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10.3.10 Liabilities of a Private Trust or Company - From 01/01/2002

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This section contains information on the treatment of liabilities of controlled private trusts [2] and controlled private companies [2]. It discusses how to determine a genuine liability and the method of apportioning an entity's liability.


According to section 52ZZH of the VEA, a trust is a controlled private trust in relation to an individual if the company is a designated private trust and the individual passes either the:

  • or control test [2]
  • source test [2].

 

 

According to section 52ZZC of the VEA, a company is a controlled private company in relation to an individual if the company is a designated private company  and the individual passes either the:

  • control test [2] or
  • source test [2].

 

 

Non-Recognised Liabilities of a Controlled Private Company or Trust

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Liabilities - loan or debt

Liabilities can include loans that have been made to a trust or company [2] or debts owed by a trust or company. Loans can be from controllers, associates [2] or a third party. Loans can also have been made by another trust or company or debts can be owed by the entity [2] to another trust or company. Liabilities on the balance sheet can generally be deducted from the value of assets to determine the assessable value of a trust or company subject to the exceptions in this section.    

More ? [4]

Non-recognised loan and debt

    

VEA ? [5]

Circumstances where a loan to or debts owed by an entity will not be recognised as a liability of that entity are:

  • where no written agreement exists which is signed by all parties to the agreement and witnessed by a third party (associates [2] are not considered to be third parties), and
  • loans from, or debts owed to, a person who is under 18 years of age.
Loan requirements

Loans must fulfil the following requirements:

  • the loan must be in the name of the trust or company,
  • an actual lending of money or an asset of particular value to a trust or company must have occurred, and
  • there must be a clear intention by the trust or company to repay.
Treatment of a non-recognised loan and debt

A loan [2] that is not recognised as a liability of an entity will still be considered to be a personal financial asset [2] of the person making the loan and is subject to the deeming provisions [2].


10.3.10/Recognised Liabilities of a Controlled Private Company or Trust [6]

More ? (go back) [7]

Individual disposes of asset to company or trust

Section 52ZZW [8] VEA

VEA ? (go back) [9]

Company has the same meaning as in the Income Tax Assessment Act 1997.

 

 

An associate of an individual for the purposes of private trusts and private companies has the meaning given by section 52ZQ of the VEA [10].

 

 

An entity means any of the following:

an individual,

a company,

a trust,

a business partnership,

a corporation sole,

a body politic.

An associate of an individual for the purposes of private trusts and private companies has the meaning given by section 52ZQ of the VEA [10].

 

 

The following investments all meet the definition of a loan:

  • debentures,
  • government and semi-government bonds,
  • bank bills
  • commercial bills,
  • non-convertible notes, and
  • capital notes.

Note – a person is not treated as having made a loan merely because:

  • the person has an account with a financial institution, or
  • the person has paid an entry contribution.

 

 

According to section 5J(1) [10] of the VEA a financial asset means;

  • a financial investment [2], or
  • a deprived asset [2]

 

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 [10].

 

 

Recognised Liabilities of a Controlled Private Company or Trust

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Last amended: 8 September 2011

Recognised liability – loan and debt

Loans to or debts owed by an entity [2] will be recognised as a genuine liability of the entity and therefore allowed as a genuine deduction from the gross asset value of the borrowing entity if:

  • they appear on the balance sheet,
  • they are made under a written agreement signed by all parties to the agreement and witnessed by a third party (associates are not considered to be third parties),
  • they are not made by a person who is under 18 years of age, and
  • considering the circumstances, and nature of parties to the loan, the loan can be considered to be genuine and not created as part of a scheme to gain an income support pension advantage.     More ? [12]

Documentation substantiating liabilities may be required where the person is attributed with less than 100% control [2] of the private company or trust and there is any doubt about whether the liability is genuine.     

