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Topics on beneficiaries of loss trusts to access concessions (2)

In: Trust
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If a trust does not meet the ‘certain entitlements requirement’ noted above in relation to fixed trusts (for example, where the trust is a discretionary trust), the law allows the trust, for an income year in which the trust has no income, to choose a certain number of beneficiaries to be taken as carrying on the primary production business of the trust for that income year.

For income averaging purposes, the trustee of a loss discretionary trust is permitted to nominate a maximum number of individual beneficiaries in respect an income year, being the higher of:

  • 12; and
  • the number of individuals that were taken to be carrying on a primary production business carried on by the trust for income averaging purposes in the previous income year.

 

For FMD purposes, the trustee of a loss discretionary trust is permitted to nominate a maximum number of individual beneficiaries in respect an income year, being the higher of:

  • 12; and
  • the number of individuals who were treated as if they were carrying on the primary production business under S.393-25(3) in the previous income year. Refer to S.393-27.

 

It is important to be aware that choosing an individual beneficiary in a loss year is not effective unless the choice is made in the manner set out in S.392-22 (for income averaging) and S.393-27 (for the FMD provisions), as follows:

  • The trustee must choose the beneficiary (or beneficiaries) no later than the time the trust’s tax return is lodged for the income year to which the choice relates, unless the Commissioner allows extra time for the choice to be made.
  • The choice must be made in writing (including specifying whether the choice is being made for FMD and/or averaging purposes) and be signed by the trustee and the beneficiary.

 

The choice need not be lodged with the ATO but once made, the choice cannot be varied and is irrevocable.

 

EXAMPLE – Beneficiary of discretionary trust with no trust income

The Fraser Farming Discretionary Trust (the ‘trust’) carried on a business of primary production during the 2019 income year. During that income year, Adam, Linda, their six adult children, and their children's six spouses, were all presently entitled to a share of trust income and were therefore taken to carry on the primary production business carried on by the trust for the purposes of both the income averaging and the FMD provisions (i.e., 14 beneficiaries in total).

The trustee of the trust also carried on a business of primary production during the 2020 income year, however, the trust had no income for this income year.

However, because there were 14 beneficiaries that were taken to carry on the primary production business carried on by the trust (for the purposes of income averaging and the FMD provisions) in the 2019 income year, the trustee is able to nominate not more than 14 beneficiaries for the purposes of income averaging and FMDs for the 2020 income year.

Importantly, the trustee is not required to nominate the same beneficiaries, or even the same number of beneficiaries, for both the income averaging and FMD provisions (i.e., up to 28 different beneficiaries can be chosen for the combined averaging and FMD provisions).

 

  • Should you have any queries, please contact Tax Ideas Accountants & Advisers on +61 2 83181545
  • Alternatively, you can book an appointment in our live calendar.

 

 

Tags: Trust

Written by Panbo Ye

I help people discover POWERFUL unknowns in Tax Ideas | Wealth Strategies | Retirement Planning | Finance Solutions!

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