Managing Your Clients’ Trust
The ATO continues to increase its compliance pressure on the Private Group segment.
Having had to consider and deal with the ATO’s views on the application of section 100A across family groups, as well as the ongoing Bendel dispute and its application to Family Trusts, the ATO is now ramping up its activity around family groups’ compliance with what was originally termed the “Trust Loss Rules”.
Over the past 30 years these rules have grown to cover a raft of tax matters that require a Trust to make a Family Trust Election (FTE), which then puts that trustee at risk of being liable for Family Trust Distribution Tax (FTDT) where they breach the FTE rules.
For many years accountants for private groups would make an FTE as a matter of course, almost at the same time the Trust was settled. This would ensure that losses incurred by that trust could more readily be recouped and, more commonly, franking credits attaching to dividends derived by the trust could be distributed on to beneficiaries.
However, care needs to be taken when the trustee seeks to distribute net income to beneficiaries that may not be in the trust’s family group on the basis of the FTE lodged.
Beneficiaries might include other related trusts or companies that don’t automatically fall within the Family Group.
A related trust for example, might be a permitted beneficiary pursuant to the Trust Deed, however it will only be a member of the Family Group of the Trust, where it too has made an FTE with the same test individual as the original trust. This is not generally a difficult fix, however what happens if the test individual of the original trust has passed away?
As our clients get older, this is a situation that we are and will face more often. The use of an Interposed Entity Election (IEE) will assist here, but that choice also requires some careful consideration of the consequences.
Getting it wrong, either by not making an appropriate FTE or IEE, or making an FTE or IEE and then making a distribution outside of the Family Group can give rise to some dire tax consequences.
These include the imposition of the FTDT to the trustee at a rate of 47% of the distribution, payable within 21 days of the breach distribution being made.
It should be noted that unlike most other taxes, there is an unlimited amendment period to apply the FTDT such that the Commissioner can raise an FTDT assessment at any time once he has identified the breach.
Now those old enough to remember when the Trust Loss rules were introduced in 1995 will recall that they were introduced as a deterrent to trust loss trafficking of the 1980’s and early 1990’s, however like a number of other tax provisions, left unchecked and without a regular tax reform process or review, trustees are being faced with an increasingly aggressive ATO seeking to apply black letter 1990’s tax law to penalise today’s ordinary family dealings.
This is another area where careful consideration needs to be exercised to ensure that you don’t unwittingly put your Trust clients at risk of these punitive rules.
If you need to discuss any tax related matter, please call Ross, Mimi, Chris or Sean on 9481 8448.