Tax update - death benefits, borrowing prohibitions and education expenses

In this bulletin we bring you a round up of recent taxation cases, news and developments.

Failure to establish Binding Death Nomination
Donovan v Donovan

The Supreme Court of Queensland has held that a letter written by a member of a superannuation fund to the corporate trustee did not demonstrate an intention to make a binding death benefit nomination.

In 2006 the member wrote to the trustee of the fund advising of his "wish" for his account balance standing to be paid to the legal personal representative of his estate in the event of his death.  The member died in 2007 leaving his wife as the remaining director of the trustee of the fund. His daughter of a prior marriage applied to the Court for an order seeking to enforce the letter as a binding death benefit nomination. In finding that the letter did not constitute a binding death benefit nomination, the Court noted the significance of the terms of the trust deed governing the fund, in particular that the deed required such a nomination to be in a particular form.

Death Benefits are only one of the many areas where the operative rules of a fund can significantly alter financial outcomes for superannuation fund members and their dependants.  In this case, the terms of the deed dictated specifically how a members account balance and death benefit would be dealt with in the event of their death. 

The case also illustrates the importance of ensuring that the rules of the fund work appropriately for your client, as well as the need to consider where specific tailoring of a superfund deed would be prudent.

Borrowing Prohibition
SMSFR 2009/2

The ATO has now confirmed its views on the meaning of the phrases "borrow money" or "maintaining an existing borrowing of money" in SMSFR 2009/2 (previously issued in draft SMSFR 2008/D4). The ATO explains that a borrowing, for the purposes of section 67 of the SIS Act, exhibits both:

  • A temporary transfer of money from the lender to the borrower; and
  • An obligation or an intention on the part of the borrower to repay that amount to the lender, which may be satisfied by the provision of an asset.

It also explains that where an SMSF refinances an original loan, a new separate borrowing has been entered into. It also explains that each drawdown of funds from a loan facility constitutes a separate borrowing.

Clients need to carefully consider loan terms when first going into these types of arrangements as well as considering all loan structuring options for superannuation funds. In addition, it is important that clients understand the circumstances in which it might be considered that a loan is being used as a means of circumventing the contribution caps.

Small Business CGT Concessions
ATO Warns of Common Mistakes

The ATO recently highlighted common mistakes identified in dealing with the small business CGT concessions.

As regards the maximum net asset value test, taxpayers must calculate the total net value of CGT assets just before the relevant CGT event, ($6 million cap for 2007-08) for all of the following:

  • the entity that had the CGT event;
  • any connected entities;
  • any small business CGT affiliates (being an individual or company that acts in accordance with the wishes of the taxpayer in relation to its business affairs). 

The ATO explains taxpayers are NOT:

  • using the market value;
  • preparing financial statements for all relevant entities just before CGT event; 
  • including CGT assets sold or the goodwill of the business;
  • including CGT assets of connected entities and small business CGT affiliates;
  • passing the active asset test; 
  • grossing-up net gains where taxpayers are beneficiaries of a trust;
  • choosing a CGT asset purchased within two years after the last CGT event when applying the replacement asset (provisions); and
  • using the contract date, but rather the settlement date as regards contracts of    sale and purchase.

It is important that the CGT Small Business Concessions are applied appropriately to client’s circumstances, in particular having regard to the above.

Self Education Expenses incurred in Deriving Youth Allowance
Anstis v FCT

The generally accepted view as regards Commonwealth Assistance Programs has for a long time been that self education expenses are not deductible as against that income.

The Federal Court has held that self-education expenses claimed by a taxpayer were deductible as the expenses were incurred as a necessary incident of deriving assessable income, which in this case was the Youth Allowance. 

The taxpayer undertook a teaching degree and was a Youth Allowance recipient. In her tax return for the 2006 income year, no income was returned from working as a teacher. A deduction of $920 for work-related self-education expenses was claimed.  The Court held that as Youth Allowance is assessable income per s 6-5 of the ITAA 1997, it follows that, a deduction from assessable income is allowable if the expenditure is incurred in deriving that assessable income per s 8-1(1). The Court said "it was sufficient that the expenditure was incurred as a necessary incident of deriving the Youth Allowance".

This case highlights the importance of always starting with basic principles when considering tax issues. It deals with the simple question of whether the expenditure was incurred in deriving assessable income, in which case it was.