Budget Changes to Family Trusts?

Hi Gang,

Can someone please explain these latest budget changes to Family Trusts which come into effect on 1 July.

Issues I don't understand are:

1. The concept of Family is now narrowed to lineal descendants of the test individual or the test individual's spouse. Does this also exclude "parents" of the test individual and/or the test individual's spouse? Also excluded are (former?) widows or widowers of the test individual?

2. Losses suffered in earlier periods can no longer be claimed including those on equities and property etc? I don't like the sound of this one!!!!

I read this in the AFR today and I'm confused to say the least.

Thanks - Gordon

 

Hi Gordon,

Since the trust is not usually a taxpayer in its own right (beneficiaries are normally the taxpayers).

The law tries to make sure that losses made in one year with one set of beneficiaries are not enjoyed as a deduction in a future year by new beneficiaries.

Also it tries to prevent the trust injecting a new income into a trust just to recover the trapped losses.

These laws are complex but discretionary trusts have the option of making a Family Trust Election to avoid all this. The catch is that any distributions made outside the family group of the "Test Individual" is taxed at the highest marginal rate.

Note a FTE is also necessary to distribute franking credits to a beneficiary who individually has more than a total of $5000 of franking credits. Also any company or trust beneficiaries may need an Interposed Entity Election.

A FTE should not be made lightly since it is restrictive on distributions and is difficult to reverse. This makes it hard if the Government starts messing around with further law changes !!!!

Cheers,

Rob

 

Hi Rob,

Thanks for that.

I think what confused me about losses is that I had never really thought of them benefitting the beneficiaries because they are trapped in the trust and carried forward until it makes a profit. Of course to do this a FTE must be made. The articles I have read about the recent changes don't really cover the detail such as FTE's etc so I think this is where some of us are getting confused.

In our case we only setup our Disc Trust really for the benifet of me and my wife (we have no children). Some years ago due to some IP losses and to subsequently access franking credits (> $5K) a FTE was made with me as the test individual. I had always been led to believe that given we don't have children distributions could be made to the immediate existing family group being our parents and sisters.

However the only distribution made to anyone other than myself and my wife is a small distribution of less than a couple of grand per annum to my wife's mother who struggles renting and living on the pension. I doubt there will ever be any distributions to any other family members in the future. Mind you if I had of known in advance all the information we would have to provide Centrelink to prove the my mother-in-law had never been the source of any funds to the trust and had no control influence I think we would have just assisted her using our own after tax monies.

Anyhow if I understand correctly given our above scenario the latest budget changes shouldn't effect us at all. After all I thought the changes were really only reversing most of the recent changes implemented by the Howard Govt.

On another note I can't help but think that Trusts may cop further negative changes in Rudd's tax system review. Interesting times are ahead.

Cheers - Gordon

 

Trusts don't necessarily need to make an FTE to use the losses, they just need to pass a bunch of rules.

And yes I suspect, the Trust hating Rudd government will be looking at trusts even more ! And Superannuation