Edited version of private advice

Authorisation Number: 1051778465410

Date of advice: 9 April 2021

Ruling

Subject: Family trust distribution tax

Question 1

Will family trust distribution tax be payable by the Trustee for the Trust (Trust) on the proposed Trust Corpus Distribution to the Individual under section 271-15 of Schedule 2F of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No

Question 2

Will the Trustee obtain a tax benefit under section 177C of the ITAA 1936 as a result of the proposed Trust Corpus Distribution to the Individual?

Answer

No

Question 3

Will section 100A of the ITAA 1936 apply to the Trustee as a result of the proposed Trust Corpus Distribution?

Answer

No

Question 4

Will section 102UM of the ITAA 1936 apply to the Trustee as a result of the proposed Trust Corpus Distribution?

Answer

No

Question 5

Is the Trust required to continue to satisfy the family control test in section 272-87 of Schedule 2F of the ITAA 1936 in years following the specified year in which the Trustee made the family trust election?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20XX to Year ended 30 June 20YY

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Trust is a discretionary trust that was established pursuant to a Deed of Settlement. The scheme description incorporates, and should be read with the Deed of Settlement.

The Trustee of the Trust made a family trust election pursuant to section 272-80 of Schedule 2F of the ITAA 1936 for a specified year naming the Individual's then spouse as the test individual.

At a later time, the Trustee of the Trust varied the family trust election pursuant to subsection 272-80(5C) of Schedule 2F of the ITAA 1936 by identifying the Individual as the new test individual as a result of the Individual and their spouse executing a financial agreement pursuant to Part VIIA of the Family Law Act 1975 (Cth).

Trust Corpus

The corpus of the Trust is $X (Trust Corpus).

The Trust Corpus was obtained since incorporation, and before the period to which this ruling applies, as follows:

a.    On specified dates, trust corpus from other trusts were distributed to the Trust; and

b.    On a specified date, the Individual and the Trustee executed a deed of gift under which the Individual gifted and transferred an amount to be held as capital of the Trust.

None of the above amounts that were distributed to the Trust were income of the Trust and the distributions have been recorded in the balance sheet of the Trust as corpus.

The Proposed Restructure - proposed Trust Corpus Distribution

To facilitate the Individual's estate planning objectives, the Trustee intends to undertake the following restructure (Proposed Restructure):

c.     The Trustee of the Trust will resolve to distribute part of the Trust Corpus (Trust Corpus Distribution) to the Individual in their personal capacity;

d.    The Individual will gift an amount equivalent to the Trust Corpus Distribution to a newly created trust;

e.    The newly created trust will enter into a loan agreement with the Trustee of the Trust for an amount equal to the Trust Corpus Distribution;

f.      The newly created trust will not make a family trust election pursuant to section 272-80 of Schedule 2F of the ITAA 1936.

The Proposed Restructure will allow the newly created trust to distribute income and capital to beneficiaries that are outside the family group of the Individual as defined in section 272-90 of Schedule 2F of the ITAA 1936.

The Trustee of the Trust will continue to distribute income and capital only to members of the Individual's family group.

A Company was recently incorporated. When the Individual passes away it is intended to become the corporate appointor of a number of the trusts under the Individual's control including the Trust. At the time the Company becomes appointor of the Trust it is intended that it will comprise both the Individual's family members as well as non-family members.

Reasons for Decision

Question 1

Summary

The Trustee of the Trust will not be liable to pay family trust distribution tax on the proposed Trust Corpus Distribution to the Individual.

Detailed reasoning

The trustee of a trust is liable to pay family trust distribution tax as imposed by the Family Trust Distribution Tax (Primary Liability) Act 1998 pursuant to section 271-15(2) if the following circumstances prescribed in subsection 271-15(1) are met as follows:

(a) a trustee makes a family trust election in relation to a trust; and

(b) at any time while the election is in force (including a time before it was made), the trust confers a present entitlement to, or distributes, income or capital of the trust:

(i) upon or to a person who is neither the individual specified in the family trust election nor a member of the individual's family group in relation to the conferral or distribution; or

(ii) upon or to the individual specified in the election or a member of the individual's family group, where the individual or member is the trustee of a trust, or the member is a trust, that is not included in the individual's family group in relation to the conferral or distribution.

Application to your circumstances

The Trust made a family trust election that was later varied to specify the Individual as the individual whose family group must be taken into account in relation to the election. Under the Proposed Restructure, the Trust will confer a present entitlement to capital on, or distribute the capital of the Trust to, the Individual.

