Bills Digest No. 35  2000-01 Social Security and Veterans' Entitlements Legislation Amendment (Private Trusts and Private Companies-Integrity of Means Testing) Bill 2000


Numerical Index | Alphabetical Index

WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

CONTENTS

Passage History
Purpose
Background
Main Provisions
Endnotes
Contact Officer & Copyright Details

Passage History

Social Security and Veterans' Entitlements Legislation Amendment (Private Trusts and Private Companies-Integrity of Means Testing) Bill 2000

Date Introduced: 17 August 2000

House: House of Representatives

Portfolio: Family and Community Services

Commencement: Royal assent. However, the inclusion of amounts in the means test under the Bill will only apply from 1 January 2002.

Purpose

To include income and assets of certain private companies and trusts in an individual's income and assets for the purposes of the social security and veterans' affairs means test.

Background

The social security income and assets tests exist to ensure that welfare payments are targeted to those in actual need of assistance. The assets test works on the presumption that after an individual has assets above a certain value it is reasonable to expect the person to liquidate some of the assets to support themselves and their dependants before being eligible for government assistance. Both the income and assets tests have phasing-in arrangements so that the full benefit is available where the income or assets are below a certain value and the amount of payment is reduced until benefits cease to be payable once income or assets exceed a certain value. The actual income and assets tests applicable to an individual will depend on their circumstances and the benefit received, although the assets tests have more general application. The following are general examples of the currently applicable tests (1 July - 19 September 2000):

Assets

  Full pension/allowance Part pension/allowance

Single home owner

Up to $133 250

Less than $264 250

Partnered home owner

Up to $189 500

Less than $407 000

Single non-home owner

Up to $228 750

Less than $359 750

Partnered non-home owner

Up to $285 500

Less than $502 500

Income test
Pensions

  Full pension/allowance Part pension/allowance

Single

Up to $106

Less than $1 087.25

Single and 1 child

Up to $130.60

Less than $1 111.85

Couple (combined)

Up to $188

Less than $1 816.50

Additional children

Add $24.60 per child

 

Newstart Allowance, Widow allowance, Parenting allowance, Sickness allowance and Mature age allowance (MAA)

  Full pension/allowance Part pension/allowance

Single 21 & over

Up to $62

Less than 577.58

Single over 18 with dependent children

Up to $62

Less than $617.72

Single over 60 after 9 months or MAA

Up to $62

Less than $617.72

Partnered over 18 with children or over 21, each

Up to 62

Less than $529.29

Source: Centrelink, http://www.centrelink.gov.au/internet/internet.nsf/payment/index.htm

In addition to the actual benefit received, eligibility for a payment, however small, can also attract significant fringe benefits, principally in relation to pharmaceutical benefits.

While there are many valid reasons for the use of private trusts and companies, for example in discretionary trusts the ability to distribute income to those most in need and for companies to have a business with limited liability, the use of such mechanisms has often been driven by tax minimisation and access to social security benefits. In regard to tax minimisation, the Review of Business Taxation (Ralph Report) has recommended that a system on entity taxation be introduced so that the type of vehicle used (ie company, trust or other arrangement) will not matter for taxation purposes. The Government has accepted this recommendation and the entity taxation system is due to commence from 1 July 2001. One of the main reasons for the reform is the notion that it is an entity's economic position that is important, rather than its structure. This Bill can be seen as having a similar effect in relation to social security benefits.

Under the current income test, income distributed by a company or trust to an individual will be included in the individual recipient's income. However, with private trusts and companies there are opportunities for the amount and timing of distributions to be made to assist in eligibility for benefits. For private companies, where the distribution of income is generally made according to the contributed capital, this can be done by retaining profits in the company when its distribution would result in the recipient being ineligible for benefits and increasing distributions in times when income from other sources is low.

For trusts the matter is complicated by the range of characteristics which a trust may have. However, the trust predominantly used for taxation/social security advantages is the discretionary trust where the trustee determines to whom and in what amount distributions are to be made to the beneficiaries of the trust. These mechanisms allow distributions to be made for maximum tax and social security advantages and has the advantage that no beneficiary has a right to a share of the income or capital of the trust so that a beneficiary cannot simply be allocated a share of the income/capital in accordance with their contributions. These trusts, which are usually relatively small, should be distinguished from widely held trusts where units are bought and sold in a market and income is distributed according to the units held. Such trusts are relatively common in the property sector and are fixed trusts.

The treatment of assets also reflects the nature of the entity involved. Where there is a right to a proportion of the entity, such as in a company or a fixed trust, the value of the assets of the entity are currently apportioned among the stakeholders of the entity. Where there is no right to a share of the capital, there is no apportioning of assets for purposes of the assets test. This is another advantage of a discretionary trust if making arrangements for maximum social security effect.

