Commercial Law Brisbane

Wednesday, February 20, 2019

Pitfalls in Leasing Part of Your Land

The Value of a Shareholders’ Agreement

Saturday, February 16, 2019

Is my Company Constitution Tax Effective?

Tax

Many will think of the Constitution of their company as a predominantly commercial document setting out the powers and procedures for the making of decisions by directors and shareholders, and the rights attaching to shares in respect of dividends, voting and winding up.

As far as tax is concerned the main focus is to allow for different classes of shares.

However, the content of the Constitution has an impact on the tax results in at least three important ways:

Super contributions for directors;
Differential dividends;
Issue of shares of a different class.

Super Contributions for Company Directors

A tax deduction is generally available for contributions made by an employer for the benefit of an employee.

For a number of years the general view has been that deductions also apply for contributions for directors. A basis for this was that the income tax legislation allowed a deductions for superannuation contributions for persons employed by a company, and the legislation deemed directors to be employed by the company (the additional requirements that they be engaged in producing assessable income or in the business of the company would ordinarily be satisfied in a trading business).

However, were substantially changed in 2007 with the Simpler Super Regime.

The revised requirements for employer contributions run as follows:

A deduction is available for contributions for employees (directors do not fall within the ordinary meaning of employee);
Employees are deemed to include those falling within the extended meaning in the Superannuation Guarantee legislation;
There are also the conditions that the employee be engaged in producing the company’s assessable income or its business, that the fund is a complying fund and the employee satisfies certain age conditions.

The Super Guarantee legislation does not deem any director to be an employee. Rather, it deems a director “who is entitled to payment for the performance of duties as a member of the executive body”.

This means is that a director is not deemed to be an employee unless they are entitled to payment for the performance of duties. The simplest way to provide that entitlement is an appropriate provision in the Company Constitution, for example providing an entitlement of say $1000 per annum. Alternatively, a binding arrangement (preferably, in writing) for the payment of directors fees is required.

Doubts of the correctness of the above analysis were put to rest by the decision in Kelly v FCT (No 2) [2012] FCA 689. A deduction for a superannuation contribution in favour of a director was denied. The court rejected the argument that actual payment of an amount was sufficient. It held that payment and entitlement to payment are different concepts, and entitlement to payment can be provided by the company’s constitution or approval by shareholders in accordance with the Corporations Act 2001.

Differential Dividends

It is quite common for a company to have various classes of shares (although readers should be mindful that the issue a different class of shares can result in the small business CGT concessions not being available on a sale of the business or shares in the company).

The issue of a different class of shares is common where it is desirable to pay dividends to certain shareholders to the exclusion of other shareholders, or at a different rate.

To do so, simply having different class of shares is not enough. If you only have different classes of shares, then all shareholders will be entitled to a share of any dividend declared in accordance with the rights attaching to those shares.

What is necessary is that the Constitution gives the directors the power to pay dividends on a differential basis. A provision of this kind is as follows:

Where there is more than one class of shares on issue, the Directors can declare a dividend so that the dividend:

(a) is made to the holders of shares of any one or more class or classes of shares;

(b) made at a higher, lower or the same rate as the dividend declared on any other class; and

provided that the shares in each class will participate equally in any dividend declared. The resolution which declares a dividend is valid, even if the resolution is passed by virtue of the votes of persons who receive the higher rate of dividend.

Issue of shares of a different class

The issue of shares of a different class may have a number of tax effects including loss of the small business CGT concessions and impact on the utilisation of the losses. In addition, whenever there is an issue of shares the value shifting provisions, debt/equity rules and dividends streaming provisions must be considered.

In respect of the small business CGT concessions, the existence of a Significant Individual is required for the 15 year exemption, retirement exemption and to apply the concessions on a disposal of shares. For there to be a Significant Individual, it must be the case that the relevant shareholder has rights in respect of voting and, importantly, any dividend or distribution of capital.

The reference to the word ‘any’ has the effect that where a shareholder owns shares of one class, but there is another class of shares on issue, a dividend could be paid on the other class with the result that the shareholder does not have rights in respect of any dividend. However, this special rule does not apply to redeemable shares (the ATO accepts this point in Taxation Determination TD 2006/77).

