New legislation brings clarity on circular trust distributions
Back in 1999, the Federal Government introduced rules to maintain tax integrity by preventing the misuse of complex chains of closely held trusts to dodge or defer taxes. These rules were later replaced by trustee beneficiary rules in 2007, which removed the requirement to report ultimate beneficiaries to the ATO. Instead, trustees of closely held trusts only needed to report specific distributions to another trust, known as a 'trustee beneficiary'.
These rules:
- Require trustees of closely held trusts to report certain distributions to trustee beneficiaries.
- Include an anti-avoidance provision to stop closely held trusts from engaging in circular trust distributions.
These rules specifically apply to closely held trusts, which encompass discretionary trusts and certain unit trusts where up to 20 individuals have significant entitlements to income or capital.
Initially, family trusts were excluded from these rules, meaning trustees didn't need to report distributions to trustee beneficiaries, and the anti-avoidance provision didn't apply to them, even if they engaged in circular trust distributions.
TAX TIP: The exclusion for closely held trusts also applies to some other trusts like complying superannuation funds and certain deceased estates.
Recognizing a gap in the anti-avoidance measures, the Government announced in the 2018/19 Federal Budget their intention to extend the anti-avoidance rule to family trusts as well.
Recent legislative changes have implemented this announcement, ensuring that family trusts are now subject to the same anti-avoidance measures as other closely held trusts.
For more detailed information, refer to Division 6D of Part III of the ITAA 1936 and the ATO's factsheet 'Trustee beneficiary reporting rules' (QC 21157).
If you need assistance, feel free to reach out to Tax Ideas Accountants & Advisers at +61 2 8318 1545 or book an appointment through our calendar.