More ? [13]

Recognised liability – provisions

Provisions made by an entity to meet other known liabilities, such as a tax obligation or accumulated employee leave, represent another party's legal interest in the asset value of the entity and so may also be deducted from the asset value of the entity which is attributable to the pensioner.

Treatment of a recognised loan and debt

Regardless of whether a loan is recognised as a liability of an entity or not, the value of the loan is considered to be a personal financial asset [2] of the lender and is subject to the deeming provisions.

Level of reasonable interest payable on a loan or debt

Reasonable interest paid on loans will be accepted as a genuine deduction from the income of the entity, regardless of whether the loan is recognised or not, as long as the loan appears on the balance sheet and is listed as an expense on the profit and loss statement. Together these documents provide evidence of the loan and any expenses that relate to it.

The current commercial interest rates would be reasonable for commercial loans. For non-commercial loans, an interest rate of no more than 10% will be accepted as reasonable. Where the person receiving the interest is not the 100% attributable stakeholder, the staff member must be convinced that there is a risk involved before accepting an interest rate greater than 10% ie the company is in trouble and borrowing from a 'lender of last resort'. If the person is however the 100% attributable stakeholder, there are no concessions for interest rates above 10%. Loans from associates or associated entities would be considered to have a nil risk factor.

Secured loan

Loans secured against a specific asset [2](s) of an entity can only be offset in relation to the asset(s) against which the loan is secured.

Example of effect of a secured loan on entity assets

A trust has assets totalling $580,000. The assets consist of a farm worth $500,000, which includes the principal home [2] of the sole attributable stakeholder [2] worth $100,000, and a holiday home worth $80,000. A liability of $100,000 is secured against the holiday home. Only $80,000 of the loan would be recognised as a liability. The excess $20,000 would not be recognised as a liability of the trust. Therefore the net attributable asset amount of the sole attributable stakeholder is $400,000 (total assets less the value of the principal home less the recognised liability). However, an exception applies if the $100,000 liability were a Primary Production liability. The excess amount of $20,000 would then be included when calculating the Primary Production aggregation amount. If the loan is secured against all the assets of the entity the loan must be apportioned before determining the net attributable asset amount.    

More ? [14]

Unsecured loan and floating charge

    

VEA ? [15]

Unsecured loans or loans secured by a 'floating charge' over all entity [2] assets will be recognised as a liability of an entity if they are:

  • made under a written agreement signed by all parties to the agreement and witnessed by a third party (associates [2] are not considered to be third parties), and
  • are NOT made by a person(s) who is under 18 years of age.
Rules for 100% attributable stakeholder

    

VEA ? [16]

Liabilities in respect of a person attributed to be in “100%” control of a private trust or company will be allowed provided that they appear on the entity's balance sheet. Documentation of these loans is not required.

Loans by a trust to an attributable stakeholder

A loan by a trust to an attributable stakeholder may have an unforeseen consequence. The loan becomes an asset of the trust, however it cannot be offset by the borrower (stakeholder) unless it is a secured loan, or unsecured but recorded in writing and witnessed by an independent third party.

If the loan cannot be offset the amount is maintained twice – once as an asset of the family trust and again as an asset of the stakeholder borrower.

Recognised financial institution

Liabilities in relation to financial institutions, banks and finance companies are to be allowed and will be considered adequately documented provided that the liability appears on the balance sheet. Further documentation such as a loan agreement or loan statement need only be requested if the assessor has doubts about the accuracy of the information provided on the balance sheet.


10.3.10/Non-Recognised Liabilities of a Controlled Private Company or Trust [17]

More ? (go back) [18]

10.3.12/Allowable & Non-allowable Income Deductions [19]

More ? (go back) [20]

10.3.16/Aggregation Assessment of a Controlled Primary Production Private Trust & Company [21]

10.3.10/Apportioning a Liability of a Controlled Private Company or Trust [22]

More ? (go back) [23]

Effect of unsecured loan on the value of assets

Section 52ZZU [8] VEA

VEA ? (go back) [24]

Attribution of Assets

Section 52ZZR [8] VEA

VEA ? (go back) [25]

An entity means any of the following:

an individual,

a company,

a trust,

a business partnership,

a corporation sole,

a body politic.

