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﻿ 10.3.11 Assessment of Capital Injection to a Private Trust or Company - From 01/01/2002
Home > Compensation and Support Policy Library > Part 10 Types of Income and Assets > 10.3 Business Structures and Trusts > 10.3.11 Assessment of Capital Injection to a Private Trust or Company - From 01/01/2002
This section contains information on the assessment and treatment of capital injections to controlled private trusts [2] and controlled private companies [2].
or control test [2]
source test [2].
control test [2] or
Person considered to be a genuine investor
A person will be considered to be a genuine investor [2] where they provide capital to an entity [2] in return for equity. Where a person is considered to be a genuine investor in an entity they will be ascribed the historical value [2] of the injection of capital. See below for further information on the treatment of injections of capital to fixed unit private trusts and private companies.
Criteria for genuine injection of capital in return for equity in a private company
A genuine injection of capital will have occurred when all of the following occur:
an actual injection of capital has been made,
the person who made the capital injection is not an attributable stakeholder [2] of the company,
the person who made the capital injection received shares in the company in return for the capital injection,
the amount of the shares was reasonably commensurate with the amount of the capital injection,
the person has a right to dividends, and that right is reasonably commensurate with the amount of the capital injection,
the person has a right to capital on wind-up of the company, and that right is reasonably commensurate with the amount of the capital injection,
the person was aged 18 years or over at the time the capital injection was made, and
Treatment if injection of capital is genuine
The person who genuinely injected capital will have the historical value [2] of the injection of capital assessed against them. If the injection of capital is genuine, it will not be regarded as income of the attributable stakeholder [2](s). The amount of the injection will be included in the entity's assets. However, the entity's assets will also be reduced by the historical value of the injection. Reasonable dividend payments can also be made to the person who injected the capital and will not be treated as income or as a gift of the attributable stakeholder/s. Such dividends will be treated as income of the genuine investor [2] for 12 months from the date of distribution.
Assessing historical value of injection to a company is subject to conditions
Assessing the historical value of the injection of capital assessed against the person who genuinely injected the capital is subject to two conditions:
the amount will be limited to the percentage share holding purchased, but must be less than 50% of the present capital value of the company, and
if the value of the company falls, the amount of the historical value attributed to the person may be subject to reduction, based on the information provided by that person, and taking into account the current and past circumstances of the company.
Reason for assessing historical value of injection
Limiting the amount to the historical value reflects the actual contribution, while recognising the reality that a non-attributable stakeholder relies entirely on the goodwill of the attributable stakeholder as:
the investor may never regain access to their investment, let alone any appreciation, and
until such time as a capital distribution is made, the attributable stakeholder has the enjoyment of the funds injected, including any appreciation.
Genuine injection of capital in return for equity in a private trust
A genuine injection of capital in return for equity in a private trust can only occur where the trust is a fixed trust, and the person obtains units [2] in return for the injection of capital. The value of the units (using the net asset backing method [2]) will be treated as an asset of the person who injected the capital. However if the injection of capital occurs after 7.30pm 9 May 2000, the guidelines regarding the assessment of fixed trusts should be examined to ensure whether, under the source test [2], the assets and income of the trust should be attributed via the normal attribution rules.
Note that it is not possible to obtain equity in a discretionary trust.
Policy Library – Overview of Ordinary Income
Section 10.1.1 [6]
10.3.8/Discretionary Trust, Rural Succession Trust, and Fixed Unit Trust [8]
A genuine injection of capital in return for equity in a private trust can only occur where the trust is a fixed trust, and the person obtains units [2] in return for the injection of capital. Genuine investors have the historical value of the injected equity capital assessed as their asset.
Historical value in relation to a trust or company means the original amount of capital invested by a stakeholder in the entity at a particular time or over a period of time.
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.
the underlying transfer was made for no consideration or for a consideration less than the arm's length amount [2] in relation to the underlying transfer.
If a sole attributable stakeholder [2], or members of a couple [2] who are the only attributable stakeholders, make a capital injection into a structure in the form of a gift, that gift will not be subject to the disposal or deprivation provisions [2] but must be included in the value of the structure. This is because a sole attributable stakeholder, or members of a couple who are the only attributable stakeholders, cannot gift to themselves.