If you are looking to issue shares simply to enable dividends to be paid to a different person, it is preferable for those shares to be issued as redeemable shares. It is also preferable for the rights attaching to those shares to be such that they can be cancelled without tax effect.

Key Points

Special provisions are required for a Company Constitution to be tax effective and to support implementation of tax planning strategies.

Before implementing any of the above arrangements, specific advice should be obtained.

As part of general tax administration, we recommend all accountants undertake a review of their client’s Company Constitutions to ensure their tax planning is not frustrated.

By Domenic Festa

Need advice? Talk to the Tax & Superannuation Team at Rouse Lawyers. Contact us today!

NOTE: This article is for general information only and should not be relied upon without first seeking advice from one of our specialist solicitors.

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Wednesday, January 23, 2019

Are You a Health Care Service Provider? Time to Review Your Privacy Policy

With the My Health Record system expanding, it is time for health care providers to review and update their Privacy Policies. Necessary changes will likely include amendments to how personal information is collected, used and shared.

Notably many Privacy Policies claim they do not share information with any third parties, this may no longer be true if a patient’s information is being uploaded to the My Health Records system. Similarly claims that the provider only collects information from the patient directly, will not be accurate if the provider accesses information from the My Health Record system. Furthermore, the My Health Record Act defines ‘use’ to include accessing, viewing, modifying and deleting information. As such, representations regarding how you use patient’s information may need redefinition.

While it is mandatory for health care providers, who hold health information, to have a compliant Privacy Policy many are falling short of their obligations. Often Privacy Policies are implemented by a web developer when the website is built. These Privacy Policies usually refer to the collection of personal information via the website. However, its far more likely the bulk of the personal information held is derived from sources including, paper forms filled out in waiting rooms, records generated in providing the health services and telephone conversations with patients.

Privacy Policies relate to how businesses deal with personal information from all sources, not just that derived from their websites.

With the notifiable data breach scheme in full force, the last thing you want to do is rush to get compliant during a data breach event before you are required to notify the commissioner.

Get in early, get compliant and avoid the $420,000 maximum penalties.

Michael Barber

Michael is a technology and commercial lawyer with Rouse Lawyers, who advises during data breach events and services clients nationwide with privacy concerns. For assistance with these matters contact mbarber@rouselawyers.com.au or phone (07) 3667 9696.

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Aussiegolfa Appeal: Relief For Grandfathered Trusts?

The Aussiegolfa appeal (Aussiegolfa Pty Ltd (Trustee) v FC of T [2018] FCAFC 122) involved the provision of residential accommodation to a related party of a superannuation fund. Amongst the range of investment rules that apply to superannuation funds, two key issues require consideration for this kind of transaction: the in-house asset rules and the sole purpose test in s 62 and 71 of the Superannuation Industry (Supervision) Act 1993 (SISA). These issues were considered and clarified in the Aussiegolfa appeal.

Brief facts

31 March 2015 – SMSF invested in a DomaCom Fund (DCF), a widely held unit trust. The investment comprised less than 1% of the units in DCF.
- DCF allowed the creation of sub funds. At the time of investment, the constitution and product disclosure statements of DCF stated that a sub fund was a separate trust.
- Under the terms of DCF, the investor could nominate a property to be acquired by DCF. SMSF nominated an apartment in a student accommodation complex.
21 July 2015 – DCF entered into a contract to acquire the property.
23 July 2015 and 17 August 2015, funds held for SMSF’s were applied to the acquisition of units in the sub fund. SMSF and related parties held all of the units in the sub fund. The property was allocated to that sub fund.
- Prior to the creation of the sub fund, the constitution of DCF was amended to provide a sub fund was not a separate trust, but the product disclosure statements continued to make references to a sub fund as a separate trust.
- Investors in a sub fund did not have a direct investment in the underlying property but were entitled to 100% of the net income and proceeds of sale of the underlying property of that sub fund.
17 August 2015 – Exclusive management of the property was granted to Student House in Australia (SHA). The first tenancy of the property (from 8 January 2016 for a period of approximately 12 months) and the second tenancy (from 20 February 2017 for a period of approximately 12 months) were granted by SHA to persons not related to SMSF. The third tenant of the property was the daughter of the sole member of SMSF at the same rental and on the same terms as that provided to the first two tenants.
3 April 2017 – The sole member stated they were using the Burwood property to test “the related party use of residential property within” self-managed superannuation funds.
Importantly, the Constitution provided that units in the sub fund had such rights as a responsible entity determines, there was no evidence of any determination of rights attaching to the units in the SMSFs sub fund.

