TAX ALERT – FEBRUARY 2016 |
Trust distributions – Not paid to family – HUGE TAX IMPLICATIONS
We are seeing increasing focus by the ATO on the reimbursement principal by applying section 100A.
Consider the following arrangement:
• The trustee of a trust estate makes a beneficiary entitled to distributable income
• The presently entitled beneficiary’s assessable income includes a share of the trust’s taxable income
• Instead of paying the amount of distributable income to the presently entitled beneficiary, the trustee gives, or lends on interest-free terms, the money to another person
• The other person benefits from the distributable income of trust, but is not assessed on any part of the trust’s taxable income.
If this arrangement was not entered into in the course of an ordinary family or commercial dealing, it will generally be a reimbursement agreement if it was intended that the beneficiary who was made presently entitled to the distributable income pay a lower amount of tax than would otherwise have been payable – for example, by the person who actually enjoyed the economic benefits of that income.
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Reimbursement Agreement
For the purpose of section 100A, a ‘reimbursement agreement’ is an agreement under which all or part of the share of income of a trust to which a beneficiary is presently entitled is used to provide a benefit to another person –that is, not that beneficiary. Benefit includes the payment or loan, the transfer of property, the provision of services or other benefits; or the release, abandonment, failure to demand payment, or postponed payment, of a debt.
To be a reimbursement agreement, at least one of the parties to the agreement must have entered into it for the purpose of, or for purposes that included, reducing a person’s liability to income tax.
‘Agreement’ is defined widely to include arrangements and understandings which can be informal, express or implied. However, agreements entered into the course of an ordinary family or commercial dealing are excluded.
There is no definition of ordinary family or commercial dealing. Whether a particular agreement comes within that exclusion will depend on all of the relevant facts. The courts have made it clear that the exclusion must be considered having regard to all of the steps compromising the reimbursement agreement – not merely components of it.
An agreement will not necessarily be considered to have been entered into in the course of an ordinary family merely because all the entities involved are members of the same ‘family group’.
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Loans
Although all the facts of any given arrangement require consideration, bona fide loans are often a feature of many ordinary commercial and family dealings.
Where a trustee lends money on terms that require repayments of principal and interest, this would go towards indicating an ordinary commercial dealing.
However, it is recognized that loans made in the course of ordinary family dealings are often not as commercial loans – for example, where money is lent by a trustee to a family member on terms that require repayments of principal only (and such repayments are intended to be made) this could still indicate an ordinary family dealing when considered together with all the other relevant facts.
Therefore in our opinion any distribution to adult children or other family members, cash should follow such distributions. In the event the parent pays significant expenses re household rent, food, travel, education and loans, etc, we suggest such amounts be kept and tallied, on an annual basis such that an offset loan agreement can be put in place and be done thereon. This would include past payments given over a statutory claims period. Otherwise, formal loan agreements should be put into place therein. The existence of an unpaid UPE (unpaid entitlement) to an adult child may be subject to legal attack under Family Law and be capable of attack as an ‘asset’ under various creditors claim. For family protection please be mindful of these balances.
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Summary
We suggest the past cavalier attitude of just journalising these amounts to the parent adult beneficiary without substantiation will be subject to scrutiny by the ATO and therefore documentation will be needed to substantiate offsets.
Disclaimer - The material contained in this newsletter does not constitute advice. DPL is not responsible for any action taken in reliance on any information contained in this newsletter. Anyone reading the newsletter should not act upon material contained in this newsletter without appropriate consultation.
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Director Summit Group, Aged Care Provider