Some Relief Measures for Family Trusts

May-June 2004

Recent law changes affecting discretionary trusts could relieve problems caused by the previous law and Australian Tax Office (ATO) interpretations:

1. Amnesty for FTE’s and IEE’s

The ATO on April 15, 2004 released “Practice Statement PS LA 2004/1 (GA)” which gives an amnesty (i.e. a once only window of opportunity) allowing late lodgement of Family Trust Elections (FTEs) and/or Interposed Entity Elections (IEEs) with retrospective effect as far back as the 1995 income year.

For some clients, this opens the door to allow them access to tax losses in Trusts or in Companies, and/or access to franking credits for dividends on some shares owned by a Trust where previously unavailable because of technical failure to make the relevant election.

If you have any trust losses or a company loss situation, contact Baldwins quickly to review the scope for claiming the tax losses either retrospectively or possibly for this June 2004 income year.

Failure to comply (where required) with these election procedures can also trigger a liability for 48.5% tax under the Family Trust Distribution Tax regime.

2. New Rules for Distributions by Trusts to Companies

Up until now, Section 109 UB (in Division 7A) deemed that an unfranked dividend would arise to an associate individual or trust where an unpaid present entitlement of Trust income to a company (as a beneficiary) was followed by the Trustee lending moneys to another non-company beneficiary.

Now, Tax Laws Amendment (2004 Measures No. 1) Bill 2004 proposes to replace s 109UB by new Subdivision EA (ss. 109XA, 109XB and 109XC).

The new law will exclude the deemed dividend rule either if a Division 7A Loan Agreement is entered into between the Trust and the associate of the Company OR if the loan is repaid before the earlier of the due date mentioned in the Division 7A Loan Agreement or by the actual date of lodgement of the Trust’s income tax return for the year of income in which the loan is made.

On the other hand, the new measures are wider in that they extend a potential deemed dividend situation beyond the case of a company having a prior credit loan account (beneficiary account) in the Trust; and a tax liability can potentially be triggered either by a payment by the Trust to a Company out of an unrealised capital gain or by a forgiveness of debt by a Trustee to the associate of the Company. Announcements accompanying the Federal Budget on May 11, 2004 foreshadow similar legislative measures being introduced for deeming some hitherto tax-free trust distributions to be assessable on a similar basis not confined to the corporate beneficiary distribution situation.

The new Subdivision EA may remove some of the illogicalities of s109UB, but legal advice should be sought from Baldwins in these situations or to ensure that an appropriate Division 7A Loan Agreement is put in place.

3. The Tax Position of a Trust Clone

Clients seeking to estate plan for their discretionary trust assets and their trust succession planning arrangements need to note final Tax Determination 7D 2004/14 (issued on April 21, 2004). The good news is CGT Event E2 is confined and can exclude some transactions occurring between identical trusts. Note that stamp duty and land tax laws have separate implications that can sometimes compete with other estate planning objectives.

For further information, contact Joe Lederman at BALDWINS, Australian Lawyers & Consultants.

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