First Instance Decision

In-house asset rules

Pagone J concluded that a sub fund was a separate trust, relying on a statement in the product disclosure statement which described a sub fund as a separate trust and various provisions of the Constitution of DCF.

Sole Purpose Test

Pagone J concluded there was a breach of the sole purpose test since the purpose was to provide residential accommodation to a related party. This was despite the property being provided to the related party on market rental terms. In reaching its decision, the court relied on a statement by the sole member and sole director of the trustee that he wished to test the ability for residential properties held by SMSFs to be used by related parties. A broad view of the decision is that providing housing to a relative would, in itself, cause a breach of the sole purpose test irrespective of the terms of the arrangement.

Concern for grandfathered trusts?

Grandfathered trusts are unit trusts established prior to 11 August 1999 where investments by superannuation funds are either made before 11 August 1999 or under transitional rules that applied until 30 June 2009.

There is no specific provision governing the transactions of grandfathered trusts (unlike ungeared trusts which are governed by Division 13.3 A of the SISA Regulations).

Some grandfathered trusts own residential property either required prior to 11 August 1999, or acquired after that date from realising other property owned prior to that date.

It is often the case that the in-house asset rules do not apply to leases of property by grandfathered trusts and the question is whether a lease of residential property to a related party would cause a breach of the sole purpose test. The view could be taken that where the property is leased on arm’s length terms at market rental, the sole purpose test may not be breached (although all circumstances of the arrangement must be considered). The same may also apply to unrelated trusts (trusts that are not controlled in any of the three ways described in s70E(2) of SISA) at least where the lease to the related party was not contemplated at the time of the investment by a superannuation fund.

The first instance decision in Aussiegolfa would have caused a change in that position on the basis of the broad view that any use of housing by a relative would in itself cause a breach of the sole purpose test.

Aussiegolfa appeal

Following the first instance decision in Aussiegolfa, we expressed the view in an earlier earlier article (see CCH Tax Week Issue 15, 20 April 2018):

The hurdle for the Aussiegolfa was the in-house asset rules.
The conclusion on the sole purpose test was reached notwithstanding the court referring to principles that an inquiry into purpose is not an inquiry into motive and where property is used for a permitted purpose, the purpose test is not breached merely because there is an incidental benefit.
The nature of the property is such that the sole purpose test would not be called into question were it not for use by a related party. It is therefore the case that the property has been used for a permitted purpose, even though there may be an incidental benefit (the use by a related party).
It is also questionable whether there can be any benefit where property that is a suitable investment for a superannuation fund is provided at market value on commercial terms. The basis for this point is, almost without exception, the cases that found a breach of the sole purpose test involved a financial benefit to a related party.

The decision of the Appeal Court is consistent with the views expressed above.

Appeal Decision

The investment by SMSF in the sub fund constituted an in-house asset because the sub fund was a separate trust. This conclusion was reached because there was an absence of evidence of the rights attaching to the particular class of units, and in the absence of that evidence reliance was placed on the statement in the product disclosure statement that a sub fund was a separate trust as secondary evidence of those rights.

In relation to the sole purpose test, the Appeal Court concluded:

There is a fundamental distinction between purpose and motive. A motive of providing accommodation to a related party, does not cause a breach of the sole purpose test.
There is not a breach of the sole purpose test merely because the trustee enters into a transaction with a related party.
Whilst a tenant of property would obtain a benefit in the sense of obtaining accommodation, where market rent is payable for the accommodation there is no relevant benefit.
In the absence of a financial or non-incidental benefit, and other facts or matters pointing to a collateral purpose, there is not a breach of the sole purpose test.
The position would be different if the lease were not at market rent or if the property were not considered a prudent investment for the SMSF and the SMSFs investment policy had been affected by the objective to lease property to the related party.

