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Last updated 27 November 2012
Attribution of the income of a private trust or private company
The basic approach for the attribution of the income of a private trust or private company is as follows:
- If the assets of an entity are attributed to a person (the attributable stakeholder) then all of the income (adjusted net profits) generated by those assets will also be attributed to them, (subject to their asset attribution percentage).
- Income from the entity for an attributable stakeholder will not be subject to the deeming provisions. Actual income will be used and will generally be assessed on an annual basis from the income tax return.
- on receiving an updated income tax return or financial statements, the amended rate of income is determined and then maintained for the following 12 months. The date of effect is based on the date that the finalised financial statements or tax returns become available to the pensioner, and whether these are provided to the Department within the allowed notification period.
- a pensioner may seek a specific review of his/her assessed rate of T&C income at any time during the 12 month review period, in which case the date of the discrete event which affects income (and whether this is notified within the allowed time) will determine the date of effect.
- If the attributable stakeholder(s) choose to distribute entity capital or income to other people, the amounts distributed are to be treated as gifts by the attributable stakeholder, and are subject to the deprivation provisions.
An exception involves distribution of the income of an entity to an attributable stakeholder's spouse. The distribution is not treated as a gift of the stakeholder and is not subject to deprivation. A pensioner who is an attributable stakeholder of a controlled entity can request a reassessment of his/her circumstances at any time.
No double counting of attributed income
If an individual is an attributable stakeholder of a controlled private trust or controlled private company and receives distributions from the structure, only those distributions that exceed the income attributed to the controller are assessed as ordinary income of the individual. Prior year profits distributed to controllers are disregarded for income purposes. This is because the distribution is already assessed against the stakeholder through the attribution process. Prior year profits will most likely have already been assessed against controllers in prior years, so for equity purposes and to prevent double counting they are not assessable as income against controllers.
Assessment of imputation credits
An imputation credit (also known as a franking credit) is a tax credit to a person receiving a dividend payment, for the tax that has already been paid on the dividend payment by the issuing company. An imputation credit is part of a person's assessable gross income.
The distribution amount on the pensioner's tax return should include any share of imputation credits. There is no requirement for the pensioner to separately notify their receipt of these payments.
If a person is deemed not to be the controller of the trust or of a private company, the person will be assessed on the actual distributions or dividends (including imputation credits) made by the private trust or company for twelve months after the date of distribution.
Capital profit on sale of assets
A business can also make a capital profit on the sale of a non-current asset. This occurs where the sale price of the asset exceeds its book value. The profit is calculated as the difference between the sale price and the book value of the asset (net of depreciation). Capital profit on the sale of an asset is treated the same as other profits and is included in the attributable income of the trust or company.
Asset revaluation reserve
A company's profit is usually calculated with regard to the normal trade of that company, ie comparing sales revenue to the cost of the goods that are sold. It is possible for a company which manufactures nails to make a profit by the manufacture and sale of those nails. A profit can also be made if the buildings in which those nails are made increase in value. This would be a capital profit. Capital profits made by revaluation of assets are usually transferred to the Asset Revaluation Reserve where they can be retained for an indefinite time before distribution. Distributions from Asset Revaluation reserves are income for departmental purposes and are assessed like any other distributions or profit.
An asset means any property, including property outside Australia.
An entity means any of the following:
a business partnership,
a corporation sole,
a body politic.
According to section 52ZZJ of the VEA, a person is an attributable stakeholder if a company or trust is a controlled private company or trust in relation to the individual unless the Commission determines otherwise.
If the individual is an attributable stakeholder of the trust or company, the individual's asset attribution percentage in relation to the trust or company is:
- 100%, or
- a lower percentage if the Commission determines otherwise.
In 1990 the government introduced legislative changes called “deeming” to simplify the assessment of cash deposits and income from certain investments. These changes were made:
- in response to pensioner concerns about complex income and assets test rules;
- to encourage pensioners to maximise their private income.
Deemed income is the minimum rate that the government expects income support pensioners to earn from investments.
Banks created “pensioner accounts” which paid interest at the deeming rate set by the government.
On 1 July 1996 further changes meant the deeming rate was applied to all financial assets as defined in section 5J(1) of the VEA.
According to section 5H of the VEA income is:
- an amount earned, derived or received by a person for the person's own use or benefit;
- a periodical payment by way of gift or allowance; or
- a periodical benefit by way of gift or allowance.
Profit, for a business, is the amount of earnings in excess of its expenses over 12 months.