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While S100A attracted the headlines and attention, other recent events have also impacted how trusts need to be managed, says IPA’s general manager of technical policy.
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Trust administration is a tricky affair, not a tick-and-flick exercise
27 June 2023
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Trusts are widely used in Australia, where they are not only the preferred structure for holding passive assets but are also used either directly or indirectly in association with the running of a business.
Trusts have historically been popular structures due to their flexibility around distributing income amongst family members and the ability to access the CGT discount.
Trust administration has now become very complex, and practitioners have started to wean clients away from this structure in preference to alternatives, such as companies.
One of the downsides of a trust is that the income must be distributed (allocated to beneficiaries) before the end of the tax financial year (30 June) otherwise the trustee is subject to tax at the highest marginal tax rate (47 per cent), which is why there is a requirement for trust resolutions to happen before the end of the financial year.
Since February 2022, the focus has been on S100A – the anti-avoidance provision which instigates if someone other than the beneficiary enjoys the benefit of the distribution – however, this is not the only issue trustees and their advisers need to focus on as there have been a plethora of other changes in the shadow of S100A controversy.
Trust administration has been impacted by many other recent events that must also be considered in addition to S100A in the lead-up to the end of the financial year, which is only a handful of days away.
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Some of these obstacles are as follows:
- Firstly, the Owies case (Owies v JJE Nominees Pty Ltd) handed down in September 2022 by the Victorian Supreme Court surprised many trustees and their advisers. Until this case, most advisers thought trustees could distribute income as they pleased (excuse the pun but that’s why these trusts are referred to as ‘discretionary’). This case provides precedence that a trustee’s power is not an unfettered discretion and care needs to be exercised when making trust resolutions. This spells danger for advisers who have treated this exercise as tick the box exercise when advising clients, which is commonplace. The Court’s decision is a warning to all trustees of discretionary family trusts. Making inquiries as to the beneficiaries’ circumstances as part of their trust resolution decision-making process if ignored may come back to bite trustees.
- As part of year-end tax planning, where there is an intention that a beneficiary will be presently entitled to income on 30 June, the beneficiary should be given notice of that intention before it is conferred. Post-midnight on 30 June, it will be too late. As we approach year-end, trustees, and advisors, need to be aware that once the trustee appoints income, presently entitled beneficiaries “just prior to midnight” on 30 June are assessed on their share of the net income of the trust. High Court judgment in FCT v Carter [2022] HCA 10 (Carter) confirms that entitled beneficiaries have little time to disclaim their entitlement.
- Distributions of capital gains to non-residents have also been turned on its head after the Peter Greensill case was handed down. It overturned a long-held view that a non-resident should not be subject to tax in Australia on capital gains derived unless the asset is sold as taxable Australian property.
- Lastly, S100A. Practitioners have been busily rewiring client expectations of distributing income to family members who do not enjoy the benefit of the distribution. The benefits are diverted back to Mum and Dad for their private use, just one of the many other practices that have been commonplace for many years that are no longer tolerated since the ATO clamped down.
Private wealth groups who use trusts are well prepared for all these changes as they have the resources through their advisers to stay on top of all these developments.
Not so for the myriad of suburban accountants who service mum-and-dad businesses using trusts. These clients are less inclined to pay their advisers more despite their warnings to do things properly to avoid problems later.
The complex nature of trust administration now comes with a price. The set-and-forget approach to trust administration is no longer appropriate today and the risks of ATO audit activity are real.
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