The decision on appeal is consistent with the views we expressed in our earlier article.

Decision Impact Statement

The ATO issued a draft Decision Impact Statement in respect of the Aussiegolfa appeal on 3 December 2018. The Commissioner considers the decision is limited to certain points of the factual matrix including that the property was initially leased to unrelated parties, the relative paid market rent and there was no suggestion that leasing the property to the relative influenced the SMSF investment policy.

They note it is the purpose of making and maintaining a fund’s investments that is central to the sole purpose test. In this regard the author submits that the sole purpose test requires that a superannuation fund is maintained for the purpose of providing retirement and death benefits as well as permitted ancillary purposes, and there is a range of investments that may achieve that purpose. A superannuation fund can satisfy that purpose notwithstanding that the trustee has the motive of acquiring investments that suit the requirements of related parties. In accordance with Aussiegolfa, such an investment would not cause a breach of the sole purpose test provided any use by related parties is on market value terms, and the investment is otherwise a prudent investment for a superannuation fund.

The ATO take a contrary view. They consider that the case is not authority for the proposition that there is no breach of the sole purpose test when market value rent is charged. That is clearly correct, the charging of market rent does not overcome the sole purpose test if there are ancillary rights attached to the investment (e.g. club membership) or the investment is not prudent, for example, a beach house used by related parties during the Christmas period each year but in a location that does not attract tenants for the remainder of the year.

The ATO conclude with the position that a super fund will contravene the sole purpose test if the fund acquires residential premises for the collateral purpose of leasing to an associate, even if the associate pays rent at market value. The author considers this position is contrary to the Aussiegolfa appeal. The reference to collateral purpose is in fact the motive of the investment and is in accordance with the decision of the primary judge which was overturned on appeal. If the ATO were right, the acquisition of business premises for use in a related party’s business would contravene the sole purpose test, which is clearly not the case in the absence of other factors described in the Aussiegolfa appeal.

Conclusion

The first instance decision would have caused concerns for residential property owned by grandfathered an unrelated trusts. The simple lease of residential property to a related party, irrespective of the terms, may have caused a breach of the sole purpose test.

The appeal court, in the author’s view, brings matters back to what existed before the first instance decision – namely the focus of the sole purpose test is on whether there is the provision of a financial benefit that is not in accordance with the core or ancillary purposes.

With proper implementation of arrangements, grandfathered and unrelated trusts are not subject to the same investment restrictions as apply to superannuation funds, and transactions can be entered into with related parties without breaching the sole purpose test.

Financial Benefit cases:

Driclad Pty Limited v Commissioner of Taxation (Cth) (1968) 121 CLR 45

Raymor Contractors Pty Ltd v Federal Commissioner of Taxation (1991) 21 ATR 1410 (Davies, Wilcox and Hill JJ) and Cameron Brae Pty Ltd v Commissioner of Taxation (2007) 161 FCR 468 (Stone, Allsop a

See also iKnow: Home » Practice Areas » Superannuation » Commentary » Annotated commentary » SUPERANNUATION INDUSTRY SUPERVISION Fund Operations » Compliance with sole purpose test

By Domenic Festa

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10 Ways to Ruin a Deal

1.Dive in unprepared.

Making an offer before you understand the business and structure of the seller.
Making an offer before you have undertaken proper due diligence.
Not seeking professional advisors before you intend to enter a transaction.

2. Appoint the wrong advisors or appoint the right ones too late.

Accountant
Lawyers
Business broker / corporate advisor

3. Fail to address tax and structuring issues from the outset.

CGT
Stamp duty
Risks for buyer and seller entities
Guarantees / warranties
Limit of liability

4. Forget about working capital.

Commonly misunderstood. Most share sales have a working capital adjustment and a level of cash and receivables are left in the business.
In an asset sale, parties often reach agreement, but working capital is not addressed. When a buyer realises he needs another $500,000 to operate the business, the deal may fall over.

5. Jump to formal agreements when a term sheet might save time and money by ensuring parties are on the same page on key issues before diving into the detail.

6. Understand whether you can get along with the seller or buyer post settlement.

7. Fail to consider vendor finance and appropriate securities (and if seller is the ‘bank’ and you are working with them it can be uncomfortable).

