributes that income to the lost trust, okay, yeah, sure, the lost trust won't pay any more tax, but you're not getting that 30% back. Yeah. I can't quite work out how it will actually be treated. And I wonder whether it'll it'll kill loss utilization entirely or just limit its effectiveness because it's it's it's the 30% rate. So it's

But but why n why do you need to go there? You've already got and the next item on our agenda is family trust distribution tax. you've already got family trust distribution tax, which is supposed to be the system that allows, you know, trusts within a family to distribute between each other and so on and so forth. what was wrong with that? I mean, there's lots of things wrong with family trust distribution tax. but what was wrong with allowing trusts within the same group to utilize losses? Well, I I I think that's right. I mean, it's obviously a change of policy that the government's decided that

Perhaps there's too much tax leakage or they weren't okay with that anymore. but I think that, you know, as far as loss trusts are concerned, the way look, we don't have any legislation on this. we're only speculating at this stage. But to my mind it seems that if you've got losses in a trust, the only way you're using them is if you can use that trust to generate income. You know, income within that same trust. So not coming from outside, it's gotta be within that trust. Which is interesting, right? Because and not

Velocity Legal (53:46.446)
But I'm advocating for anything just as a because I don't want to get you guys cancelled, you know, the second episode here. you know, I don't don't want to certainly don't want to do that. But what what I will say is this is that you know, it's inherent in in people's nature in our game. I don't think anyone in in our game, whether it be tax lawyers or accountants, are out to say we are going to structure you and do things on the basis that you pay a fair amount of tax.

That's not the that's not the aim of the game. you know, the aim of the game is is that you pay what you need to pay, you know, in a fair system. However, where the rules are so stacked up against, you know, and this is part of the problem too, if people perceive unfairness in the system, then naturally they'll treat that unfairness and they'll seek ways to mitigate unfairness.

dare I say, in aggressive industry has that with bottom of the harbor schemes and the, you know, the various agricultural products and the promoter penalty stuff. You know, there's there's history of that. 100%. And now we're going to be into this vortex now where you'll have people who will go out and do that. and what will happen is then you'll have more resources getting thrown at compliance. Compliance will get harder. It will be a knock-on effect to the

Little guys who are trying to do the right thing as well too and you you become it it just becomes a red hot mess. Yeah, I mean, I think like one aspect of I mean, some of what's giving rise to all the trust splitting and all those issues was the fact that, you know, i say you had a couple that had family, they had children, and you know, husband wife earning a hundred thousand dollars each will pay less tax than if you've got, say, the wife earning two hundred thousand and the husband being the primary carer. And that just is just wrong. Like it why should they

i they're in the same economic position. Why are they paying different taxes? So, you know, people then use things like trust structures, you know, splitting and all that sort of thing to try and correct that imbalance. Whereas a an easier way to have fixed it would have just been allowed families to lodge family based returns and pay taxes a collective. and many countries do that. Yeah, many countries do that. So, you know, you can reproach for reform in different ways. I think that would have been the better way than just saying, you know, streaming and splitting's cancelled, thirty percent minimum tax. Yep.

Velocity Legal (56:11.648)
One thing that was not in the budget, which we're gonna talk about now, is that that there's dire need for reform for is family trust distribution tax. And this has been in the media very recently. we had a situation reported that there was a there was a bus services family business which was said to face combined family trust distribution tax and GIC.

Exceeding $67 million, which according to the article was more than double the family's estimated $30 million net wealth. $67 million liabilities for family trust distribution tax and GIC. And presumably GIC was probably more than 50% of that. And that the the the this was in the accountants daily.

reporting the tax institute was calling for urgent reform of the rules. I I for one was sort of surprised that there was absolutely nothing in the budget about family trust distribution tax. Because I mean how unfair is that that just doesn't say yes, you could say, well they're a wealthy client, you know, you know, though who care, who cares? but you know, that just that just seems, you know, out of all proportion. It's it's fundamentally wrong that

You've got something that in my mind, I believe was intended to keep something inside the family. And by large and part, there's no mischief in terms of these, in terms of, you know, nominated individuals and all that sort of stuff. The thing, too, and this is the thing that I get really frustrated with, is when the ATO come out and say, Well, our hands are tied, we can't do anything about it. It's like,

Well, you're allocating resources to something that you never would have before. Don't sit here and say your hands are tied because you can choose what you go after and what you don't go after in terms of where where is the real mischief here. That's just an easy take. and the thing that's really, you know, really concerning with that too is then when they came out and gave an amnesty and said, you know, if you guys come forward and confess your sins, then we'll make sure that we don't slap you as hard.

Velocity Legal (58:35.948)
So hang on, no, there's no the whole genesis of why this awoke to begin with was because someone identified an issue and they did the right thing by doing voluntary disclosure, if I'm not mistaken. and they came after him with a with a gadling gun and and then some. And I'm thinking to myself, and that in itself is problematic for practitioners because of the fact that even if you were to use voluntary disclosure and say, hey, I

Put my hands up here. I've actually done the wrong thing here. It and I can understand how this can happen. The incentive to to do that becomes diminished because of the fact that you're really trying to weigh up. Well, hang on a second. Is this really what are the odds of this getting picked up? I have to weigh up against the consequence of it getting picked up. And when you talk about 67 million bucks, don't get me wrong when I say this, but

If you knew that was going to be the case and you had to roll the dice between the two, where you were confronted with, well, it's going to be everything lost anyway. You know, what'd you do? Yeah. Well, I can tell you right now. Well, look, you know, and again, I'm not advocating for anything, but you know, a senseical person would be forgiven for thinking, well, I'll just run the gauntlet because I want to come. Because I'm going to lose everything anyway if I voluntarily disclose. So what's what's the I can take a chance.

