FAMILY TRUSTS COULD FACE RESTRUCTURE
Thousands of family trusts may be forced to restructure their financing under federal government changes that could outlaw well-established strategies used by small businesses, professionals and family groups.
"Many genuine tax distributions of capital for SMEs and successions trusts may be caught under amendments to legislation," said Advantage One Tax Associate, Don Blackwell.
The changes potentially reduced the viability of the existing structures of many clients.
"They require a rethink of what ownership/operating structures we should recommend to clients."
The concerns stem from the details of the Board of Taxation's report on trusts, which recommended against taxing trusts like companies, an outcome hailed as a win for the business lobby, farmers and the wealthy who campaigned to maintain the existing tax treatment.
On the same day, Mr Costello announced the government would legislate with effect from December 12 to close a loophole that allowed trusts to make a company a presently entitled beneficiary of the trust income, without actually paying out any money.
The strategy allows trusts to accrue income taxed at only the 30 percent corporate rate, which can be distributed via an asset revaluation, to individuals who can avoid paying "top up" taxes to the 48.5 per cent marginal rate.
"In such circumstances, the individuals are able to access, without further tax liability, trust income that has been taxed only at the company tax rate," the report said in recommending legal changes.
The board's report is ostensibly concerned with situations where tax free distributions are made to beneficiaries out of asset revaluation reserves in an attempt to circumvent the operation of the existing legislation," Mr Blackwell said.
"If the amendments are limited to these types of situations fine, however, if tax free distributions out of ordinary trust corpus (monies settled upon a trust) are also to be caught as deemed dividends in cases where the trust owes unpaid beneficiary entitlement to a company, then this would be reminiscent of entity tax."
A significant concern is if the government retrospectively repeals the section setting out the consequences where a trustee makes a company presently entitled to the income of a trust, but does not actually pay money to the company within a reasonable time.
"The consequences could be either that the trustee would be assessed on the amount of the income as if there had been no distribution, or that the company would have to pay a top-up tax," Mr. Blackwell said.
Trusts with business operations often used such unpaid trust entitlements to repay external bank loans.
"All existing arrangements with a discretionary trust that owes money to someone whether it's a vendor, bank, or family member, may go from a position of being able to repay the loan using income taxed at 30 per cent, to using income taxed at 48.5 per cent - a huge increase."
A major attraction of using a trust with a company beneficiary is that it allows income to be split among family members and taxed at their marginal rates with residual taxed at lower company rates, while the disposal of trust assets qualified as well for the 50 per cent capital gains tax discount.
"The only consolation is in the fact the legislation proposed will be drafted with community consultation. There remains a great deal of uncertainty on the final outcomes," Mr Blackwell said.
date of article: 16 January 2003
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