At last count there were just under a million trusts lodging tax returns in Australia, and there’ll be a heap more not required to lodge tax returns. Trusts can be a flexible and efficient entity for business, investment or asset protection, but come with a level of complexity.
The two most common types of trust are discretionary trusts and unit trusts, and the main difference is in how the entitlements of beneficiaries are worked out. Discretionary trusts rely on the discretion of the Trustee, whereas in a unit trust, the income is generally distributed in accordance with the ownership of the units.
A discretionary trust can elect to become a “family trust”. This doesn’t change the structure but gives it a designation with the ATO that provides certain tax benefits provided the trust only distributes within a predetermined family group, based around a nominated test person. Distributions made outside of the family group incur additional tax.
The ATO is currently taking a greater interest in family trusts and compliance with family trust rules, especially with high net-worth family groups.
Part of this includes reviewing whether family trust elections are made validly and ensuring no distributions have been made to non-family members.
There are various reasons to make a family trust election. The first is to allow dividends with franking credits above $5,000 to flow through to beneficiaries.
The second is to assist the trust, or a company that the trust holds shares in, in utilising any prior year losses. The third is in assist in accessing the small business CGT concessions.
If you are unsure if your trust has lodged a family trust election, you can check via your ATO business portal or ask your tax agent.
Another important consideration for your trust is its vesting date. In all states except South Australia a trust must end or “vest” no longer than 80 years after the trust was established. This is based on ancient English law to ensure a trust does not end up with nobody to look after the assets.
The vesting date is defined in the Trust Deed. It’s common for the date to be set at 80 years, but a deed can prescribe a shorter date and trustees can decide to vest early. Some older deeds specify a shorter vesting period.
Trusts became popular in Australia in the 1970s, so most vesting dates are sometime after 2050. But don’t be complacent – check your deed in case yours is earlier. If the date passes without your knowledge, the trust will end on that day which can trigger a CGT liability for the beneficiaries, even though the assets aren’t sold. You don’t want this, trust me.
by MARK DOUGLAS
FCPA
Managing Partner of Francis A Jones
www.faj.com.au