And maybe I'll be okay, or I don't take a chance and I put my hands up and I know a hundred percent I'm not gonna be okay and I'm gonna be worse off, as you say, in terms of your net worth. I I suppose the thing with voluntary disclosure is there there is the benefit of penalty reduction and it's you know, eighty percent if you do it before a an investigation commences. But the thing with family trust distribution tax is that because there's no like a

amendment period for it. It's unlimited amendment period. And then you get the GI C that accrues and your your voluntary disclosure doesn't save you from GI C. It only helps you with the penalty. Even that alone could be ruinous for a person. I mean, you know, obviously there was some mistake that was made. A family trust election was made. A distribution was perhaps made outside of the family group. it may have happened twenty odd years ago and it's been discovered now. twenty years of, you know, accumulated, you know

Velocity Legal (01:00:45.304)
G I C no amendment period, no limitation whatsoever. It's you know, what do you do? What do you do with that? There's no way you can really protect yourself from something like that. It's reminiscent of when I, you know, you might have an argument with your spouse and it's like, do you remember back 20 years ago you did that? And it's like, no, it's coming back to haunt me. It's coming back to haunt me. Haven't forgotten. It's just an unlimited period of review. Yeah, unlimited period of review. That's a good one. I thought before we move on to some

cases because there are some quite interesting cases that were decided in in May. I thought we would just round off on the other things in the budget, not not in any particular detail because of the but we have the working Australian tax offset or the WATO $250, the thousand dollar standard deduction for work related expenses, the instant asset write-off being made

Permanent at $20,000, some significant changes to the RD rules and the percentages and the thresholds and a few other things. and and loss carryback measures, in addition to additional ATO powers to investigate and pursue fraud. in a normal year, probably would spend a whole episode talking about all those things, but

Because of all these other ones that that you know, the oxygen's been sucked to to those. Well, that's right. I mean, look, you know, I'm all for, you know, tax reductions and offsets and that sort of thing. it doesn't feel like much in the context of what they're doing with trusts and capital. is giving a very small amount back to to workers. the really interesting thing is that this concept of, you know, working Australians tax offset that's, you know, you know, labor income, you know, it's really tied to

Australian residents who are earning labor income. And that's that's a significant distinction because, you know, in the past with these sort of offsets were against income generally, but now it's very much targeted towards labor. and I have a range of questions around that. So for example, what if you're in the PSI rules, for example? you know, what if you're in the professional services and you receive a trust distribution that's tied to your

Velocity Legal (01:03:05.078)
you know, work in a firm or, you know, in a business or whatever, you know, is that is that eligible for these? Or and I think to to tie that back, that particularly with that 30% minimum tr tax rate for discretionary trust, one of the suggestions was, well, the the the persons running the trusts can pay themselves salaries. And I think that will that will definitely be a consideration for businesses. If there are any businesses left in discretionary trusts, those that are

That would definitely be a consideration. Yeah. I think it's important too for for people to understand again at a grassroots level that a lot of the reason why people don't pay themselves a wage necessarily is because you have the overheads that are attached to that with your superannuation, your work cover, payroll tax sometimes as well too. P A Y G with holding and pay P A Y G withholding. And the thing is is that a lot of people, especially those in small business.

will opt not to do that because of the fact that every dollar counts. Yep. You know, and you need as much working again, ironically, working capital. And you've got uncertainty as well. Absolutely. Absolutely. What's interesting though is that, you know, that twenty grand write off which we've been, you know, screaming for for ages, I always laughed when you know, it always became an announcement because it's always every year. Well it's every year because of the fact that this way when they front

You know, the people that go, Well, we've invested X amount of billion dollars into small business. You know, it's always that announcement. And it's like, yeah, but you've given something, you know, at what stage do you keep giving something that it's just like becomes permanent? It's no longer an announcement. Yeah. but I guess, you know, this way now that it's permanent, that takes that off the It's a positive, albeit a small one that that should have been done many years ago. 100%. Let's get into the cases for this for this month. And we've picked out four cases. Cameron

Chung, Frizzell, and Botella, all really interesting cases. I'm going to start with Cameron because it ties into some of the stuff we've been talking about already. It's got a family trust election element. It has unpaid present entitlements and a Division 7A element. Essentially, in this case, the the lay of the land was that.

Velocity Legal (01:05:30.082)
We had a family trust, the Cameron Family Trust, and it received income from another trust within its with it by a related party. What the Cameron Family Trust then did is it made a company adjuvant, we'll just call it bucket company for this per present purposes, made that bucket company presently entitled to income. A pretty common thing to do. Very common.

And those unpaid present entitlements were put on subtrusts in accordance with the former PSLA 2010 four. The those essentially those seven-year interest-only loans, they're not not that popular, but in this case the taxpayers did that. the amounts were significant. We're talking

ranging from one to four million dollars type distributions each year. and the there's two issues that were relevant in this case. But the first one was that although the family trust, they put those they they they had interest interest only charged under the PSLA and they claimed interest. Well they paid interest under those under those to the the bucket company. So so there was an expense

for the Cameron Family Trust. and they claimed a deduction for that. Now the issue was whether or not that was a allowable deduction. Was that for the Cameron Family Trust, was that incurred in gaining or producing the family trust's accessible income? it's funny because you're thinking, Division 7A, UPE compliance, all this type of stuff.

someone's not adequately turned their mind to is this expense actually deductible or not? and there's a variety of situations where you sort of see this sometimes say, hang on a sec, is that is that deductible? and the issue essentially is that for that family trust

Velocity Legal (01:07:48.248)
For that expense, what income was received by the family trust? And the answer is unfortunately there wasn't any. So the family trust didn't essentially carry on the business. It would have been different if it was just the family trust generated income and made the a company presently entitled. That would have been completely different. But that wasn't the situation. Essentially, it was a chain of trusts, two chain of two, and that for that.

