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What's new?

Unpaid Present Entitlements

A draft ruling was issued in December 2009 by the Commissioner of Taxation dealing specifically with unpaid present entitlements to companies. The ruling seeks to apply the existing Division 7A rules to amounts of income distributed by trusts to Corporate Beneficiaries that are not subsequently paid. In effect, any amounts not paid to the Company and not subject to a loan agreement meeting the requirements of Division 7A, would be treated as a deemed dividend.

This draft ruling is open for comment from interested parties until February of this year. As the ruling represents a significant change in the way in which these rules are applied in practice the industry bodies are to submit a combined response to the ruling. Once a final ruling has been issued, we will advise further on the impact this may have on your existing circumstances. In the meantime, it is relevant to consider alternative taxation strategies for the 2010 and future years where a Corporate beneficiary has been utilised in the past if the Trust does not have sufficient income to make the required repayments or to transfer the entitlements in full.

Private Ancillary Funds

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Private Ancillary Fund (PAF) is the new term for what was previously known as a Prescribed Private Fund (PPF).

PAFs are a type of charitable trust set up with a corporate trustee, designed to encourage private philanthropy by providing organisations, families and individuals with greater flexibility to start their own trust fund for philanthropic purposes. It allows you to choose how your gift is to be used by defining the purpose and beneficiaries of the trust.

The Treasurer has issued legally enforceable guidelines that came into effect from 1 October 2009. The object of the guidelines is to set minimum standards for the governance and conduct of a PAF and its trustee.

As outlined in the Guidelines, some of the features of PAFs include the following:

To be established and operated as a not-for-profit entity;
They are to distribute at least 5% of the net value of the fund each year to eligible organisations;
They cannot solicit donations from the public, as it is a private fund;
An audit of their financial statements to be carried out & compliance to the Guidelines each year;
They are to prepare, maintain and implement an investment strategy for the fund.
Some of the benefits of using a Private Ancillary Fund as your vehicle for philanthropy:
High level of control – you define the purpose and choose how your donations are used;
Tax-deductibility – contributions to the fund (by you or others) may be tax deductible;
Tax Exempt – the income and capital gains are tax exempt within the fund, meaning higher returns and more money for your chosen causes. If the fund receives Australian company dividends the franking credits attached to these are refundable to the fund.

Major changes for PAFs that were PPFs prior to 1 October 2009.

The major changes for PAFs (from PPFs) are:

Trustees of new funds must be corporations (existing individual trustees of PPFs can continue);
The Accumulation Plan is replaced by a 5% minimum distribution requirement, although if currently in an accumulation plan the old distribution rules will apply until the end of the plan. The existing accumulation plan can continue but must end by 2013-2014;
PAFs must have a formal Investment Plan and Distribution Strategy;
The trustee is prohibited from borrowing money or maintaining an existing borrowing of money, although if there is an existing borrowing it may be maintained but its terms cannot be altered without consent by the ATO;
The market value of the fund’s assets must be assessed annually (every 3 years for land);
PAFs must now lodge income tax returns;
The annual audit must be for compliance with the Guidelines as well as the Financial Statements;
Where the governing rules (Deed) of the PPF as at 25 June 2009 prevent compliance with the Guidelines the fund has until 1 October 2012 to change the deed to comply. However the trustee must comply with the Guidelines as far as possible without breaching the deed; and
The Commissioner of Taxation has increased powers to tighten the compliance regime including administrative penalties, sharing information about non-compliance with the relevant State Attorney General and ultimately suspending or removing the trustee.

Recommended Action
Nelson Wheeler Nexia can assist all former PPFs and their advisors to ensure the fund complies with the new requirements by:

Supplying formal advice on the new PAF requirements;
Reviewing the fund’s governing documents and accumulation plan and advising on recommended amendments.

Nelson Wheeler Nexia can also assist you to establish and manage a new PAF. We can take care of the administration and compliance issues, deal with the tax issues, and provide advice on the distribution of funds to eligible organisations.

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The contents of this Bulletin are general in nature. We therefore accept no responsibility to persons acting on the information herein without first consulting us.