New Legislation Addresses Family Trust Tax Loophole
Previously, family trusts were exempt from the anti-avoidance provision, allowing them to engage in circular trust distributions and avoid tax liabilities. Although the ATO could address this using other anti-avoidance rules, it required detailed analysis.
To combat this, the government changed the law, removing family trusts from the excluded category of closely held trusts, effective from July 1, 2019. Now, most family trusts fall under the closely held trust definition and are subject to the anti-avoidance provision if involved in circular trust distributions.
Implications of the Legislation:
Example: Application of Anti-Avoidance Rules Trust C, a family trust, distributes $10,000 income to Trust D on June 30, 2020, then Trust D distributes it back to Trust C. As a result, Trust C must pay $4,700 TBNT.
Effect of Timing: If the circular trust distribution occurred before July 1, 2019, Trust C wouldn't have been subject to the anti-avoidance provision, although other anti-avoidance rules might have applied.
These changes ensure fair taxation and prevent tax evasion through circular trust distributions.
Should you have any questions or need assistance, feel free to reach out to Tax Ideas Accountants & Advisers at +61 2 83181545 or book an appointment through our live calendar.