That receiving trust, that family trust, it they didn't, they didn't sort of back-to-back it. It wasn't a back-to-back loan type situation. So all that family trust had was a UPE to another trust, which was put just well, nothing was done with it. It was just a trust-to-trust UPE. taxpayer tried to argue total holdings, which is a famous case about deductions, where.

Essentially a a holding company lent money to a subsidiary, but it was deductible because there was an expectation that that holding company might get dividends in the future. that was distinguished by the federal court essentially on the basis that, well, that's a holding company to a subsidiary. This is a trust that has no obligation to distribute to another trust in the future. and for that reason, the taxpayer failed, not deductible.

Thought, thoughts? Well, it's a really interesting decision because I think that you know, it's it's a very common thing, obviously, that people will enter into arrangements to manage Division 7A. sometimes it'll just be a direct Division 7A loan. In this case, it was a UPE, it was a subtrust arrangement to manage a UPE. And I think most people do understand that the interest you pay under those arrangements is deductible. So I think that this decision might come as a surprise to a lot of

A lot of people and and it might be the unique circumstances of this case dealing with the chain of trusts. but I think it highlights that you really do need to have that direct nexus with income earnings. It's also just thinking about that at that Section 81 question and and and what you know, is this actually deductible? And look, I think there was actually a simple fix. I think the simple fix was if if they'd put the UPE from the original trust to the family trust essentially on the PSLA twenty ten slash four terms.

Velocity Legal (01:10:10.488)
They would have been okay, I think, because then there would have been it would have been like the situation of client borrows money from the bank, client lends it to their company or family trust, charges the same interest rate, and there's you don't break the deductibility link. would you agree, Anthony? Well to me, the whole thing is it really comes back to the whole purpose test, isn't it? Or use tests. that's just

interest deductibility 101, which is that you've borrowed money. What is the use of the funds? Is it income producing? to me, all the all the other stuff insofar as you know putting it on those terms from what I can see there, the course just peeled it right back and going, well it's a use test. Yeah. It's a use test case. and you've got no income tied into what you've borrowed for. whether

the corporate beneficiary, you know, had something that they were anticipating to buy or whatever it might be, if there was some sort of purpose there that you could rely on on the likes of the Steel Steels case, you know, where you can where you can look at that. but the thing is, is that yeah, in this case it was just very, very much a a case of, well, you borrowed money, what was it for? Okay.

wasn't income producing. It is what it is. It's a it's a standard eight dash one Parmigiana arrangement. Parmigiana arrangement. I like it. It's the tax deduction for all. The the other part of the case concerned whether a family trust election was made or not. and essentially this boiled down to some some records

referring to a in the in the the the family trust's tax return, referring to a family trust. in particular the the nineteen ninety nine tax return referred to a family trust election that specified the nineteen ninety-five income yeah and a particular person as a specified beneficiary sorry the specified individual and there were distributions made outside of that group and and family trust distribution tax notices and the argument was that well

Velocity Legal (01:12:28.14)
We actually never made a family trust election. unfortunately, I think I think it boils down to there really wasn't. I mean, it's a hard thing to not to disprove that to prove that something didn't happen. Where you have a burden of proof. you have the onus of proof to prove that it didn't happen. and they weren't able to prove that it that it didn't happen, essentially. It was in a tax return. I've got no reason to really think that that wouldn't be correct. You signed it.

I think it's it's it's not it's it's there's no absolutes on this, but it's I think it's really, well, if there's a family trust election mentioned in a tax return, yes, that's not the form that you need to do to make the election. It's probably pretty good evidence. And and when taxpayers got an onus of proof to prove otherwise, I mean how are you how are you possibly going to do that? Yeah. Look, this this just goes back to your standard onus type cases where the don't the onus of proof always falls on the taxpayer.

And as you said quite rightly, Andrew, that proving the non-existence of something is incredibly hard. And especially trying to prove it from twenty-five years ago is extraordinarily difficult. I think that you know, really the best evidence is contemporaneous evidence. And the the only contemporaneous evidence you have here is a nineteen ninety-nine tax return saying that there was an FTE. Yeah. So good luck. You know, I I think really the the the the best way you could maybe argue something like this.

Is to say that the original family trust election was invalid to begin with. And the way you do that is to argue that the family control test, which is a precondition to making an election, wasn't satisfied. But then you would need evidence around the distributions that were being made by the trust in the mid-90s to demonstrate that it wasn't eligible to make an FT to begin with.

So so Anthony, we call the first one the eight one is a Parmigiana case. I guess onus of proof is what, a steak and chips or a porterhouse? You know what's funny? I I've just I've I've listened to you guys and I've and I'm reading this, and I'll be honest with you. Like I'm looking at I'm like the commission already got up on the eight dash one, right? Yep. And and I'm looking at this and I'm like, you know what? This is it was such an unfair outcome, if I'm to be honest with you. And and and I I just I feel like this is like that.

Velocity Legal (01:14:48.75)
karate kid moment where sensei's in the background talking to the commissioner and going, you know, now sweep the leg. You know, like let's fin finish him. Go for the channel. You know, go for it. Like, you know. And it's like, hang on, the he's already you've won. You've got the eight dash one. Why why you why why do you need to go any f like it just I don't know. I I looked at this and I thought, that's really kicking them with them down is the other way to I don't know. It's either that or the Street Fighter, you know, finish him. Yeah. You know, like it's it's

I don't know. You see this in in ATL reviews all the time that and this is why it's like an an audit is so dangerous. Once they look at you, and it could be for anything, could be GST, could be a deduction, doesn't matter what it is, once they're in there, it turns into a complete forensic audit. Right. This this case, I I don't have the the the the inside knowledge on this case.