If there are multiple attributable stakeholders and one of those stakeholders makes a capital injection to a structure in the form of a gift, the gift will be included in the value of the structure and attributed to the attributable stakeholders in accordance with their assessed attribution percentage. The attributable stakeholder who made the gift will be subject to the deprivation provisions [2] of the Act, in regard to the amount of the gift attributed to the other (attributable) stakeholders.
If the gift is from a third party (that is, a person who is not an attributable stakeholder [2] of the trust or company), the amount of the gift will be added to the value of the entity [2]. The third party making the gift would be subject to the deprivation provisions [2], if that third party is or becomes an income support recipient.
10.3.7/Attribution Percentage [14]
10.3.6/The Source Test [16]
According to Section 5E(2) [18]of the VEA [18]a person is a member of a couple, if they are:
When making a decision whether a course of conduct warrants application of the deprivation provisions, reference should be made to section 48 of the VEA [10] in relation to income and section 52E of the VEA [10] in respect of assets.
Gifting of trust units where only trust asset is pensioner's principal home
If a veteran who would like to:
gift money to a unit trust of which they are a 100% attributable stakeholder,
have the trust use all that money to purchase their principal residence,
have the house purchased be regarded as adequate consideration for the price paid, and
have the principal residence be the only trust asset,
after 1 January 2002, the deprivation rules do not apply. The house would be an asset of the trust unless the veteran can reasonably establish security of tenure. If the trust subsequently disposes of trust units [2] to a non-attributable stakeholder, a disposal of assets would have occurred subject to allowable gifting limits and security of tenure may need to be re-examined.
10.3.9/Security of Tenure - Home owned by a Private Company or Trust [21]
Source URL (modified on 16/10/2014 - 2:11pm): http://clik.dva.gov.au/compensation-and-support-policy-library/part-10-types-income-and-assets/103-business-structures-and-trusts/10311-assessment-capital-injection-private-trust-or-company-01012002
[1] http://clik.dva.gov.au/user/login?destination=node/16520%23comment-form
[3] http://clik.dva.gov.au/user/login?destination=node/16519%23comment-form
[4] http://clik.dva.gov.au/book/export/html/16520#tgt-cspol_part10_ftn476
[5] http://clik.dva.gov.au/book/export/html/16520#tgt-cspol_part10_ftn477
[6] http://clik.dva.gov.au/compensation-and-support-policy-library/part-10-types-income-and-assets/101-ordinary-income/1011-overview-ordinary-income
[7] http://clik.dva.gov.au/book/export/html/16520#ref-cspol_part10_ftn476
[8] http://clik.dva.gov.au/compensation-and-support-policy-library/part-10-types-income-and-assets/103-business-structures-and-trusts/1038-other-trust-matters-01012002/discretionary-trust-rural-succession-trust-and-fixed-unit-trust
[9] http://clik.dva.gov.au/book/export/html/16520#ref-cspol_part10_ftn477
[11] http://clik.dva.gov.au/user/login?destination=node/16323%23comment-form
[12] http://clik.dva.gov.au/book/export/html/16520#tgt-cspol_part10_ftn478
[13] http://clik.dva.gov.au/book/export/html/16520#tgt-cspol_part10_ftn479
[14] http://clik.dva.gov.au/compensation-and-support-policy-library/part-10-types-income-and-assets/103-business-structures-and-trusts/1037-attribution-percentage-derivation-and-attribution-period-01012002/attribution-percentage
[15] http://clik.dva.gov.au/book/export/html/16520#ref-cspol_part10_ftn478
[16] http://clik.dva.gov.au/compensation-and-support-policy-library/part-10-types-income-and-assets/103-business-structures-and-trusts/1036-attribution-guidelines-private-trusts-private-companies-01012002/source-test
[17] http://clik.dva.gov.au/book/export/html/16520#ref-cspol_part10_ftn479
[18] http://www.comlaw.gov.au/Series/C2004A03268
[19] http://clik.dva.gov.au/user/login?destination=node/16497%23comment-form
[20] http://clik.dva.gov.au/book/export/html/16520#tgt-cspol_part10_ftn480
[21] http://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/security-tenure-home-owned-private-company-or-trust
[22] http://clik.dva.gov.au/book/export/html/16520#ref-cspol_part10_ftn480