8. Announce a sale too early

To Staff
To Suppliers
To the Market

9. Ask due diligence questions too late and then ask for adjustments.

10. Competitor paranoia complex. Over thinking/assuming the buyer is just looking under your hood.

By Matthew Rouse

The post 10 Ways to Ruin a Deal appeared first on Rouse Lawyers.

Tuesday, December 4, 2018

Tis The Season to be Jolly…But Not Too Jolly At Your End of Year Work Functions

Whilst the end of year work function is a great time for your team and business to celebrate your successes for the year, remember that your function needs to run as a ‘work’ function, without breaching your workplace health and safety obligations, your Human Resources policies and other legal obligations that your business must comply with.

Businesses should take steps to minimise the risks at your end of year functions and educate employees about the expected standards of behaviour at such functions and have some key steps in place to prevent any issues from arising, or if they do, to properly manage them to avoid issues, claims and litigation and starting your New Year off with the wrong kind of bang!

If employees become intoxicated at your end of year function or engage in inappropriate or unruly behaviour, your business should have a plan in place to deal with that.

Remember that, as the employer, your business can be held vicariously liable for the conduct, or rather misconduct, of your employees, even at your end of year work functions that are off site and outside of normal business hours. It is therefore a good risk management practice to remind your employees of their obligations, whilst of course still encouraging them to celebrate their successes for the year and have a good time, but that this is a balancing act for everyone attending.

What should your business be doing to prepare for your end of year work function?

Before end of year functions

Make sure that your business has the necessary Human Resources policies in place to address issues that may occur at end of year functions, such as a Code of Conduct and relevant policies, including on workplace bullying, sexual harassment and discrimination and that these are current and up to date and available to employees.

Make sure your Managers, Supervisors and Team Leaders are aware of and know that they are expected to model your relevant Human Resources policies at your end of year function.

Nominate key Managers, Supervisors and/or Team Leaders to discretely supervise at the function and give them clear authority to act if they see inappropriate or unruly behaviour – for example, arranging to cease serving alcohol to an intoxicated employee, to having a discrete discussion with an intoxicated or unruly employee to leave and assist in getting them home safely, e.g. ordering and escorting them to a taxi.

Make sure that your business sends out a clear email message prior to any end of year work functions – to set the expectations of employees regarding their conduct and behaviour at the function – and that your Human Resources policies still apply at your end of year function and that employees are expected to comply and behave appropriately and within the normal boundaries expected at work whilst they attend end of year functions. Also prompt them make appropriate arrangements to get home safely at the end of the function.

Whilst there is no specific obligation to provide transport home to employees after your end of year function, you should take active steps to minimise the risk of injury to your employees by specifying the clear rules that apply at your function, arranging for their safe travel home, and if anyone requires assistance in getting home, have designated personnel at the function to assist in arranging taxis for employees.

Make it clear that any post-function activities or after parties are on an employee’s own time and at their own responsibility.

At the end of year function

Set clear start and finish times for your end of year function.
Take steps to ensure that there is responsible service and consumption of alcohol and sufficient food and non-alcoholic drinks for employees to enjoy at the function. Place limits on the supply of alcohol if necessary.
Ensure your designated Managers, Supervisors and Team Leaders work to prevent excessive drinking and inappropriate or unruly behaviour.
Utilise taxis to ensure everyone leaves the function safely and can head home safely after the function.

What if something goes wrong?

Act quickly and discretely:
- If an employee is too intoxicated, send them home in a taxi straight away;

- If your Managers, Supervisors and/or Team Leaders become aware of inappropriate or unruly behaviour they should take immediate steps to stop the behaviour.

Make sure your Human Resources policies are adhered to carefully. If an investigation needs to be conducted after the end of year function, make sure this occurs.
Finalise any investigation and implement any disciplinary action required in accordance with your business procedures.

If your business follows the above steps, your business and your employees should be able to enjoy a successful and incident free end of year function and your business can start the New Year off with the right kind of bang!

In the event you need assistance to prepare for your end of year function, or dealing with an incident that occurs, Rouse Lawyers is experienced in providing responsive legal advice to manage such functions, and any incidents and investigations to navigate and minimise the risks to your business.

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