As the Individual is the individual specified in the family trust election, the circumstances in subsection 271-15(1) will not occur and the Trustee of the Trust will not be liable to family trust distribution tax.

Question 2

Summary

The Trustee of the Trust will not obtain a tax benefit under section 177C of the ITAA 1936 as a result of the proposed Trust Corpus Distribution to the Individual.

Detailed reasoning

In order for Part IVA to apply, the following requirements must be met:

•         there must be a scheme (section 177A);

•         a taxpayer must have obtained, or would but for section 177F, obtain a tax benefit in connection with the scheme (section 177C and section 177CB); and

•         the dominant purpose of a person who entered into or carried out the scheme, or any part of the scheme, was to enable the taxpayer to obtain a tax benefit in connection with the scheme (subsection 177D(1)).

Part IVA requires the consideration of a 'scheme' which is very widely defined in subsection 177A(1). The breadth of what may constitute a scheme reflects the objective nature of the inquiry to be made under Part IVA. The scheme ultimately matters only in the context of whether there is a tax benefit obtained by the taxpayer in connection with the scheme for which the conclusion in subsection 177D(1) can be reached: paragraph 62 of Law Administration Practice Statement PS LA 2005/24: Application of the General Anti-Avoidance Rules (PS LA 2005/24).

Tax Benefit

Part IVA cannot apply unless a taxpayer has obtained, or would, but for section 177F obtain, a tax benefit in connection with a scheme. Subsection 177C(1) defines tax benefit to include benefits relating broadly to:

•         an amount not being included in the assessable income of the taxpayer of a year of income;

•         a deduction being allowable to the taxpayer in relation to a year of income;

•         a capital loss being incurred by the taxpayer during a year of income;

•         a foreign income tax offset being allowable to the taxpayer;

•         an innovation tax offset being allowable to a taxpayer;

•         an exploration credit being issued to a taxpayer;

•         an amount of withholding tax not being incurred by the taxpayer in a year of income.

The identification of a tax benefit necessarily requires consideration of the income tax consequences, but for the operation of Part IVA, of an 'alternative hypothesis' or an 'alternative postulate'. This is what would have happened or might reasonably be expected to have happened if the particular scheme had not been entered into or carried out.

Application to your circumstances

Having regard to the relevant facts and circumstances, we consider the objective sought to be achieved by the Proposed Restructure is to move the capital from the Trust to a trust under the Individual's control that has not made a family trust election so that distributions can be made outside of the Individual's family group without triggering a liability to family trust distribution tax. If the distribution to the proposed new trust were to occur directly, a liability for family trust distribution tax would arise for the Trustee of the Trust. This is because the newly created trust will not make a family trust election or interposed entity election and it is intended that the trustee of the newly created trust will be able to distribute income and capital to beneficiaries that are outside the family group of the Individual as defined in section 272-90.

It is the Commissioner's view that the Proposed Restructure is a scheme as defined in section 177A being entered into. However, the effect of the identified scheme is the non-application of family trust distributions tax only. This does not fall within the scope of any of the categories of tax benefit as defined in section 177C. Consequently, the proposed restructure does not result in a tax benefit under section 177C.

Question 3

Summary

Section 100A will not apply to the Trustee as a result of the proposed Trust Corpus Distribution.

Detailed reasoning

Section 100A provides that:

Where:

(a) apart from this section, a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate; and

(b) the present entitlement of the beneficiary to that share or to a part of that share of the income of the trust estate (which share or part, as the case may be, is in this subsection referred to as the relevant trust income ) arose out of a reimbursement agreement or arose by reason of any act, transaction or circumstance that occurred in connection with, or as a result of, a reimbursement agreement;

the beneficiary shall, for the purposes of this Act, be deemed not to be, and never to have been, presently entitled to the relevant trust income.

Relevantly the threshold criterion for section 100A to apply is that a beneficiary of a trust estate is presently entitled to a share of the 'income of the trust estate'.

As stated in Draft Taxation Ruling TR 2012/D1 Income tax: meaning of 'income of the trust estate' in Division 6 of Part III of the Income Tax Assessment Act 1936 and related provisions:

86. The many references in Division 6 to the 'income of the trust estate' show that the trust estate and its income are distinct concepts, the income being the product of the estate. The distinction was most recently commented upon by the Full Federal Court in Leighton v. Commissioner of Taxation. In that case, Mr Leighton was the trustee of a trust for the benefit of two companies, Salina and Kolton, and the Full Federal Court observed:

The share sale proceeds deposited... into the Westpac Bank account in Mr Leighton's name... did not represent the income of either Salina or Kolton but rather represented the realisation of the income... already derived by these companies. Upon being deposited, the proceeds were impressed with a trust in favour of Salina and Kolton, but they did not comprise the income of a trust estate. Rather, those deposited proceeds constituted or augmented a trust estate of which Mr Leighton was trustee. The income of that trust estate was such income, if any, as was later derived from the investment of that trust estate, e.g. any bank interest on the deposited proceeds.