On 23 November 1999 the Minister for Family and Community Services issued a Discussion Paper, Private Trusts and Private Companies, Maintaining the Integrity of the Means Test, outlining how the Government proposed to change the means tests to prevent these entities being used to circumvent the existing arrangements. The proposals to attribute income and assets contained in the Discussion Paper are substantially the same as those contained in the Bill. The main difference between the Discussion Paper and the Bill is that the Bill contains concessional rules for primary production trusts while the Discussion Paper contained no specific concession. In this regard the Discussion Paper stated:

Most farmers do not use private company or trust structures to operate their businesses - ATO and Australian Bureau of Agricultural Economics (ABARE) figures show that 90 per cent of farms are operated by partnerships or sole traders.

However, some farmers hold their properties in interposed structures and may be affected by this proposal.

For smaller farmers who do use interposed structures, existing social security safeguards ensure that those in genuine need receive income support.(1)

In regard to the number of recipients to be affected by the proposed changes, the Discussion Paper estimated that approximately 90 000 existing Centrelink income support customers had some active involvement in a private company or trust and that on the basis of an examination of some of these customer's records it estimated that around 35 000 customers would lose all or part of their existing entitlement. This was broken down into 14 000 partnered Parenting payees, 11 000 Age pensioners, 4 000 Newstart allowance recipients and 6 000 spread over other assistance.(2)

In a Media Release accompanying the release of the Discussion Paper and dated 23 November 1999, the Minister estimated that the savings under the measure would be over $100 million per year.

It was announced in the 2000-01 Budget that the measure would be introduced in the Departments of Family and Community Services (F&CS), Health and Aged Care (HAC) and Veterans' Affairs (VA) from 1 January 2002. The estimated financial impact of the measures are:

Department 2000-01 ($m)* 2001-02 ($m) 2002-03($m) 2003-04($m)

F&CS

22.2

-37.7

-126.6

-132.6

HAC

-

-2.3

-4.8

-5.0

VA

3.2

-2.6

-8.8

-8.9

Total

25.4

-42.6

140.3

-146.5

* Costs in 2000-01 reflect initial assessment, system changes and other up-front costs.

Source: 2000-01 Budget Paper No. 2, p. 90.

Main Provisions

Item 23 of Schedule 1 will insert a new Part 3.18 into the Social Security Act 1991 (SS Act) titled 'Means test treatment of private companies and private trusts'.

Designated Private Company/Trust

Proposed section 1207N provides that a company will be a 'designated private company' if it is not an excluded company (the Secretary may declare that companies in a specified class are excluded) and:

  • the company satisfies at least two the following:
  • consolidated gross operating revenue, including subsidiaries, is less than $10 million
  • the value of the consolidated gross assets is less than $5 million
  • the company and its subsidiaries have fewer than 50 employees at the end of the financial year, or
  • the company came into existence after the end of the previous financial year, or
  • the company is a declared private company (the Secretary may declare that companies in a specified classes are declared companies).

Designated private trusts are dealt with in proposed section 1207P and are trusts that are not:

  • an excluded trust (the Secretary may declare that trusts in a specified class are excluded trusts)
  • a fixed trust with units held by 50 or more members which was not created or allowed to operate for the sole or dominant purpose of avoiding the application of the rules contained in the Bill, or
  • a complying superannuation fund.

Controlled Private Company/Trust

A controlled private company in relation to an individual is a designated private company which in relation to the individual passes either:

  • the control test:
  • the direct voting interest controlled by the individual and their associates is 50% or more of the voting power in the company (the direct voting interest may be traced through other companies under proposed section 1207R with the formula used being based on the direct voting interests held in the various entities. Control is given a wide definition to include control through arrangements or practices which have no legal force (proposed section 1207S) or
  • the direct control interests held by the individual and their associates is 15% or more (direct control of the company is equal to the percentage of paid up share capital held, the percentage of rights to distributions of the company held or which the person has a right to acquire. There is provision for tracing interests through interposed companies (proposed section 1207T), or
  • the source test - this test is satisfied if the individual has transferred property or services to the company on or after 9 May 2000 and the transfer was made for no consideration or for less consideration than would have been obtained in an arm's length transaction (proposed section 1207Q).

Controlled private trusts are dealt with in proposed section 1207V. A designated private trust will be a controlled private trust in relation to an individual if the individual satisfies either:

  • the control test:
  • the individual or any of their associates is a trustee of the trust
  • a group relating to the individual is able to appoint or remove any of the trustees (a group includes the individual acting alone, an associate acting alone, the individual and one or more associates acting together or two or more associates acting together)
  • a group relating to the individual can vary the trust deed or veto a decision of the trustee
  • the individual and their associates hold 50% or more of the interests in the capital or income of the trust (an entity will be taken to have an interest if it has entered into a contract to purchase a share of the capital or income of the trust, has a right or option to have such a share transferred to it or is otherwise entitled to acquire such a share (proposed section 1207W)
  • a group in relation to the individual has the power to obtain, or control the application of, the beneficial enjoyment of the capital or income of the trust, or
  • the trustee is under an obligation, or is accustomed, to act in accordance with the direction or wishes of a group in relation to the individual or might reasonably be expected to so act, or
  • the source test: (this is the same as for a company.