Control includes control as a result of, or by means of, trusts, agreements, arrangements, understandings and practices, whether or not having legal or equitable force and whether or not based on legal or equitable rights.

According to section 5J(1) [10] of the VEA a financial asset means;

  • a financial investment [2], or
  • a deprived asset [2]

 

An asset means any property, including property outside Australia.

The principal home has the meaning given by subsection 5LA(1) [10] of the VEA and subsection 5LA(2) [10] of the VEA. The principal home of a person is generally the place in which they reside. In certain circumstances, however, the principal home of a person can be the place in which they formerly resided. The following property is regarded as part of the principal home.

  • the residence itself (e.g. house, flat, caravan),
  • permanent fixtures (e.g. stoves, built-in heaters, dish-washers, light fittings and affixed carpets),
  • [glossary:curtilage:DEF/Curtilage] (i.e. two hectares [2] or less of private land [2] around the home where the private land use test [2] has been satisfied, or all land held on the same title as the person's principal home where the extended land use test [2] has been satisfied), or
  •       any garage, shed, tennis court or swimming pool used primarily for private purposes provided it is on the same title as the principal home.

 

 

According to section 52ZZJ of the VEA [10], 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.

 

 

An entity means any of the following:

an individual,

a company,

a trust,

a business partnership,

a corporation sole,

a body politic.

An associate of an individual for the purposes of private trusts and private companies has the meaning given by section 52ZQ of the VEA [10].

 

 

Apportioning a Liability of a Controlled Private Company or Trust

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VEA ? [27]

Apportioning a loan or encumbrance

If there is a recognised liability secured against more than one asset of an entity [2], the value of the liability is shared between the assets in proportion to the respective values of the assets. The liability reduces the value of the assessable asset(s) proportionally, according to the value of the asset(s). Generally a liability will be secured against an asset such as real estate.    

More ? [28]

Example of apportioning a loan or encumbrance

The total assets of an entity are $500,000. The sole attributable stakeholder's principal home [2], worth $100,000, is part of the entity assets. The entity has a recognised liability of $200,000 secured against all its assets. The net asset attribution amount for the attributable stakeholder [2] is calculated as follows:

Total entity assets

$500,000

Less value of principal home

$400,000 ($500,000-$100,000)

Assessable assets as a % of total entity assets

80% ($400,000?$500,000)

Total liability

$200,000

Amount of assessable liability

$160,000 ($200,000x80%)

Attribution %

100%

Net attributable asset amount

$240,000

($500,000-($100,000+$160,000))

Apportionment and multiple attributable stakeholders

    

VEA ? [29]

If there are multiple attributable stakeholders, any genuine liabilities secured against the assets of the entity must be apportioned before determining each stakeholder's net asset attribution amount. If the principal home of a stakeholder is part of the entity assets then the home is an exempt asset [2] for that stakeholder only.    

More ? [30]

Example 1 of apportionment and multiple attributable stakeholders

Example 1: Darren, Fiona (a partnered couple) and Terry are attributed with one third each of the assets of a private family trust. The trust has assets totalling $600,000, and includes the principal home of Darren and Fiona which is valued at $100,000. The trust has a liability of $300,000 secured against the assets. The net asset attribution amount for each stakeholder is calculated as follows:

Darren & Fiona

Terry

Total entity assets

$600,000

$600,000

Less value of principal home

$500,000

($600,000-$100,000)

Nil

Assessable assets as a % of total entity assets

83.33% ($500,000?$600,000)

100%

Total liability

$300,000

$300,000

Amount of assessable liability

$250,000 ($300,000x83.33%)

$300,000

($300,000 x 100%)

