A new anti-avoidance rule announced in the federal budget put the kibosh on some aggressive tax-planning techniques. Relate to distributions from trusts, which is something the Australian Tax Office is also keeping a close eye on through its trust task force.
The measure is an anti-avoidance rule applying to circular (or round-robin) distributions by family trusts. Some trustees seek to make distributions through a chain of trusts so that the identity of the ultimate beneficiary is disguised and no tax is paid.
The government expects to increase revenue by $20 million over two years by making it clear that family trusts cannot engage in such behaviour. William Buck national tax leader Greg Travers says the change will affect a small number of taxpayers, mainly larger private groups with wealth accumulated over generations. "A standard family trust distributing to family members should not be affected," he says.
"But some families will have multiple layers of trusts to deal with different parts of the family and often each part of the family will manage their own affairs independent of other parts. This measure will necessitate a review of the trust distributions made across the entire family group, which will be quite an exercise."
So what's the mischief occurring?
Suppose there are two trusts, trust A and trust B.
"If a particular year trust A chooses to distribute all of its income to trust B, and then trust B chooses to distribute all of its income to trust A, you have this perpetual motion where income allegedly never comes into the hands of any beneficiary who is going to be taxed," BDO tax partner Mark Molesworth explains. Legislation was previously enacted to impose a top rate of tax on circular distributions, but at the time family trusts were excluded. The government will close that loophole. "This measure will better enable the ATO to pursue family trusts that engage in these arrangements by extending the specific anti-avoidance rule, imposing tax on such distributions at a rate equal to the top personal tax rate plus the Medicare levy," the budget says.
A family trust for tax purposes is one whose trustee has made a "family trust election". This election is a choice to specify an individual around whom the family group is formed. A maximum number of beneficiaries is then nominated.
"Presumably some people were thinking, well, if I have two trusts with the family trust election I can go round and round in circles and nobody ever pays tax," Molesworth says. "Again, it's not a strategy I would ever have recommended to any of my clients because I think it runs the risk of falling foul of the quite wide anti-avoidance provisions that already exist in the law. But it would appear the government wants to make it absolutely clear this is not allowed."
William Buck's Travers hopes there will be exclusions for taxpayers doing the right thing. Trusts that lodge electronic returns and quote valid tax file numbers for all beneficiaries for example, should be exempted, he says. "The compliance burden needs to be placed on those taxpayers who are causing the issues, not those who are complying with the laws."