But it wouldn't surprise me if this started as a deduction question. And then during the course of their review, they noticed the family trust election and FDDT. And then it just morphed into this, this, this monster. I I 100% agree with you. And I've seen it with I had an audit about 10 years ago which started off as a it was to do with subies for a construction client of mine. And it was during the time where T PARS came in. Yeah. Okay. Yep. and it started off as.

a a construction audit, but it morphed into an FBT audit. Yeah. and I was like, hang on a second. I said, I I I invited you for lunch, but I didn't realise you were going to stay the weekend. Like I did I what are you talking about here? And you're right, I I think they use it they use it to, you know, they come in, have a look around and then they go, you know what? I mean here I might as well go have a look upstairs or look downstairs. Yeah. yeah I I I

100% agree with what you're saying. which is that I reckon it did start off as one thing and then it just morphed into you know into something else. The next one on our list I'll throw to you, Rajan. It's a it's a it's a steak and chips case, I think. onus of proof again. Yeah, ch Chung's case. So I think I've talked about this case in the past in other forums, not not not not in tax talks. And again, this is the onus of proof case. This is the unexplained income type cases. We've had a string of these over the last couple of years.

Velocity Legal (01:17:06.488)
This one was a particularly big one, so I'm not surprised that it got appealed to the full federal court and basically concerned an amount of about $30 odd million dollars that had been received by the taxpayer over a period of some years. Now, I think the first point I can make about this case is that the individual concerned had not lodged tax returns between 2005 and 2015 from memory. So that automatically opens you up to basically you know.

What's going on here? What's going on here? Default assessments, there's no period of review because you never lodged a return. So, you know, the first comment I'd make is that if this person had just lodged a nil return, and I would I would recommend to everyone, like, you know, if you're getting any sort of money and you you decide it's not accessible, just lodge a nil return for goodness sakes, because just doing that alone you know, i enlivens the period of review and could have saved this taxpayer millions of dollars.

But that's not what happened. So you got a default assessment, which is an automatic 75% penalty. So you double your fund, basically. But I've gone into a whole bunch of other things. But really the detail of this case was that Mr. Chung had received amounts of money from family members in Vanuatu. Apparently, his family members ran a supermarket, Obon Marsh, I believe it's called. And you can look them up, they have a website.

and he basically said that look, you know, due to our Chinese culture and traditions, you know, they were just payments, they were just gifts, you know, they they weren't income, they were just it was a cultural tradition. It was the red envelope, you Don't ask questions. It's just if it's got the seal on it, just don't. Yeah, it was a it was a red packet, you know, like that's all it was. and at first instance, the taxpayer, you know, it was a good witness. They provided evidence and the judge believed them.

And said that, yeah, no, I believed, yeah, this is an income. the problem is, though, that that's not the test, right? In these owners' cases, it's not enough to say that the commissioner's wrong. You also have to demonstrate what your income actually was, and especially when you're dealing with the default assessment. You have you have to do that. it wasn't enough to convince the judge that, well, no, this wasn't income, it was a gift. And I guess the other problem they had that this taxpayer had was that there was evidence to suggest that it wasn't.

Velocity Legal (01:19:28.002)
So for example, the website listed him as a managing director. He referred to it as you know, like as him having an ownership stake in the business. There were numerous comments and other evidentiary material to suggest that he actually had some v an interest in this business. And so s all of a sudden it's not looking like a gift, it's suddenly looking like more than that. At the very minimum, it cast a doubt on what he was saying as a witness. Yeah. My my my reflection on the case seems to be that

in first instance, well, sorry, I'll rephrase that. The the the full federal court has said that look, yes, how a person's credibility is assessed is important and you know, you can believe what people say, but there's only so far you can take that. If you've got documentation and other things that are inconsistent with that and it hasn't been, I guess that tension hasn't been ventilated in an appropriate way.

then well we can't overlook all this other stuff that's inconsistent with what the person's actually saying. That's right. to to to try to simplify it into into as as simple as possible. Well you guys have seen a fair few of these cases, right? And and for the listeners it's it's actually good knowledge is is how do the courts, or the commissioner for that matter, well we know what the commissioner's gonna think because that's why they've taken them to the court, but in terms of the cultural card.

Right. And whilst that, you know, can be seen as a throwaway, but also too, it does have some significance of of just it's flashing back to me where, you know, when I went back to Italy and my, you know, my great auntie was in her nineties. she had her pension stuffed in the walls, in you know, under the mattress, under this and that and whatever it is. And like you're not gonna get documentation about, yeah, by the way, yeah, we we found this in the wall, and we found this and we found this and we found this.

Unless for the fact that, you know, obviously you're you're a credible witness, you know, comes back to to that sort of thing as well too. But in terms of how that stacks up in a in a court sense, what what bearing does the cultural side of things have in the equation, you know, especially with something like this? I don't think all that much, to be honest. I mean, look, sometimes it it it often does get raised because it's typically people from other cultures who get swept up in all of this these tax reviews.

Velocity Legal (01:21:55.958)
And it is a very common thing that particularly of older generations from certain parts of the world that hiding cash, you know, under the mattress or in the wall, as you say. W'd'd you why'd you look at me funny when you were explaining about hiding cash there? I know it's not easy being the the Italian in the room, I no, no, it was your I I I get I'm feeling a bit nervous. Actually, is the air con on in here? Yeah, no, no, it wasn't it.