Attribution of income/assets to an Individual

If a company or trust is a controlled private company or trust in relation to an individual, the individual is an attributable stakeholder in relation to the company or trust and the trust is not a concessional primary production trust (see below), then the percentage of the income and assets attributable to the individual will be 100% or such other percentage as the Secretary determines (proposed section 1207X).

The amount of income to be attributed to the individual is dealt with in proposed section 1207Y. If the company or trust derives ordinary income during a period on or after 1 January 2002 while the individual is an attributable stakeholder and:

  • during that period if the income had been derived by the individual it would have been ordinary income for the individual and
  • the income is not excluded income (the Secretary may determine that for a specific individual an amount from a specified company or trust is excluded - in making such a determination the Secretary must act in accordance with any relevant decision making principles which will be disallowable by either House of Parliament(3)), then
  • yearly income is to be attributed to the individual equal to the income of the company or trust in the same proportion as the period during which the income was derived is to a year (proposed section 1207Y).

Income from a company or trust is not to be attributed to more than one individual and the Secretary may determine that a specified amount is not to be attributed to an individual. The Secretary is to act in accordance with any relevant decision making principles (proposed section 1207Z).

In determining the income of a company or trust certain amounts that are excluded from the general definition of an individual's ordinary income contained in the SS Act are to be included. These amounts include:

  • superannuation investment returns
  • emergency relief and assistance
  • payments under various Acts providing Commonwealth assistance
  • insurance or compensation payments due to loss or damage, and
  • certain investments of less than 12 months (proposed section 1208).

If the company or trust is a trading entity, the difference in the value of the trading stock over the period is to be included or deducted from the calculation of income (proposed section 1208A).

The income of the company or trust may be reduced by deductions and depreciation allowable under income tax law except to the extent that they are an ineligible deduction, an ineligible part of a deduction or an ineligible amount (determinations specifying these deductions/amounts will be disallowable by either House of Parliament (proposed section 1208B)).

The attribution of assets is dealt with in proposed Division 8. The value of an asset held by a company or trust will be attributed to an attributable stakeholder:

  • if the company/trust owns the asset on or after 1 January 2002
  • if the assets was held by the individual it would have been included in the assets test, and
  • the asset is not an excluded asset (the Secretary may determine that a particular asset is to be excluded and is to act in accordance with any relevant decision making principles) (proposed section 1208E).

Proposed section 1208F deals with when the value of an asset attributed to an individual will be deemed to be unrealisable. This will be when the underlying asset held by the company or trust is unrealisable by the company or trust during the relevant period without having regard to the constituent documents of the company or relevant trust deed or any scheme entered into for the sole or dominant purpose of avoiding the attribution rules. (Unrealisable assets may be excluded in cases of financial hardship.)

If an asset is subject to an encumbrance or charge the value of the asset is to be reduced by the value of the charge/encumbrance unless:

  • it is a collateral security
  • the charge/encumbrance was given for the benefit of an entity other than the company/trust, or
  • the charge/encumbrance is to be excluded under a determination made by the Secretary which must be made in accordance with any relevant decision making principles.

If the charge is over more than one asset, the value of the asset to be attributed to the individual is to be reduced in accordance with the formula contained in proposed subsection 1208F(3) which reflects the proportion of the charge relating to the asset and other assets subject to the charge/encumbrance (proposed section 1208G).

If the asset is subject to an unsecured loan, the Secretary may determine any reduction in the value of the asset. Such a determination must be made in accordance with any relevant decision making principles (proposed section 1208H).

Proposed Division 9 modifies the asset deprivation rules contained in the SS Act (which allow a proportion of the value of an asset to continue to be included for the purposes of the assets test when it has been disposed of in certain ways, such as certain gifts). The proposed Division will:

  • reduce the amount to be included for the deprivation rules to nil or such amount determined by the Secretary where, as a result of the disposal, the rules contained in this Bill apply (proposed section 1208K)
  • include for the purposes of the deprivation rules for an individual an amount relating to an asset:
  • disposed of by a company or trust for which the individual is an attributable stakeholder (proposed section 1208L), or
  • if the individual ceases to be an attributable stakeholder (proposed section 1208M).

Where an individual transfers property to a company or trust on or after 1 January 2002 and as a result becomes an attributable stakeholder, or already is an attributable stakeholder, in respect of the company or trust, proposed section 1208Q provides that the Secretary may determine that the deprivation rules do not apply.

