Family Trusts

On 17 February 2020 the Australian Financial Review ran an article titled ‘Fresh scrutiny of trust payouts to beneficiaries’. 

For clients who may have seen the article, we wanted to further explain the issues, so that clients with family trusts are not unnecessarily alarmed.

The essence of the article, is that if family trusts are used to distribute income (or capital gains) to children who are over 18 (or other low income beneficiaries), then the ATO may look to apply an anti-avoidance provision (known as Section 100A).

This can occur in situations where the beneficiary reimburses the trust or other beneficiaries (for example if a child reimburses a parent) in a way which suggests that they were never the intended beneficiary.

We have set out below an example as a discussion point.

Example

The ‘Magic Family Trust’ derives income of $200,000 in a given tax year.

Mr and Mrs Johnson as the directors of the Trustee company – decide to distribute $130,000 to Mrs Johnson and $70,000 to Earvin Johnson Junior who is now 20 years of age. 

On the $70,000 distributed to him Earvin pays significantly less tax than Mrs Johnson would have paid, because Earvin is still studying and does not earn an income.

On the trust distribution Earvin pays $15,697 of tax whereas Mrs Johnson would have paid approximately $27,500 on that additional $70,000, had the distribution been made to her.

Discussions between Mrs Johnson and Earvin lead to a transfer of funds from Earvin’s bank account to Mrs Johnson on the basis that it is ‘family income’ and Mrs Johnson will spend or invest those funds as she decides.

If this scenario was reviewed by the ATO, they may seek to apply Section 100A to the affairs of the Johnson’s. Although there is effectively an exception for ‘ordinary family dealings’ it is not clear whether a court would agree that the arrangement above would be considered as such.

In our example it would be necessary to determine what Mrs Johnson did with the money and if the funds were effectively used for Earvin’s benefit. For example the AFR article says that “in some cases, senior external lawyers and barristers have been engaged by the ATO to review spending on household costs, family holidays, cars and a range of other living expenses.’ 

However if the funds were clearly used for something which did not benefit Earvin then in our view Section 100A would be likely to apply.

Section 100A would have the effect of treating Earvin as never being entitled to the income. It means that the Magic Family Trust could potentially be assessed to pay tax at 47% on the $70,000 distributed to Earvin, excluding penalties (which would be applied).

That would increase the tax to $32,900 excluding penalties, compared to the $15,697 that Earvin would have originally paid.

ATO Ruling pending

The Australian Financial Review article also reports that the ATO is developing a public ruling which will discuss interpretational issues associated with Section 100A.

It is hoped that the public ruling will outline the ATO’s views on the ‘ordinary family dealing’ exception, so that taxpayers can have certainty about what type of arrangements will be acceptable to the ATO when it comes to distributing trust income.

For now –  if you have any questions about distributing from your family trust in your personal circumstances please contact Dianne Lee, Daniel Wilkie or Matthew Marcarian on 02 8920 0077.

Non-Residents Can No Longer Claim The CGT Main Residence Exemption

On December 5th 2019 the contentious law denying non-residents the Capital Gains Tax (CGT) main residence exemption was passed.

This means that the update we previously provided on this legislation is still in force. If you are no longer an Australian resident, or are permanently moving overseas, and you still own a property that was your main residence in Australia, then you need to know what this means.

Existing Non-Residents with Main Residence Property In Australia

Did you purchase your Australian main residence before 9 May 2017? If you did then you only have until 30 June 2020 to sell your property if you want to claim the CGT main residence exemption.

After this date non-residents will not be able to claim the exemption. Basically this means you will be assessed on the full capital gain.

On the other hand, if you plan to return to Australia in the future then you may still be able to claim the exemption. If this is the case then you can wait to sell your former main residence once you return to Australia. Once you are a tax resident again then you will be assessed as an Australian tax resident. This means the law will again allow you to claim whatever main residence concession you would ordinarily be entitled to. Given the rise in Australian property prices over the last decade, this change could see an Expat caught unaware, being exposed to capital gains tax of several hundred thousand dollars (if not more), depending on the situation.

For a more detailed look at what the law entails please refer to our “Update on CGT Main Residence Exemption for expats” post.

Seek Tax Advice

The change in law has the potential to significantly impact non-residents. While you can get a general overview from the information provided in our blog, it is important that your specific situation be assessed by a tax specialist. This is important because your individual situation will be dependant on many variables that can’t be adequately covered in a general blog. A personalised assessment will ensure that you understand your options and can make the best decision for your situation.