Wasn't alerted comment at all. But but the issue, yeah, but the issue is it does come up and people often do say in a court setting that, well, you know, there's there's a cultural context. But it's it's it's not so much that it's what you can prove, you know. Where where's the evidence? Where's the where's the contemporaneous third party evidence that proves all that? And that's the big challenge that when you're dealing exclusively in cash, you don't have the benefit of things like bank records, bank statements, you know,

Transfer records. You don't have the benefit of those things to shore up your position. So then you're relying entirely upon witness statements and evidence. And then if you find, as Andrew said, if you find anything inconsistent with those statements, then you're sort of stuffed at that point. It just makes it really hard to prove your case. 100%. 100%. Well, the next one we've got is also, I I guess it it it it touches on that as well. this is a case

Called Frizzell and the Commission of Taxation 2026 in the Administrative Repuh Review Tribunal. In this case, it was a far cry from $30 million. These were much more modest distributions. In essence, the taxpayer became an Australian resident in 2016.

And received some distributions in 2019 and 2020 years. 78,000 pounds, 58,000 pounds, and 20,000 Australian dollars. We're not talking millions. still nice to receive a distribution, but we're not we're far cry from the from the Chung territory. now the issue was that that money came from overseas trusts.

Velocity Legal (01:24:12.13)
And as soon as you hear the words overseas trust, the next second. Yep. 99 B. Yep. and it was a ninety nine B, it was a ninety nine B case. have you have you had to have much dealings with with next section section ninety nine B, Anthony? What's what's what's what's does the grin travel through well in these microphones? Yes, it does. It does. Yeah. yeah, I have. yeah, I have. And it's

Yeah, it's a it's unforgiving provision, isn't it? It is unforgiving. And essentially the the only way, or I wouldn't say the only way, but the main way out of section ninety nine B is that section deems essentially anything from a foreign trust to be income unless an exclusion applies. And the most typical exclusion is that it is corpus. Not only is it corpus, it's also an amount which would not have been taxed if.

That foreign trust was an Australian taxpayer under the hypothetical taxpayer test. So essentially, a taxpayer needs to prove one, it's corpus, and two, it wouldn't have been taxable in Australia. So something like someone passes away overseas and money goes to an overseas trust, and then the money goes from the overseas trust to Australia. That's that's your classic kind of corpus, not taxable situation. However, your opposite is where you've got.

trust retaining income or you know building on its corpus but hey they're really accumulated profits or it's gone from this trust to this trust to this trust to this other trust and maybe it's corpus of the last trust, but not any of those other trusts. Those type of things. the taxpayer, I don't think well they were self represented. So they didn't there's your first issue. but

They seem to sort of suggest that they didn't know that they received the money from a trust. It's kind of I'm not sure their arguments were that well considered, but but there was inconsistent with self-representation, isn't it? It's Yeah. I think the and and and essentially they lost i i i in the in the main part they lost the case and and pen penalties of recklessness were were imposed as well. So fifty percent penalties, and essentially on the penalties

Velocity Legal (01:26:34.488)
Tribunal said, well, you haven't really provided enough evidence to suggest it's not reckless, essentially. So again, your burden type issues that how can I say it's not reckless? If the ATO said it's reckless and you haven't really provided any evidence to the contrary, I can't really say it's not reckless either. Is the simplified version of that. But I guess you I guess we have these conversations, you know, people ask, particularly from overseas advisors, does Australia have a gift tax? Well, no.

We don't have a gift tax in Australia. But if you're thinking about if if it's from an individual, fine. But are we talking about a company overseas or we're talking about trust overseas, in which case, essentially it could be a gift tax? I think this case is interesting. It it sort of also brings up the issue around burden of proof and that sort of thing, because you know, usually the as the typical answer to a nine nine B is assessment is no, it's corpus, right? But as you said, Andrew, that it has to be

corpus and it also has to be an amount that would not have been accessible in that hypothetical taxpayer situation. But then you have to prove that it wouldn't have been taxable. And to be able to prove that you need to track the source of the funds. Now if this particular taxpayer didn't know that it even came from a trust to begin with, then how is she going to prove the actual source of the of the funds in which the distribution came? Because because that's the level of detail you need to have. You need to know

Where did that money come from? How did the trust get the money? And it came through a chain of trust too, which means you've got to then track it through the other trust. And then how did it get the money? Where did it come from? And we're talking about someone who'd been a resident for three years at that point. Yes. And the thing is too, it's am I right in thinking this person was from the UK, right? sorry, the distribution's from somewhere in the UK. So it's not like it was coming from somewhere that didn't have a sophisticated tax system where you could trace it. Like it's not like it

came from North Korea or something like that. You know what I mean? Where it's like, Yeah, don't know if they know what a trust is. but yeah, it's what's interesting though, and you and you both touched on it, and I must admit it's not something I've had to turn my mind to, but the that's an important point about the fact that the burden of proof also applies to the penalty regime, not just the fact that it's about the burden of proof proving your position. Yeah. So and I I

Velocity Legal (01:28:57.358)
To be honest with you, that's a that's a pretty big ask in itself, isn't it? It is, yeah. You know, it's like not only preview case, but also prove to us why we shouldn't have penalized you like it's almost like if you're a beneficiary, let's say you move to Australia and you've got family overseas and they say, Okay, we're gonna give you this this this inheritance type thing. Okay. Well, before you do that, I need to know is it where's it coming from? What's the source? Let's say it's an individual and I still need to know source anyway.