Attribution %

33.33% each

33.33%

Net attributable asset amount

$83,333 each

(($600,000-(100,000+$250,000)) x33.33%)

$100,000

(($600,000-$300,000) x33.33%)

Example 2 of apportionment and multiple attributable stakeholders

Example 2: Three brothers Tony, Dominic and Ben are attributed with one third each of an entity with assets totalling $1,000,000. The principal home of each brother is part of the assets of the entity. Tony's home is valued at $120,000, Dominic's home is valued at $90,000, and Ben's home is valued at $60,000. The entity also has a liability of $300,000 secured against all its assets. The net asset attribution amount for each stakeholder is calculated as follows:

Tony

Dominic

Ben

Total entity assets

$1,000,000

$1,000,000

$1,000,000

Less value of principal home

$880,000

($1,000,000-$120,000)

$910,000

($1,000,000-$90,000)

$940,000

($1,000,000-$60,000)

Assessable assets as a % of total entity assets

88%

($880,000?$1,000,000)

91%

($910,000?$1,000,000)

94%

($940,000?$1,000,000)

Total liability

$300,000

$300,000

$300,000

Amount of assessable liability

$264,000

($300,000x88%)

$273,000

($300,000x91%)

$282,000

($300,000x94%)

Attribution %

33.33%

33.33%

33.33%

Net attributable asset amount

$205,313

(($1,000,000-($120,000+$264,000))

x33.33%)

$212,312

(($1,000,000-($90,000+$273,000))

x33.33%)

$219,311

(($1,000,000-($60,000+$282,000))

x33.33%)


Effect of charge or encumbrance on the value of assets

Section 52ZZT [8] VEA

VEA ? (go back) [31]

10.3.10/Non-recognised Liabilities of a Controlled Private Company or Trust [17]

10.3.10/Recognised Liabilities of a Controlled Private Company or Trust [6]

More ? (go back) [32]

Attributable stakeholder, asset and income attribution percentage

Section 52ZZJ [8] VEA

VEA ? (go back) [33]

10.3.10/Non-recognised Liabilities of a Controlled Private Company or Trust [17]

10.3.10/Recognised Liabilities of a Controlled Private Company or Trust [6]

10.3.9/Homeowner & Non-Homeowner where Home is owned by a Private Company or Trust [34]

More ? (go back) [35]

An entity means any of the following:

an individual,

a company,

a trust,

a business partnership,

a corporation sole,

a body politic.

The principal home has the meaning given by subsection 5LA(1) [10] of the VEA and subsection 5LA(2) [10] of the VEA. The principal home of a person is generally the place in which they reside. In certain circumstances, however, the principal home of a person can be the place in which they formerly resided. The following property is regarded as part of the principal home.

  • the residence itself (e.g. house, flat, caravan),
  • permanent fixtures (e.g. stoves, built-in heaters, dish-washers, light fittings and affixed carpets),
  • [glossary:curtilage:DEF/Curtilage] (i.e. two hectares [2] or less of private land [2] around the home where the private land use test [2] has been satisfied, or all land held on the same title as the person's principal home where the extended land use test [2] has been satisfied), or
  •       any garage, shed, tennis court or swimming pool used primarily for private purposes provided it is on the same title as the principal home.

 

 

According to section 52ZZJ of the VEA [10], 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.

 

 

An exempt asset is one that is disregarded when calculating the value of a person's assets [2] under the assets test [2].  Examples of exempt assets include:

  • the value of a person's principal home [2],
  • any motor vehicle provided under the Vehicle Assistance Scheme,
  • the value of any medal or decoration awarded for valour, other than used as an investment or hobby,
  • up to two funeral bonds [2] where the combined amount invested is within the funeral bond threshold [2],
  • a prepaid funeral [2] or cemetery plot
  • value of a superannuation fund [2] investment prior to pension age [2].

For a full legislative definition see section 52 of the VEA.

 

 


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