Friday, July 2, 2021

I like your old stuff better than your new stuff** - Tax Office shows its (previous) caring approach towards family trusts distributing to testamentary trusts

New (financial) year.

More lock downs.

And a reminder some things never change - for example, the Tax Office don’t like trusts.

Previous posts have considered the Tax Office’s views about distributing from a testamentary trust to a family trust, that (at least in part) offered an (arguably) unnecessarily narrow interpretation of the tax rules.

In the context of the 2018 budget changes to the excepted trust income regime, it is timely to revisit PBR 1051238902389 that considers the situation where an inter vivos family discretionary trust was distributing to a testamentary trust.

In contrast to the approach of the changes, the ruling sees the Tax Office adopt a more collaborative approach.

Briefly, to the extent relevant, the factual matrix was as follows:
  1. a willmaker was the ultimate controller of a family trust;
  2. the willmaker's estate plan attempted to mandate that the assets of the family trust be sold and the cash distributed directly (and equally) to four testamentary trusts established under the will;
  3. it was acknowledged by the parties that the directions of the willmaker were an attempted fettering of the trustee's discretion. Therefore, while they could be taken into account, they were not be binding;
  4. this said, the assets of the family trust were sold and the intention was to then have the cash distributed to the testamentary trusts – who were potential beneficiaries of the family trust (an approach adopted by default by all View trust documents).
In determining that income of a prescribed person (eg including a minor) as a beneficiary of a testamentary trust, even if sourced from a distribution made by a family trust, is excepted trust income (ie minor's are taxed at adult rates) of the beneficiary, the Tax Office confirmed:
  1. Following the decision in Furse (another case regularly explored in View posts), all that is necessary for the assessable income of a trust estate to be excepted trust income is that the assessable income be the assessable income of the trust estate and that the trust estate be as a result of a will.
  2. Thus, any amounts representing a distribution from a family trust to a testamentary trust are 'assessable income of a trust estate that resulted from a will’, and therefore will be 'excepted trust income’, unless otherwise excluded.
  3. Again largely following the analysis in the Furse decision, the main exclusions (namely either that the parties are not dealing at arm's length or the arrangement is one predominately driven by achieving the tax benefit) were held not to be applicable and thus access to the excepted trust income provisions was confirmed.
  4. While the outcome in this private ruling is a positive one, distributions by family trusts to testamentary trusts are clearly denied access to the excepted trust income regime under the new legislation, regardless of how they are made.
  5. Practically, the capital gains tax consequences of the distribution from the family trust would also need to be considered, given none of the rollover concessions otherwise available on death under division 128 of the Tax Act would be available on either the sale of the assets by the inter vivos trust, nor a straight distribution of the assets in specie. Similarly, to the extent the distributions were of dutiable property, the exemptions available for deceased estates would also not apply.
As usual, please contact me if you would like access to any of the content mentioned in this post.

** For the trainspotters, the title of today's post is riffed from the Regurgitator song ‘I like your old stuff better than your new stuff’.

View here:

PS and the image the quintessential lock down WFH set up.