This article analyses the key changes arising from the Budget and legislative changes over the previous year which impact upon tax and superannuation. Some of the most significant changes are:
- a deferral of increases in the contributions caps for over 50s, the impact of which is that all taxpayers will have a concessional contributions cap of $25,000;
- an increase of the contributions tax for individuals with income greater than $300,000;
- all trust distributions made in the 2011-2012 financial year must be recorded in writing by the trustee of the fund on or before 30 June 2012;
- any resolutions to stream capital gains to beneficiaries must be effected and recorded on or before 30 June 2012; and
- an expected end to the pension drawdown relief in 2013-2014.
Trustees must also be keenly aware of the issues around the definitions of 'income of the trust estate' and 'taxable income' of the trust (we refer to these as the 'Bamford Issues', arising as they do in this context from the High Court's decision in Bamford's case).
Our analysis of these issues is set out in the following sections of this article. As always, if you have any specific concerns or queries, you should seek legal advice.
Budget legislation still to be passed
The changes relating to contributions caps and contributions tax were announced in the Budget. This article assumes that this legislation will be passed (as we expect it to be), but you will need to monitor this.
A concessional contributions cap of $25,000 for all taxpayers
At the moment (until 30 June 2012), the concessional contributions cap for under 50s is $25,000 and for over 50s is $50,000.
The Government had originally proposed to change the concessional contributions cap so that individuals over 50 years old and with an account balance of $500,000 or less, would be able to make up to $50,000 in concessional contributions. The changes for these over 50s have now been deferred until 1 July 2014.
The higher contributions cap will not apply to excess concessional contributions because these contributions are already taxed at the highest marginal rate of 46.5%. The non-concessional contributions cap remains $150,000.
As a result, the concessional contributions cap will be $25,000 for all taxpayers.
Impact: individuals aged 50 years or over, who have a concessional contributions cap of $50,000, need to be aware that their concessional cap ends on 30 June 2012.
Increased tax rate on super contributions for high income earners
From 1 July 2012, individuals with income of $300,000 or more will incur tax of 30% on their concessional superannuation contributions. This is twice the existing contributions tax of 15%.
For the purposes of assessing an individual's income, the items which the ATO will take into account include taxable income, concessional superannuation contributions, fringe benefits and tax-free government pensions.
If an individual's income (excluding their concessional contributions) is less than $300,000, but the inclusion of their concessional contributions pushes their income over the threshold, the increased contributions tax will only apply to that part of the contribution which is in excess of the threshold. So, for example, a person with a $295,000 salary and $25,000 concessional contributions will only be subject to the higher rate on $20,000 of the $25,000 contributions.
Impact: all members of accumulation and defined benefit schemes whose adjusted taxable income exceeds $300,000 and who make a personal contribution to their super on or after 1 July 2012.
Trustees: key responsibilities before 30 June 2012
From the 2011-2012 income tax year, all trustees who make beneficiaries entitled to trust income by way of a resolution must do so by the end of the income year (30 June). If the discretionary trust deed requires a resolution to be made on or before 30 June 2012, trustees should comply with the requirements of the Deed.
This requirement applies equally to streaming of capital gains to beneficiaries, which must also be effected and recorded on or before 30 June 2012. As set out in the Tax Laws Amendment (2011 Measures No.5) Act 2011 (Bamford Amendment Act), if a trust deed permits it, the trust's capital gains and franked distributions can be streamed to beneficiaries for tax purposes by making those beneficiaries specifically entitled to those distributions. For the 2010-2011 income year, a beneficiary's entitlement to a capital gain could be recorded in the trust's accounts or records two months after the end of the income year in which the capital gain was made (31 August). This flexibility has now been removed, so that the trust's accounts must record all streaming of capital gains on or before 30 June.
In September 2011, as a result of the Federal Court's decision in Colonial First State Investments Limited v Commissioner of Taxation  FCA 16, the ATO withdrew its acceptance of trustees making resolutions by 31 August in each financial year. Accordingly, trustees need to ensure that any resolution made to distribute the trust's income for the 2011 to 2012 year is made in accordance with the terms of the trust deed and on or before 30 June 2012.
The key feature of the trustee's resolution is that it needs to be made in accordance with the terms of the trust deed - therefore, if a trust deed requires that the resolution be made in writing then it needs to be made in writing. If the trust does not have this requirement, then the resolution need not be in writing (but Maddocks recommends that it is).
If a resolution is made after 30 June and no beneficiary was presently entitled to trust income as at 30 June, the trustee will be assessed on the trust's taxable income at the highest marginal tax rate plus the Medicare levy. But again, this is subject to the terms of the trust deed, which may vest that income in beneficiaries on 30 June if no resolution is passed.
The trust accounts do not, however, need to be prepared by 30 June 2012 so the resolution does not need to specify an actual dollar amount for the resolution to be effective in making the beneficiary presently entitled (unless the trust deed specifically requires it).
Impact: trustees must pass and record resolutions distributing income and streaming capital gains and franked dividends to beneficiaries in the trust's accounts on or before 30 June.
2013-2014: an end to pension drawdown relief on the horizon
The Government provided drawdown relief to pensioners in the 2008-2009, 2009-2010 and 2010-2011 years, by halving the minimum pension payment amounts. This relief has been extended to the 2011-2012 and 2012-2013 years by reducing the minimum payment amounts by 25 per cent.
Impact: drawdown cushioning finishes on 1 July 2013.
Bamford Issues and TR 2012/D1
As outlined in previous ClearLaw articles, Bamford's case highlighted the potential mismatch between 'income of the trust' to which beneficiaries are entitled and the 'taxable income' of the trust on which beneficiaries are assessed for tax. Read our earlier article here.
As a result of the legislative changes to capital gains streaming effected by the Bamford Amendment Act which we set out earlier, a beneficiary may now be assessed based on a specific entitlement to a capital gain, even though they do not have a present entitlement to income of the trust estate. In effect, the Act seeks to ensure that capital gains and distributions received by beneficiaries are taxed in the hands of those beneficiaries.
In its Draft Ruling TR 2012/D1 the Commissioner of Taxation set out his views on the meaning of 'income of the trust estate' as used in Division 6 of Part III of the Income Tax Assessment Act 1936. Read our earlier ClearLaw article on the Draft Ruling here. While the terms of the trust deed itself will be the primary determinant of the meaning of 'income of the trust estate', the Draft Ruling also says that the amount in question must:
- be measured in respect of distinct years of income;
- be a product 'of the trust estate'; and
- be an amount to which a beneficiary is, or can be made, presently entitled.
Impact 1: trustees must review the definition and treatment of 'income' in trust deeds.
Impact 2: the streaming provisions effected by the Bamford Amendment Act are not affected, and continue to apply.
- Click here to read the ATO's Draft Ruling.
- Click here to read the ATO's outline of the 2012 changes to superannuation and tax.
More information from Maddocks
For more information, contact Maddocks on (03) 9288 0555 and ask to speak to a member of the Superannuation and Financial Services Team.
More Information from Cleardocs
For more information about the Cleardocs SMSF package, see here. You can order an SMSF online from that page.