TaxRambling.com

When I was at Uni my Dad would have the family trust cut a $5,200 cheque for me, which I would bank, get a bank cheque, and give it back to dad with a note thanking him for paying for my Uni (he paid my HECS upfront).

But today the Commissioner has announced he thinks this is dodgy under section 100A. Have a look at this example he gives…

Example 1

7. The ABC Trust’s beneficiaries include the members of the ABC Family. David is the sole trustee of the ABC Trust. David and his wife Rani have two children, Jenny (aged 22) and Paul (aged 19), who live with them in the family home. David and Rani have an existing mortgage on the home. Jenny and Paul are both full-time students and during the 2020-21 income year, they each earned approximately $12,000 from casual employment.

8. During the 2020-21 income year, the ABC Trust derives income of $720,000 (the trust’s net income is also $720,000).

9. A resolution of the trustee of the ABC Trust dated 30 June 2021 shows both Jenny and Paul are each presently entitled to $160,000 of the income of the ABC Trust, with David and Rani each presently entitled to $200,000.

10. Jenny and Paul are not paid any amounts. Instead, David transfers an amount equal to their entitlements to the mortgage offset account that he and Rani maintain. Jenny and Paul’s entitlements are recorded as having been fully paid in the accounts of the ABC Trust. David pays Jenny and Paul’s tax liabilities in relation to their entitlements from his personal funds.

11. David has taken these actions as Jenny and Paul have agreed that their entitlements from the ABC Trust will be managed by David for the benefit of all family members. David has determined that those entitlements should be applied to reduce the debt on the family home.

12. This arrangement raises the concerns mentioned in this Alert. By entering into this arrangement, the purported $160,000 entitlements of both Jenny and Paul are not subject to the top marginal tax rate. David has not managed the entitlements for the benefit of all members of the family. The arrangement has the result that the post-tax amounts of Jenny and Paul’s entitlements have been diverted to meet their parent’s individual liabilities in circumstances where their parents would have been able to meet them. David and Rani receive the same economic benefit from that income as if it had been appointed to them directly, but without the amounts being included in their assessable income and subject to tax at a higher marginal tax rate. The arrangement involving the making of the trust distributions and use of those amounts appears to be motivated by the tax outcome achieved rather than ordinary familial objectives.

… but maybe my Dad is OK (other than it is 30 years ago) as it was for a cost I would often have to pay – HECS… Have a look at the second example…

Example 3

17. The Green Trust’s beneficiaries include the members of the Green Family. Mary Green is the sole trustee of the Green Trust. Mary has an adult child, Genevieve (aged 19), who lives with her grandmother in order to be close to the university she attends.

18. It is agreed between Mary and Genevieve that Genevieve’s tuition fees of $20,000 will not have to be met by Genevieve but that they will be paid out of her trust entitlement. It is agreed between Genevieve and her grandmother that the grandmother will be paid board of $10,000 a year.

19. During the 2020-21 income year, the Green Trust derives income of $300,000 (the trust’s net income is also $300,000).

20. On 30 June 2021, Mary as the trustee of the Green Trust resolves to make Genevieve presently entitled to $40,000 of the trust income and make Mary entitled to the remaining $260,000.

21. $20,000 of the $40,000 that Genevieve is presently entitled to is paid to Mary, who has previously met the tuition fees of $20,000 as they fell due. $10,000 of that $40,000 is paid directly to the grandmother. The remaining $10,000 is paid to Genevieve, some of which is used to meet her tax obligations on the $40,000.

22. Although $30,000 of the $40,000 is not received directly by Genevieve, and might appear to be within the scope of this Alert, it is important that the $30,000 is applied to repay loans for legitimate expenses that might ordinarily be borne by an adult child and were temporarily met on Genevieve’s behalf (being tuition fees and arm’s length board). The remaining $10,000 was actually received by Genevieve. Accordingly, the concerns raised in this Alert do not arise in arrangements of this type.

So as the money was repaying Dad for my HECS debt, it was probably OK…

The Commissioner released a ruling at the same time and it has an example that we also might be able to use…

Example 5 – unpaid entitlements held on separate trust

121. From time to time, the trustee of the Davidson Family Trust makes John, who is a family member, presently entitled to a share of trust income. John’s entitlement is determined so his taxable income will not exceed certain marginal tax rate thresholds. John is a full-time student and does not have income from other sources. In a particular year, funds underlying the present entitlement are set aside to be held by the trustee upon a separate trust for the sole benefit of John, who has indicated he may be unlikely to call for his entitlements until such time as he purchases a home or makes a similar investment. Nonetheless, John is at liberty to call for his trust entitlements at any time.

122. John’s tax-free threshold reduces the overall tax on the trust net income. However, in the absence of additional factors, the arrangement would likely be entered into in the course of ordinary dealing.

So if the trust holds the PE on a separate sub-trust for the adult child to one day buy a house, then we are OK. This might work for me as my Dad did kick in an amount for my first unit.

Finally, The Commissioner also released Practical Compliance Guideline on this section 100A issue today as well. but I will save that for another post as this is way too long already (However, he starts by saying he is not looking at years before 1 July 2014 – Good news for my Dad and the 1990 $5,200 cheque his trust gave me.)

So at the moment just saying the adult child got $18,200 is not going to be enough…