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:
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:
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]
VEA ? [5]
Circumstances where a loan to or debts owed by an entity will not be recognised as a liability of that entity are:
Loans must fulfil the following requirements:
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].
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:
Note – a person is not treated as having made a loan merely because:
According to section 5J(1) [10] of the VEA a financial asset means;
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:
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].
Last amended: 8 September 2011
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:
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]
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.
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.
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.
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.
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]
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:
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.
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.
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.
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;
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.
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].
VEA ? [27]
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]
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)) |
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: 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: 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%) |
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]
Attributable stakeholder, asset and income attribution percentage
Section 52ZZJ [8] VEA
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.
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:
For a full legislative definition see section 52 of the VEA.
Links
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[2] https://clik.dva.gov.au/%23
[3] https://clik.dva.gov.au/user/login?destination=node/16322%23comment-form
[4] https://clik.dva.gov.au/book/export/html/16420#tgt-cspol_part10_ftn465
[5] https://clik.dva.gov.au/book/export/html/16420#tgt-cspol_part10_ftn466
[6] https://clik.dva.gov.au/compensation-and-support-policy-library/part-10-types-income-and-assets/103-business-structures-and-trusts/10310-liabilities-private-trust-or-company-01012002/recognised-liabilities-controlled-private-company-or-trust
[7] https://clik.dva.gov.au/book/export/html/16420#ref-cspol_part10_ftn465
[8] https://clik.dva.gov.au/service-eligibility-assistant-updates/all-determinations-order-date-signed-oldest-most-recent/determinations-under-vea
[9] https://clik.dva.gov.au/book/export/html/16420#ref-cspol_part10_ftn466
[10] http://clik.dva.gov.au/legislation-library
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[12] https://clik.dva.gov.au/book/export/html/16420#tgt-cspol_part10_ftn467
[13] https://clik.dva.gov.au/book/export/html/16420#tgt-cspol_part10_ftn468
[14] https://clik.dva.gov.au/book/export/html/16420#tgt-cspol_part10_ftn469
[15] https://clik.dva.gov.au/book/export/html/16420#tgt-cspol_part10_ftn470
[16] https://clik.dva.gov.au/book/export/html/16420#tgt-cspol_part10_ftn471
[17] https://clik.dva.gov.au/compensation-and-support-policy-library/part-10-types-income-and-assets/103-business-structures-and-trusts/10310-liabilities-private-trust-or-company-01012002/non-recognised-liabilities-controlled-private-company-or-trust
[18] https://clik.dva.gov.au/book/export/html/16420#ref-cspol_part10_ftn467
[19] https://clik.dva.gov.au/compensation-and-support-policy-library/part-10-types-income-and-assets/103-business-structures-and-trusts/10312-assessing-income-distributions-private-trust-or-company-01012002
[20] https://clik.dva.gov.au/book/export/html/16420#ref-cspol_part10_ftn468
[21] https://clik.dva.gov.au/compensation-and-support-policy-library/part-10-types-income-and-assets/103-business-structures-and-trusts/10316-primary-production-private-trust-company-issues-01012002
[22] https://clik.dva.gov.au/compensation-and-support-policy-library/part-10-types-income-and-assets/103-business-structures-and-trusts/10310-liabilities-private-trust-or-company-01012002/apportioning-liability-controlled-private-company-or-trust
[23] https://clik.dva.gov.au/book/export/html/16420#ref-cspol_part10_ftn469
[24] https://clik.dva.gov.au/book/export/html/16420#ref-cspol_part10_ftn470
[25] https://clik.dva.gov.au/book/export/html/16420#ref-cspol_part10_ftn471
[26] https://clik.dva.gov.au/user/login?destination=node/16542%23comment-form
[27] https://clik.dva.gov.au/book/export/html/16420#tgt-cspol_part10_ftn472
[28] https://clik.dva.gov.au/book/export/html/16420#tgt-cspol_part10_ftn473
[29] https://clik.dva.gov.au/book/export/html/16420#tgt-cspol_part10_ftn474
[30] https://clik.dva.gov.au/book/export/html/16420#tgt-cspol_part10_ftn475
[31] https://clik.dva.gov.au/book/export/html/16420#ref-cspol_part10_ftn472
[32] https://clik.dva.gov.au/book/export/html/16420#ref-cspol_part10_ftn473
[33] https://clik.dva.gov.au/book/export/html/16420#ref-cspol_part10_ftn474
[34] https://clik.dva.gov.au/compensation-and-support-policy-library/part-10-types-income-and-assets/103-business-structures-and-trusts/1039-assessing-assets-private-trust-or-company-01012002
[35] https://clik.dva.gov.au/book/export/html/16420#ref-cspol_part10_ftn475