At least to some degree. what documentation do I have around this? is it coming from a trust? All this stuff. And it's almost like if you're not satisfied on those, you shouldn't accept the gift. I mean, you're gonna get taxed on it plus a 50% penalty. That's pr you're pretty much wiping out most of the most of the gift there. but it's it's worse than that because nine nine B has a statutory interest charge. Yes. Yes. And once you add that statutory interest charge, it pretty much wipes out your entire distribution. You've you're paying the whole amount in tax. Yeah.

So it's basically before getting that, if you're not satisfied to that level of detail, don't don't don't take the gift. Yeah, a hundred percent case. And you Frieza, like there's not many ninety-nine B cases, but f this case reminds me of an earlier case from twenty nineteen, which was Campbell's case, which was an Australian resident who received funds from a New Zealand trust. She had the same problem. She had exactly the same problem. She was arguing the corpus exemption. She didn't have sufficient records and evidence to actually demonstrate

Where where the the source of the funds. So she couldn't she couldn't prove up the corpus exemption. And I think the judge in that case made a comment that I would expect at a minimum to see some resolutions, something, financial statements, resolutions, something that that shores up the source of the funds. Yeah. if you don't have that, yeah, don't don't accept the gift. Yeah. You you can sort of sympathize with situations like this because already it it's hard enough for us on our side to get the contemporaneous evidence and everything else.

But then you have to expect from across the hemisphere. Yes. In terms of saying, Hey guys, you I need you to do the same thing. And actually, if anything, the bar's going to be higher because of the fact you're not dealing in the same jurisdiction. They don't have the same data matching. They don't have any information they can tap into. They're heavily reliant on what you present. So it becomes even more onerous from that perspective. yeah, wild, wild case. Next one's Votella. Yep.

Velocity Legal (01:31:21.442)
My last, lucky last on the list, Bertella and the Commissioner. Yeah, so this case is it it sort of concerns the application of Division 7a and in particular this this issue around the written agreement. So as many of you will know, as both of you certainly know, you Division 7A requires that you have a written loan agreement in place. if that that is to avoid the consequences of division of the deemed dividend under Div 7A. and if you don't have that, then you have a ticket.

Breach and and you've got a deemed dividend. Now, there's some conditions around that written agreement. You know, first of all, must be in writing very obviously, has to be in place at the correct time, has to specify the correct, you know, interest rate and the correct term and the minimum repayments that are required and and whatnot. So that's all fine.

In this particular case, though, Botella was relying on terms in a constitution. So there was no separate written loan agreement, but there was terms in a company constitution that basically said, look, any any advances that were made by the relevant company to the individual or a shareholder or associate of shareholder were were to be on Division 7A terms. I've seen this come up a few times in the past. And I think that

I I know Andrew, you and I would have always had some concerns about the company constitution fallback mechanism. It's almost like your default distribution mechanism for a trustee that if all else fails, the constitution might might save you. Yeah, well, you know, come to the rescue. but in this particular case, the the administrative review review tribunal said that that is not a written loan agreement. Doesn't qualify for DIP 7A purposes. Yeah. W what are your thoughts on this, Anthony?

That's like pulling the emergency parachute and and nothing's coming out, isn't it? Like, you know, it it's it's you're gonna be straight to the ground with that one. look, I I think you'll find that majority of constitutions have some sort of one nine N fallback in there in some way, shape or form. and this really

Velocity Legal (01:33:41.976)
Well, it brings it into question, doesn't it? Absolutely. I'd I I'd always I always thought like, you know, if if it wasn't too so a co a constitution is signed by shareholders, or if it's not signed by the shareholders, it's sort of adhered to by the shareholders because there's a transfer of shares later on. So you could say, well, if a shareholder I've signed or good enough to sign the constitution. Now, shareholders might not be the ones who have been lent the money in the first place. So if we're talking about an associate

I don't think you were ever going to get any any protection from under this. what the tribunal have essentially said is so so what the taxpayer did was essentially I think they it looks like they just didn't do agreements when they were supposed to, and that this was a a fallback argument. As typically this is where when the only time you're relying on the provision of the constitution is usually as a fallback. You got your nails like scratching all the way down, just trying to hold it. Hanging on, yeah. Hanging on. and

What they so what they had in terms of evidence was really sort of just journal entries and financial statements of amounts. So they didn't they didn't have written loan agreements. And what the tribunal said is that to satisfy the conditions of section 109N, it's not just enough for how to have an agreement in writing. You need to have the whole of the agreement in writing. So you can't have an agreement partly in writing, part implied, part oral, part writing.

That's not going to be enough. You have to have the whole agreement in writing. So what was in writing? Okay, well, there's a constitution and it set out these terms. But what wasn't in writing? Who's it? Who's the borrower? Who's the lender? What's the amount? Those things, yeah, they're in journal entries, but that's not enough. They're saying the whole agreement, the whole agreement needs to be in writing. So I think what would have worked in this situation is if there was a

If there was a one pager before the lodgement date to say, company, you I acknowledge you've lent me money, it's this amount and the terms of the constitution are gonna apply to it. That probably would have been enough. but they didn't have that. It sounds is it It's very similar to service fee type discussion. Yeah, I was gonna say is that S

Velocity Legal (01:36:03.604)
SNF or SNA. S S N A S N A. You're right. where it's it's that whole thing of, you know, if it's not in writing, it didn't happen. Yeah. and there's there's elements of that argument here, which is effectively well, you can't just imply it's not the fact of you can't just have this sort of, you know, we come together and we we can sort of feel what's going on. We have the vibe of of there's something, there's an agreement here, but you know, in the absence of it being in writing, then it doesn't

doesn't exist no matter what you can do or what's implied or what's journaled. And, you know, I mean, you know, we've we all know that journals are accountants' friends in in terms of things, but they mean nothing without the substance behind it. Well the real question I have is what happens to your facility agreements? Because you can you sometimes you'll have a division Division 7A agreement where you say, okay, I lend $100,000 and it's this is the term. But a lot of times you might say, we'll enter into an agreement and it'll be whatever's drawn upon

