My Family Trust – What is the state of play?

Most business owners will have heard of changes in respect of family trusts and perhaps the case of Bamford which resulted in the 2011 ‘trust streaming’ amendments to the Income Tax Assessment Acts. So what should you do?

To check if a trust deed should be varied?

The simplest test to check if a family discretionary trust deed should be updated by adding further wording is to look at the definition of ‘income of the trust fund’ or ‘net income’. If your deed states that “income” means ‘section 95 net income’, or there is no definition stated regarding “income” , then your trust deed needs amending.

The ATO’s draft taxation ruling (TR 2012/D1) lists some of the serious problems that can arise if your deed does not define income properly. This will include the limitation to “stream” income to different beneficiaries in financial years and deal with franking credits on shares held by the trust to minimise tax.

Unit trusts?

If your unit trust receives franked dividends (tax has been paid) from distributions made by a trustee, the trust must be a ‘fixed’ trust in order to get the tax benefit.

If a unit holder in the trust is a superannuation fund, there is a real risk that money paid (distributions) from the unit trust to the superannuation fund will be taxed at a higher rate as ‘non-arm’s length income’. This was the situation in the recent case of MH Ghali Superannuation Fund ([2012] AATA 527).

If franked dividends are paid or a superannuation fund holds units the odds are the trust deed should be amended and updated in the wording, as very few unit trusts appear to qualify as “fixed trusts” under the tough provisions set out in the Tax Legislation.

What action to take?

We can read your trust deed and advise whether it is a discretionary trust, a unit trust or “hybrid” trust ( a blend of the two) to confirm if the wording must be updated. If the wording of a deed needs to be amended, we can draft the required Deed of Variation and Resolutions of the Trustee adopting the changes for a set amount.

It is particularly important that the trust deed is reviewed well before the end of the financial year so get cracking and contact us without delay!

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