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Topics on trust distributions (6)

In: Trust
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New legislation introduced to ‘fix’ deficiency in anti-avoidance provision

Prior to recent changes to the law, a family trust was not subject to the anti-avoidance provision as it was excluded from the ‘closely held trust’ definition. Refer to former paragraph (c) in the definition of ‘excluded trust’ in S.102UC (4). This created the potential for circular trust distributions to occur involving family trusts, resulting in these trusts avoiding liability for tax on such distributions.

While the ATO always had the ability to prevent this from happening by applying other anti- avoidance rules to such arrangements (e.g., by applying the general anti-avoidance rules in Part IVA or the ‘reimbursement agreement’ rules in S.100A), these rules were not self-executing and required a detailed analysis as to their application.

To better enable the ATO to take action against family trusts that engage in circular trust distributions, the Federal Government has recently enacted legislation modifying the definition of ‘closely held trust’, by removing family trusts from the list of excluded trusts in S.102UC(4) with effect from 1 July 2019 (i.e., the 2020 income year). Refer to the Treasury Laws Amendment (2019 Tax Integrity and Other Measures No. 1) Act 2019.

As a family trust is no longer an ‘excluded trust’ from this date, it is therefore now a closely held trust under S.102UC (1) where the trust is, broadly:

  • a unit trust, in which up to 20 individuals have, between them, 75% or more of the units in the trust; or
  • a discretionary trust.

Most family trusts meet the above definition and therefore, being closely held trusts, are subject to the anti-avoidance provision if they engage in a circular trust distribution on or after 1 July 2019. Importantly, family trusts (despite being closely held trusts) continue to be excluded from the requirement to lodge correct TB statements when making distributions to trustee beneficiaries. Refer to S.102UK(1) (ca)(i) and S.102UT(1)(c)(i).

EXAMPLE – Application of anti-avoidance rules from 1 July 2019

Mr C is the sole trustee of the C Discretionary Trust (‘Trust C’), which is a family trust with $10,000 of net (taxable) income in the 2020 income year. As the trust deed contains an income equalisation clause, its income for trust law purposes for the year is also $10,000.

On 30 June 2020, Trust C makes a related discretionary trust (‘Trust D’) presently entitled to all of its trust income for the year (i.e., $10,000). A correct TB statement is lodged to ensure that TBNT does not apply to the distribution. On the same day (i.e., 30 June 2020), Trust D (which has no income other than the distribution) makes Trust C presently entitled to all of its trust income (i.e., $10,000).

 

Does the anti-avoidance provision apply to Trust C?

In short, yes. As family trusts are no longer excluded from the definition of ‘closely held trust’ from 1 July 2019, the anti-avoidance provision applies to Trust C (being a closely held trust that has engaged in a circular trust distribution). As a result, Mr C (in his capacity as trustee of Trust C) is liable for $4,700 of TBNT (i.e., 47% x $10,000).

 

Would the answer have been different had Trust C instead engaged in a circular trust distribution on 30 June 2019?

Yes. The anti-avoidance provision would not have applied as, prior to 1 July 2019, a family trust was not considered a closely held trust. Such arrangements were, however, potentially subject to other anti-avoidance rules (e.g., the general anti-avoidance rules in Part IVA and the reimbursement agreement rules in S.100A).

 

  • 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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