87. As the trust estate and its income are distinct concepts, it follows that something which formed part of the trust estate at the start of an income year cannot itself be income for that year.

Application to your circumstances

Under the proposed restructure, the Trustee will distribute part of the corpus of the Trust (the trust estate) to the Individual. It is not making the Individual presently entitled to 'income of the trust estate'. Therefore, section 100A has no application to the proposed distribution to the Individual.

Question 4

Summary

Section 102UM will not apply to the Trustee as a result of the proposed Trust Corpus Distribution.

Detailed reasoning

Subsection 102UM(1) provides:

This section applies if:

(a) a share of the net income of a closely held trust for a year of income is included in the assessable income of a trustee beneficiary of the trust under section 97; and

(b) the trustee of the closely held trust becomes presently entitled to an amount that is reasonably attributable to the whole or a part of the untaxed part of the share; and

(c) trustee beneficiary non-disclosure tax is not payable by the trustee of the closely held trust on the untaxed part under paragraph 102UK(2)(a).

Subsection 102UC(1) defines a closely held trust to include a discretionary trust (except where the trust is an excluded trust). From 1 July 2019, section 102UM applies to family trusts.[1]

The Explanatory Memorandum to the Tax Laws Amendment (2007 Measures No. 4) Bill 2007 that substituted subsections 102UM(1) and (2) explains its purpose as follows:

4.36 The purpose of section 102UM is to discourage the use of a chain of trusts to channel income through a circular chain of trusts to disguise the identity of the final beneficiary in receipt of the income. In such a round robin arrangement, amounts are included in the assessable income of a trustee beneficiary of a closely held trust under section 97 and the amount (or part of it) 'comes back' to the trustee of a closely held trust.

Application to your circumstances

In your circumstances, although the Trust is a closely held trust, the proposed Trust Corpus Distribution is not a distribution of income of the trust estate and the Proposed Restructure will not result in the Trustee becoming presently entitled to any amount that is reasonably attributable to any share of net income included in the income of a trustee beneficiary of the Trust. Therefore, section 102UM does not apply to the proposed Trust Corpus Distribution.

Question 5

Summary

The Trust is not required to continue to satisfy the family control test in section 272-87 in years following the specified year in which the Trustee made the family trust election.

Detailed reasoning

Section 272-75 provides that a trust is a family trust at any time when a family trust election in respect of the trust is in force.

Subsection 272-80(1) provides that, subject to that section, the trustee of a trust may make an election (the family trust election) that the trust is a family trust for the purposes of Schedule 2F at all times after the beginning of a specified income year. The election must also specify an individual as the individual whose family group is to be taken into account in relation to the election: subsection 272-80(3).

Subsection 272-80(4) provides that if the trust does not pass the family control test in subsection 272-87(1) at the end of the specified income year, the trustee must not make an election. Pursuant to subsection 272-80(4A) an earlier year may be the specified year if at all times from the beginning of the specified income year until 30 June of the preceding income year in which the election is made:

•         the entity passes the family control test; and

•         any conferral of present entitlement or any actual distributions of income or capital of the trust made by the trustee during that period have been made to the individual specified in the election or to members of that individual's family group.

Subsection 272-80(5) provides that a family trust election can only be varied or revoked in certain limited circumstances (as provided for in subsections 272-80(5A), (5B), (5C), (6) and (6A)).

Subsection 272-80(9) provides that the family trust election is in force, if it is not revoked, at all times after the election commencement time. Subsection 272-80(10) states that the election commencement time is:

(a) if the trust does not pass the family control test (see section 272-87) at all times in the income year specified - the earliest time from which the trust does pass the family control test for the remainder of that income year; or

(b) in any other case - the beginning of the income year specified.

The trustee must not make more than one family trust election: subsection 272-80(11).

Application to your circumstances

The Trust is not required to continue to satisfy the family control test after making a family trust election following the year in which the family trust election is made.

[1] Schedule 4 of the Treasury Laws Amendment (2019 Tax Integrity and Other Measures No. 1) Act 2019 amended the definition of excluded trust to remove the reference to family trusts; a trust in relation to which an interposed entity election has been made and is in force in accordance with section 272-85 in Schedule 2F; and a trust that is covered by subsection 272-90(5) in Schedule 2F.

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