It could happen over multiple years and we just want to have one thing that's sort of an agreement to rule them all. It's like it's like an overgraph or an umbrella an umbrella facility. Yeah. Yeah. What happens to those? Because I think this this line of reasoning could sort of be relevant there. And I think I think again, it's not a high burden to get over, but I think under those type agreements you're sort of gonna have to have a a drawdown notice sign.

each year. And if you don't have that, I think you run into this exact same issue. Well it's you know, and again, when you say logic, look at logic of this whole thing. and without sort of logic attacks sometimes don't they just you know just just it's like w water and oil. but the thing is is that like I sort of think to myself, well you look at any sort of commercial arrangement like that with a bank, okay, and say you want an overdraft with a bank and they give you a million dollars worth of overdrafts.

Okay, so well, already you've specified we're gonna give you up to a million. That's your that's your cap. I sort of look at that and I go, well, there is always a possibility of having some sort of written agreement because obviously the bank is going to be more onerous than what a Division 7A loan agreement is because they're trying protect their capital. So if it's good enough for them in terms of, well, this is what we've lent you and this is how much we're gonna charge you if you draw down on it, really then brings into question, well.

Velocity Legal (01:38:30.744)
Can you have a similar sort of arrangement for Division Seven A purposes where you go, well, hang on, let's just do this now. You know, you can say, geez, if you're gonna do that, you might as well just have a default for ten million bucks or something like that, you 'cause you're never gonna hit it. But I I sort of wonder if if well you can't help but turn your mind to something like that in terms of whether that's feasible or not. Yeah. this case had another issue, regarding dividend stripping and franking credits, which was quite interesting.

so it seemed that what happened in this case is that there was a restructure done. so effectively a new holding company was put in place. Yep. and then a large dividend was paid up into that holding company. it's it's not an uncommon approach. some oftentimes it's being done for asset protection reasons. so if you've got a trading entity, for example, significant retained earnings, you can put in a holding company in place and then

Effectively draw a dividend out. It's generally tax neutral, a frank dividend between two companies. And it removes those retained earnings away from the trading company so that if anything goes wrong with a trading company, you're not sacrificing a whole host of pr of prior year profits. So it's it's not an uncommon strategy. It's commonly done for asset protection, but but according to the co court, this this was a dividend strip. Well, they went a little bit beyond just that.

Not only did they interpose, so they had a whole operating company, let's just say, let's give the example of a million dollars, because that's roughly the figures were that were there. Million dollars of retained profits in that in that operating company. Now, Anthony, if I was if I was that company I was and I would lend that out to you, let's say you're a shareholder and associate, Division 7A would apply to that, correct? 100%. Absolutely. Definitely got a distributor surplus. Now, what happened here was that we interposed a holding company.

And we did it through CGT rollover, subdivision 122A, I believe. And when you do that rollover, the holding company gets all the shares in the subsidiary. So that's a million dollars of value for the holding company. And then almost all the time, what happens is the holding company then issues shares to the shareholder. and in this example, they would have issued a million dollars of shares paid at one dollar to the shareholder. Now

Velocity Legal (01:40:53.024)
It's sort of not, I sort of say it's not real share capital because no one it's sort of done under a rollover. So for the for the holding company, it's its cost base is still all, you know, governed by the CGT rollover rules. It's essentially its inherited cost base. But what if that holding company was then to lend out the money? What's what would its distributable surplus be? And what it what it what it was on their balance sheet is that what did the issued share capital? A million dollars.

What's the what what's the first thing that goes into or no, I think it's the last thing that goes into that distributor surplus calculation. You minus off share capital. So a million dollars of assets. the subsidiary, if we did that calculation, you know, there's ten dollars of share capital at the end. But for the holding company, you've got the million dollars and then you've got a million dollars of share capital at the end. What's your distributor surplus? The thing is is water from wine? Wine from making look.

I the only thing I can say in regards to this, especially when it comes to dividing dividend stripping arrangements, fortunately for me, it's not something I've had to turn my mind to all that often. Yeah. That being said, I heed your point about about the knock-on effect and and what that then translates to. Essentially they've turned a di something that would have been a div seven A loan because there was a distributable surplus from the operating company.

Into a non-division 7A loan from the holding company because the holding company does not have a distributable surplus. So it's sort of a bit funny to think dividend stripping because the value's still there. We haven't stripped anything out. We've made an interest-free loan. Part for A, maybe. Yeah. That would be the other way of tacking it. But the the the tribunal said it was a dividend strip. That a dividend strip is a pretty broad category of things.

And to be able to take out money interest free, whereas you would have otherwise had to charge interest under Division Seven A terms was enough to to be a dividend strip. But I take your point, Anthony. If it wasn't that, you're probably looking at it. You know, Raj and I wouldn't never be advising people to do this. It's it's very high, highly aggressive behaviour as well. Yeah. Something dare I say you'd see

Velocity Legal (01:43:20.523)
More often post budget. I think that's a great way of tying it back to the budget. That you know, that that you think about why people do these things in the first place. you know, there is always that risk that that you you you you push too hard on some things and it just encourages I think we've seen, you know, number of these cases we were talking about, or two of these cases we're talking about a division seven A. to tie it back to the budget, the push of that budget is very much moved to companies.

