This section contains information on the resignation of an attributable stakeholder from a controlled private trust or controlled private company both before and after 1 January 2002.
VEA ? [3]
An attributable stakeholder [4] who resigns control [4] of a private trust or private company on or after 1 January 2002 will be treated in a manner comparable to other people who gift or relinquish assets. That is, the deprivation provisions [4] will apply to them from the date of resignation (subject to the assessed asset attribution percentage [4] of the structure attributed to the stakeholder).
A genuine resignation will be accepted as having occurred where both the attributable stakeholder and their spouse fulfil all the following criteria:
One exception to the above rules is that the resigning attributable stakeholder(s) can also retain a life interest [4] in their principal residence [4] if the residence is part of the assets of the trust or company. If the new attributable stakeholder/s is an associate, the associate rule will not apply. The 'old' attributable stakeholder(s) will not be held to be in control simply by operation of the associate rule.
VEA ? [5]
Example 1: George is the sole attributable stakeholder of a private trust with assets worth $550,000, which includes his principal residence valued at $120,000. In March 2005 George decided to retire and resigns from the trust. He transfers appointorship to his son Jerry. George's deprivation amount is $420,000 ($550,000 less $120,000 principal residence less $10,000 free area). George serves a five-year deprivation period from his date of resignation. As George retains a life interest in his home the value of the principal residence is taken off the deprivation amount.
Example 2: Barry and Sue, a married couple, are attributed with 75% of the assets and income of a private company. The total value of the company is $400,000. Barry and Sue's attributable asset amount is $300,000 (75%). Barry and Sue decide to resign control of the company with the third stakeholder gaining 100% control. Barry and Sue's deprivation amount is $290,000 ($300,000 less $10,000 free area). They serve a five-year deprivation period from their date of resignation.
If a resigning stakeholder holds a mortgage over an asset of the entity, then the issue of whether the stakeholder has genuinely ceded control of the entity must be investigated. The mortgage documents should be examined to ascertain the nature of the mortgage.
Individual ceases to be an attributable stakeholder of a company or trust
Section 52ZZY [6] VEA
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.
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.
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:
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.
A life interest arises when a pensioner:
A life interest remains current until the pensioner:
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.
VEA ? [12]
As a discretionary trust [4][glossary:'s:] assets and income do not become assessable until 1 January 2002, the deprivation provisions [4] do not apply if a person resigns from the trust before that date. If a person is already serving a five-year deprivation period arising from having originally gifted assets to the trust, any deprivation amount will continue to be assessed for the balance of the five-year period. However, if the person making the gift is deemed to still be the controller, the amount of the disposition is to be reduced by the person's attribution percentage [4] from 1 January 2002.
Henry and Mary are the appointors and trustees of a discretionary family trust that was set up 7 years ago. The assets [4] of the trust total $700,000, including the family home that is valued at $170,000. Henry and Mary are in receipt of a service pension. They realise that come 1 January 2002 they will be attributed with the assets and income of the trust and will no longer be entitled to the pension. On 1 November 2001 they resign from the trust, keeping a life interest [4] in the family home. Their entitlement to pension is not affected.
If a person resigns from a fixed unit trust or private company before 1 January 2002 and relinquishes their units [4] or shares for less than the value assessed (using the net asset backing method [4]), the deprivation provisions [4] will apply.
More ? [13]
Rodney and Marie (a married couple) are the majority shareholders in a private company. They hold 95 voting shares between them. Their shares are valued at $50,000 (using the net asset backing method). On 20 September 2001, Rodney and Marie resign from the company and sell the shares to their children for $15,000. Rod and Marie are subject to deprivation for the amount of $25,000 ($50,000-$15,000-$10,000(gifting free area)).
A discretionary trust is a private trust set up by an individual or individuals either to:
In virtually all cases the trust deed gives absolute discretion to the trustee to distribute both income and capital among the beneficiaries as he or she sees fit.
Attribution percentage is the percentage of income or assets in the private trust or company that will be taken to be the income and assets of the pensioner for the purpose of the income and assets tests. This only applies if the pensioner (or spouse) is determined to be a controller of the private trust or company.
An asset means any property, including property outside Australia.
A life interest arises when a pensioner:
A life interest remains current until the pensioner:
Units in relation to a trust, include a beneficial interest, however described, in the property or income of the trust.
The net asset backing method provides the least complex and consistent basis for assessing the value of private companies. The method values the shares in a private company by calculating the:
The calculation is based upon information in the company balance sheet and depreciation schedule taking into consideration the current market value rather than the historical value as may appear in the balance sheet.
Links
[1] https://clik.dva.gov.au/user/login?destination=node/16422%23comment-form
[2] https://clik.dva.gov.au/user/login?destination=node/16365%23comment-form
[3] https://clik.dva.gov.au/book/export/html/16422#tgt-cspol_part10_ftn504
[4] https://clik.dva.gov.au/%23
[5] https://clik.dva.gov.au/book/export/html/16422#tgt-cspol_part10_ftn505
[6] https://clik.dva.gov.au/service-eligibility-assistant-updates/all-determinations-order-date-signed-oldest-most-recent/determinations-under-vea
[7] https://clik.dva.gov.au/book/export/html/16422#ref-cspol_part10_ftn504
[8] https://clik.dva.gov.au/legislation-library
[9] https://clik.dva.gov.au/book/export/html/16422#ref-cspol_part10_ftn505
[10] http://clik.dva.gov.au/legislation-library
[11] https://clik.dva.gov.au/user/login?destination=node/16515%23comment-form
[12] https://clik.dva.gov.au/book/export/html/16422#tgt-cspol_part10_ftn506
[13] https://clik.dva.gov.au/book/export/html/16422#tgt-cspol_part10_ftn507
[14] https://clik.dva.gov.au/book/export/html/16422#ref-cspol_part10_ftn506
[15] https://clik.dva.gov.au/compensation-and-support-policy-library/part-9-principles-determining-pension-rate/96-deprivation-income-and-assets/962-general-provisions-deprivation
[16] https://clik.dva.gov.au/book/export/html/16422#ref-cspol_part10_ftn507