Assessment of liabilities for trust and companies 043-04090010

General information about liabilities shown on the balance sheet of a business is not covered in this procedure. It is covered in the procedure, Business liabilities.

Some liabilities on the balance sheet are not allowable liabilities for social security purposes even though they may be allowable as liabilities for accounting and taxation purposes. This decision will be made by Complex Assessment Officers (CAO).

Unsecured liabilities, or liabilities secured by a floating charge over all trust and company assets, are generally allowed, unless they are loans from controllers or other third parties. In these cases, the liability will be allowed provided that the entity balance sheet records the liability and in the case of third parties, the liability is also evidenced by a written acknowledgement.

Non-primary production liabilities secured against assets not owned by the trust or company are not allowed. The amount allowed in respect of a liability secured against non-primary production asset(s) is limited to the value of the secured assets. The liability may reduce the value of the assessable asset that it is secured against where the asset is owned by a part or full controller under their personal Assets Test. If the asset is owned by the 100 per cent controller of an entity then all of the liability will reduce the value of the assessable asset. If the asset is owned by a part controller then only a portion of the liability (which equates to the attribution percentage) would reduce the value of the assessable asset.

Because of the principles of primary production aggregation, the full amount of any liabilities borrowed by the trust or company for the purposes of operating a primary production business may be allowed in respect of primary production assets. An entity primary production liability may be secured against assets not owned by that entity. These assets may be primary or non-primary production related. Where this occurs, the total value of the entity primary production liability is to be recorded on the entity record and documented.

This means that the total balance of the entity primary production liability is to be recorded on the entity record and documented. Provided that the entity liability is coded with a primary production percentage on the Trust/Company Liabilities (TRLD) screen, and the other non-entity asset types are recorded correctly on the customer record, aggregation should automatically occur for all primary production assets.

A liability may be wholly secured against the principal residence of an entity controller. In these circumstances the controller would be a home owner and therefore the principal residence and any liabilities secured against the principal residence would be disregarded. This applies whether the property is in the name of the customer or the entity.

A liability may be secured against trust and company asset(s) which consist of a mix of exempt and assessable assets, for example, a liability might be secured against a farm on which the principal residence of an entity controller is situated. In this situation the amount of the liability allowed will need to be apportioned. However, if the purpose of the loan was to operate a primary production business of the trust or company (rather than to purchase the property including the principal residence), primary production aggregation will apply and the loan will not need to be apportioned.

Liabilities can arise when trust and company income is documented as having been distributed to stakeholders who subsequently loan the funds back. In a number of cases the stakeholder may be unaware of the 'loan' owed to them by the entity, as the distribution did not result in the actual receipt of money by the stakeholder, even though it appears on their individual income tax return. Documentation will be required to confirm that all persons and organisations owed funds by trusts and companies, particularly family members and other close associates, are aware of the existence of the liability.

Provision accounts are listed on a business balance sheet to account for future amounts that a business will be liable to pay out to employees, shareholders and/or other parties.

Provisions such as income tax, dividends payable and annual leave are an allowable liability where a business is legally committed to paying out the designated amount at a future date.

There will be no liability allowed where the entity has no legal liability to pay out the amounts, for example, long service leave in respect of employees who have not been employed for 7 years, and bad debts.

There are six possible assessment regimes involving liabilities. Liabilities may be assessed as recognised or not recognised, depending on to whom the amount is owed.

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 should only be requested to confirm the security of the loan or the name the loan is in.

Liabilities, such as borrowings from entity associates and debts owed to entity associates, will be allowed as a liability of the entity provided the entity balance sheet records the liability and it is evidenced by a written acknowledgement. A controller, a trustee or a public officer can sign the acknowledgement on behalf of the trust or company.

Liabilities in respect of a customer who is the 100 per cent controller of the trust or company, or in respect of a partnered couple who have 100 per cent control in total, (for example 50/50 per cent or 100/0 per cent), will be allowed provided the entity balance sheet records the liability.

There is no need for documentation such as a loan acknowledgement. It is accepted that a 100 per cent controller, or both of a partnered couple with 100 per cent control in total, would be aware of the existence of the liability. The effect of allowing a liability in respect of the trust or company will be offset against the assessment of the liability as a personal asset of the controller.

Liabilities in respect of part (less than 100 per cent) controllers can be treated in a manner identical to liabilities in respect of associates except for the rules about signatories to the liability acknowledgement. If a partnered couple have 100 per cent control in total then they are considered to be sole controllers.

In situations involving liabilities to part controllers, the part controller cannot sign an agreement on behalf of the trust or company. Another person who is a controller, trustee or public officer must sign instead.

Loans from minors and debts owed to minors will not be accepted as liabilities of a trust or company, but will be assessed as personal assets of the minors. Customers under the age of 18 years are generally minors (unless they are aged at least 16 and are engaged in a full-time occupation or receiving a social security income support payment). Minors are under a legal disadvantage because they cannot generally give a discharge for money paid to them.

Liabilities can include loans that have been made to the trust or company by another entity, or debts owed by the entity to another entity.

For liabilities in respect of another entity controlled by a genuine third party such as a private investor, the rules for third parties should be applied, that is, the liability will be considered to be adequately documented provided the liability appears on the balance sheet and a loan agreement is provided.

Liabilities in respect of another entity which is controlled by an associate or a part controller will be allowed provided the entity balance sheet records the liability and provided it is evidenced by a written acknowledgement.

Where a part (less than 100 per cent) controller is involved they cannot be the sole signatory to a liability acknowledgement, that is, they cannot sign on behalf of both the lender organisation and the organisation that owes the liability. Another controller, trustee or a public officer must sign the acknowledgement on behalf of the lender trust or company.

Liabilities in respect of another trust or company which is also controlled by the same 100 per cent controller or by a partnered couple who have 100 per cent control in total, (either 50 per cent each or one partner with 100 per cent), will be allowed as a liability of the entity provided the two entity balance sheets record the amount as an asset and a liability respectively.

Liabilities in respect of another trust or company which is controlled by a minor will not be accepted as a liability of the entity (unless they are aged at least 16 and are engaged in a full-time occupation or receiving a social security income support payment).