Why wasn't Division 7A considered? Because it's going to be an even bigger pain point now, or or or pressure point is probably the better word for it. Because if everyone's in companies, that's the way to get the lowest tax rates. It puts the pressure so much more on Division 7A. I I'm not a I try not to be cynical. I really mean that. but the thing is, you know, one can't help but go, All right, there was the removal of franking credits that was tried.

An election that was lost. Now you've got this family trust situation where you have a a a non-refundable offset, right? And the way you get that passed is by selling it to the people that they're this this mythical creature that helps the rich avoid tax. And that's how you get the people on board. Because the frank and credit stuff, that was that was too broad. It affects mum and dad investors, yada, yada, yada. It was too

Too broad a stroke. So let's go after the, you know, the wealthy, or perceived wealthy, I should say. and then you've got this situation now where it's like, all right, well, if we can get that through, then we're allowing people to rest because even that, like allowing people to restructure into a company, it's almost like you're herding them into one into one vehicle and and and you know, petting them and saying everything's gonna be okay. You just relax. I can't help but then feel that.

It'll be a case of, well, we're already doing it for trust. All we're done is just expand the scope to include companies now. Like it's not this shouldn't be something that you're not unfamiliar with. You know, we're we're we're just we're just giving it leveling the plague, yeah. We're making it a fairer, a fairer, it's a fairer system and and you know, and that's the thing too, because now it's a case of well

Velocity Legal (01:45:38.946)
You had the wealthy and trust. Now you can go, well, now everyone's in a company. Well, the wealthy are in the company now. So now we've got to take care of the wealthy in the company. It's like that if I was a strategist, you know, and chess is not my game, but if I was a strategist in that sphere, that's to me, looks more logical in the sense of, well, let's herd them all into there. And it's a case, well, look, we thought we fixed the problem, but now that we're all in these companies, we've got to take care of this franking credit problem now. Yeah. and and hoping that.

There'd be enough people who are angry with the disillusion that these perceived wealthy are getting access to that, that that will trump the everyday investor who are affected by ranking credits, so to speak. Well, we've had a blockbus episode so far. there's so much in the budget, we only sort of touch the touch touch the surface of it. this these conversations are gonna play out over years to come. complex complexity.

Uncertainty, political uncertainty. there there's so much there in that alone. so so we've spent most of the episode talking about that. some interesting cases. We haven't gone through any ATO updates this month. we had enough to to consider, or any state tax state tax cases either. but yeah, a jam packed agenda. some great analogies to take going forward. The Parmigiana case, these tax reform hats. I think they the

But the you know, you've set the bar very high, Anthony, as a as a first guest on Tax Talks two point So look mate, I you know I think if we set it that every guest has to bring in some sort of some sort of product placement. Yeah. You know, or some sort of prop, you know, then then you know, we should be we should be right moving forward. So apologies for whoever comes after. Well we've got the we've got your your your your razor blades over there, Levix as well. yes. So that's

That's For a quality shave. Yeah, the the mix is your way to go. The the side hustle. This is I think anyone who's who's in practice, you know, it's not that you don't love what you do, because I do love what I do. but if it's the only thing you do, then you know, it can become quite monotonous and you have to you have to have something else. And ironically too, by having something else it helps you feed real life experiences into your clients because you can know you talk about like importing and manufacturing and

Velocity Legal (01:47:59.99)
All that sort of stuff, rather than just saying, yeah, I read about it. Sounded good. I think this is how it works. But yeah, I've gone down the rabbit hole of of grooming. so yes, we we not only shave your taxes, but we also shave your face. That's a good that's a good catch line. So I can't thank you enough for being part of this episode too, Anthony. It's been an absolute pleasure having you join us this month. I've

Been it's been an absolute privilege and you know it's it's great just to to to talk to you guys about everything that's going on and and obviously to you to your listeners out there as well too. it is a a a very precarious landscape. you know, there's no point sugarcoating that. and the only thing I can really say to people is that there's a lot of merit in dealing with what you know, not what you don't know. and the only thing that you'll see here now.

And and my takeaway to those listening is you work on that. You work on what will happen, not what might happen. and what you'll see is there'll be a holding pattern now until something comes up. I know there's a lot of budget fatigue. I know a lot of people are sick of hearing about it, I know people are sick of hearing people moan and you know, whine about it. But I think there's something very important to this is that keeping the conversation alive is what drives the pressure on making sure that.

This does not go away because if you don't, then this is how things get well pushed through. so and and I think that's to be honestly, a big pain point for for the for the government at the moment is the fact that this isn't hasn't been announced. It's not like a band-aid that's been ripped off and it was ow, I'm sore, but then you know, I'll be fine. This is now, no, no, there's enduring pain here. And and I think it's so important that that people like

you know, yourselves and and everyone in the profession, keep the conversation going. You you have to. because at the end of the day, that's the that's the the key for for this and and and to all the, you know, especially the small practitioners out there, like I really do feel for a lot of them. they're already contending with a lot of a lot of heavy lifting as it is. And I can't underscore enough that a lot of them are saying to themselves, What I I don't need this.

Velocity Legal (01:50:24.866)
Why why do I need this? I don't need this stress. We're already dealing with AML and payday super and everything else. And I'll I'll be quite frank with you guys. I really don't think in terms of a in terms of a how tired we are, I don't think any of us have fully recovered from COVID, not covet in the sense of the th the you know, the pandemic itself, but but the work that was involved with COVID.

to now and the and the cascading effect of that. you know, it's almost like we've woken up and had amnesia. You know, but but yeah, it's it's very important that we keep this, you know, keep this alive. And and thank you very much for for having the opportunity to come on here and chat to you guys about all things tax. It was great. Well said. Thanks so much, Anthony. Thanks, Anthony. Cheers, guys. Cheers.