If a company or trust disposes of the income from an asset, the asset is not disposed of and the individual is an attributable stakeholder, the individual will be taken to have disposed of the income for the purposes of the deprivation rules for an amount equal to their attributable percentage of the income. The Secretary, acting in accordance with any relevant decision making principles, will have power to exempt a disposal from this rule or to reduce the amount included for the deprivation rules (proposed section 1208R).

If income is transferred to a company or trust prior to 1 January 2002, the transfer amounts to a disposal and the individual is an attributable stakeholder of the company/trust, the amount of the transfer for the purposes of the deprivation rules is to be reduced by the attribution percentage of the individual or such higher percentage as determined by the Secretary following any relevant decision making principles (proposed section 1208S). Proposed section 1208T contains similar rules where the individual's spouse disposes of income in similar circumstances.

Primary Production Trusts

The definition of a concessional primary production trust (CPPT) is contained in proposed section 1208U. A trust will be a CPPT in relation to an individual where, at the test time, all of the following conditions are satisfied:

  • the trust is a controlled private trust in relation to the individual
  • the trust carries on primary production or has made assets available to another entity which are used solely or principally for primary production
  • 70% of the net value of the assets of the trust, excluding the principal home of the individual if that is owned by the trust, is so used
  • the sum of the net adjusted primary production assets (see below) owned or controlled by the individual and their spouse and used wholly or principally for primary production is less than the threshold ($750 000 subject to indexation)
  • the individual and their spouse's combined adjusted net primary production income (see below) over the previous three years was less than $28 200 (indexed from 1 July 2000) or, if there was no such income over the previous three years the Secretary determines that the income limit is to apply
  • the individual is not actively involved in primary production enterprise but an eligible descendent is
  • the individual is able to appoint the trustee, or a trustee, but only on death, resignation, becoming subject to a legal disability or in accordance with a statutory trustee law
  • if the individual may veto the decision of the trustee, or direct the trustee, this may be done only in relation to the sale of land, fishing or timber rights used for the enterprise or in accordance with a statutory trustee law
  • there is a provision in the trust deed that neither the individual or their spouse can become a trustee of the trust and that this and the last two points cannot be altered by the trustee
  • neither the individual or their spouse can vary the trust deed, and
  • neither the individual or their spouse is capable of benefiting either directly or through an interposed entity, or receiving any remuneration other than as a beneficiary (any ability to receive food for personal consumption produced by the trust, a principal home and services for the home and other minor non-cash benefit provided on an irregular basis are to be ignored).

The adjusted net value of assets is dealt with in proposed section 1208Z. This will be 100% of the net value of the assets of a controlled private trust or such lower percentage as the Secretary, acting in accordance with the relevant decision making principles, determines. If the asset is owned in partnership, this will be reduced to the individual's share of the partnership.

Adjusted net primary production income is dealt with in proposed section 1209. Again this will be 100% of the net value of the income of a controlled private trust or such lower percentage as the Secretary, acting in accordance with the relevant decision making principles, determines. If the income is earned in partnership, this will be reduced to the individuals share of the partnership.

In determining income from primary production, proposed section 1209C provides for reductions to be allowed for losses and outgoings, depreciation and other deductions allowable under income tax law. The Secretary will have power to determine, according to any relevant decision making principles, that a deduction is an ineligible deduction, a specified amount is an ineligible amount or that part of a deduction is an ineligible part.

Proposed Division 12 contains general anti-avoidance rules. If one or more entities enters into a scheme with the sole or dominant purpose of obtaining a social security advantage (a benefit to which they were not entitled, a higher rate of payment or a fringe benefit they would not have received but for the scheme) the Secretary may make a determination regarding attribution, ownership of an asset or derivation of income (proposed section 1209D).

Proposed Division 14 deals with information gathering. The main effect of the proposed Division is to allow information to be obtained, including information from the Commissioner of Taxation, during the period between the commencement of the Bill (Royal Assent) and the coming into effect of the proposed Part 3.18 (1 January 2002).

Amendments to the Veterans' Entitlements Act 1986

Schedule 2 of the Bill will insert a new Division 11A into this Act which mirrors the measures described above. The explanatory memorandum to the Bill contains a table listing the comparable provisions.

Endnotes

  1. Minister for Family and Community Services, Discussion Paper - Private Trusts and Private Companies, p. 21.
  2. Ibid.
  3. Proposed section 1209G provides that decision making principles are disallowable instruments for the purposes of section 46A of the Acts Interpretation Act 1901.

Contact Officer and Copyright Details

Chris Field
5 September 2000
Bills Digest Service
Information and Research Services

This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document.

IRS staff are available to discuss the paper's contents with Senators and Members
and their staff but not with members of the public.

ISSN 1328-8091
© Commonwealth of Australia 2000

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Published by the Department of the Parliamentary Library, 2000.

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