Situation may arise where use a loan facility to borrow money for income-producing purpose (e.g., the acquisition of a rental property) but the client then draws further money (e.g., using a redraw facility) for private purposes. If this occurs, the loan account becomes a ‘mixed purpose account’, and the interest will cease to be 100% deductible. Instead, interest will need to be apportioned between each purpose – which is a daunting calculation.

In addition, any repayments will generally need to be applied proportionately against the income-producing and private portions of the loan balance at that time. In other words, any repayment cannot simply be applied solely against the private portion of the loan.

However, a strategy that can effectively remedy this problem is to refinance the mixed purpose loan by borrowing an equivalent amount under two separate loans or sub-accounts.

In TR 2000/2, the ATO provides that, where a taxpayer with a mixed purpose loan refinances the loan by borrowing under two separate loans (or sub-accounts) that are equal to the respective income-producing and non-income-producing proportions of the mixed purpose loan, the interest accrued on the debt incurred in refinancing the income producing portion of the mixed-purpose debt will be fully deductible.

The government has made amendments to “provide tax certainty for deceased estates in situations where a person has died while in receipt of a superannuation income stream”.

Broadly, a superannuation fund is entitled to a tax exemption for income that supports the payment of superannuation income stream benefits (i.e., superannuation pensions).

The term ‘superannuation income stream benefit’ is defined in the Income Tax Assessment Regulations 1997 (ITAR), and this meaning has been expanded for the purposes of the earnings tax exemption.

The expanded meaning of this term ensures that, where a complying superannuation fund member was receiving a superannuation income stream immediately before their death, the superannuation fund will continue to be entitled to the earnings tax exemption in the period from the member/s death until their benefits are cashed:

• by paying them out as a lump sum; and/ or
• by commencing a new superannuation income stream;

subject to the benefits being cashed as soon as practicable.

The level of the exemption would be no greater than it was before the member’s death (allowing for investment earnings after the member’s death).

Also, the tax-free and taxable components of that superannuation income stream are to be used in calculating the tax components of the superannuation benefits paid after the death of a person who was receiving a superannuating income stream immediately before their death.

The amendments apply to the 2012/13 and future income years.

Some common errors occurring when applying the small business CGT concessions, and has offered tips to avoid those errors.

Correctly report earn-out arrangements
The sale of a business often includes a clause for further payments to be made due to future earnings. otherwise referred to as earn-out rights.

Earn-out rights must be included in the capital proceeds of a CGT event A1 and when calculating whether the client meets the maximum net asset maximum net asset value test.

Satisfy the maximum net asset value test
Just prior to the CGT event, the total net value of the client’s CGT assets cannot exceed $6 million.

This includes the net value of the CGT assets of any entity that is connected with the client, is an affiliate of the client, or who is connected with the client’s affiliates.

Determine the market value of a business or asset
Where the market value is required, accepted valuation principles should be applied.

Use the contract date, not settlement date
The CGT event occurs at the time the contract is entered into, not at the settlement date. For disposal of assets (CGT event A1), the time of the CGT event is when the disposal contract is signed.

Where contract and settlement dates cross over the financial years, the capital gain or loss should be declared in the financial year in which the contract was signed.

SMSF trustees should be made aware of the following changes that are intended to apply from 1 July 2013:

• the ATO will have the power to issue administrative penalties against SMSF trustees (and directors of corporate trustees);
• the ATO will have the power to issue relevant persons with a direction to rectify specified contraventions within a specified reasonable time;
• the ATO will have the power to enforce mandatory education for trustees who have contravened SIS Legislation; and
• amounts illegally early released will be taxed at the superannuation non-complying tax rate(i.e., currently 46.5%).

These changes are intended to broaden the actions that the ATO can take against recalcitrant SMSF trustees (and directors of corporate trustees), acknowledging that the existing tools available to address instances of non-compliance are relatively ‘blunt instruments’.

Prior to 1 July 2013, the only tools the ATO had were basically the following (and the new tools are intended to complement these existing tool):

• making an SMSF non-complying for taxation purposes;
• applying to a court for civil penalties to be imposed (a person may also are face criminal penalties for more serious breaches of the law);
• accepting an enforceable undertaking in relation to a contravention; and
• disqualifying a trustee of an SMSF.

Note that these measures were contained in the Superannuation Legislation Amendment (Reducing Illegal Early Release and Other Measures) Bill 2012.