Trusts 2012 TAX-EFFECTIVE STRUCTURING WITH TRUSTS...1. Tax-effective structuring with trusts...3

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1 TAX-EFFECTIVE STRUCTURING WITH TRUSTS...1 Tax-effective structuring with trusts...3 Introduction What is a trust? What are the common types of trusts available for clients to use? Fixed Trusts Discretionary Trust Unit Trust Hybrid Trust Class Trust Pedigree Trust Testamentary Trust (or Will Trust ) Child maintenance Trust Special Disability Trusts Service Trust Superannuation fund Bare Trust Other types of Trusts Determining what type of trust will suit a client s needs What are the key drivers when assisting a client to choose a trust? Trust Comparison Guide Who should take on the key roles in the trust? Settlor Trustee Appointor Beneficiaries Guardian...27 National Tax & Accountants Association Ltd: March April 2012 i

2 NTAA GUIDE TO TRUST RESOLUTIONS AND STREAMING IN Trust distributions for Introduction Overview of the Bill 5 amendments How does Subdivision 115-C deal with capital gains? How does Subdivision 207-B deal with franked dividends? How does the new Division 6E operate?...49 How does the trust deed affect trustee distributions and the streaming of capital gains and franked dividends? Determining the income of the trust Common income definitions found in trust deeds What issues arise for each type of income definition clause? Issues for trusts that derive no capital gains and/or franked dividends Issues for trusts that derive capital gains Issues for trusts deriving franked dividends...62 Troubleshooting with trust distributions Issues with the concept of trust income Capital gains Streaming the gross amount When is a beneficiary specifically entitled to a capital gain? How is the capital gain included in trust income? What if the trust makes more than one capital gain? Trust makes multiple capital gains Streaming capital gains with a loss on franked dividends Existence of a power to stream in the trust deed When will a trust deed contain a power to stream? TR 92/13 and streaming Current ATO view Why are mop-up clauses crucial to tax planning? The problem with percentage based income distributions The problems with fixed income distributions...83 ii National Tax & Accountants Association Ltd: March April 2012

3 6.3 How does a balance beneficiary help avoid a S.99A trustee assessment? Who pays the tax if the ATO later amends the net (taxable) income?...84 ATO LAUNCHES AUDIT CRACKDOWN ON TRUSTS IN ATO to scrutinise trustee resolutions for ATO attack on trustee resolutions for What are the new rules for tax effective streaming of capital gains and franked dividends? Special ATO arrangements for the 2011 income year What compliance action is the ATO undertaking in 2011/12? Making beneficiaries presently entitled to trust income Does a trust distribution need to be in writing? Dangers with recording distributions in writing after year end What is the preferred course of action when making trust distributions?...95 Trusts face increased exposure to Division 7A under new ATO ruling...96 Introduction When will the ATO treat a bucket company UPE as a Division 7A loan back to the trust? UPEs created before 16 December UPEs created on or after 16 December What options are available to avoid a UPE being a deemed dividend to the trust? Trustee puts the UPE funds on sub-trust Enter into a Division 7A complying loan agreement How does a sub-trust arrangement work? What options are available under a sub-trust? Key dates to be aware of for sub-trust arrangements Financing and distributions between trusts and family entities approach with caution Can Subdivision EA apply to bucket company UPEs? Consider the cash flow implications of distributing to a bucket company Are distributions to bucket companies a thing of the past? Trust loans under the interposed entity rules National Tax & Accountants Association Ltd: March April 2012 iii

4 6.1 Where a present entitlement is made through one or more interposed trusts new S.109XI Where loans or payments are made through one or more interposed entities new S.109XF and S.109XG New TFN withholding rules apply to closely held trusts and family trusts Trusts that are subject to (or excluded from) the new TFN withholding measures Trusts excluded from the new TFN withholding rules Beneficiaries subject to (or excluded from) the new TFN withholding rules When does a withholding obligation arise? Withholding from a distribution to a beneficiary Withholding from a present entitlement Reporting obligations under new measures Where beneficiary has quoted their TFN Where beneficiary has not quoted their TFN TRUST DANGER AREAS New laws crackdown on income splitting with minors The taxation of the income of minors What rates of tax apply to Division 6AA income? Amendments remove availability of LITO on unearned income from 2012 income year When will a minor still be eligible for LITO? Distributing franked dividends tips and traps Refunding franking credits Trusts where deductions exceed dividends Trust makes a loss but has net (taxable) income Applying the 45 day holding rule to trusts Applying the 45 day holding rule to a discretionary trust Small shareholder exemption for trust beneficiaries How does the 45 day holding rule apply in relation to a unit trust? iv National Tax & Accountants Association Ltd: March April 2012

5 New rules for reporting of distributions to trustee beneficiaries When do the trustee beneficiary reporting rules apply? Is the trust a closely held trust? Did the trust distribute to another trust? How to make a correct TB statement What consequences arise if a trustee fails to make a correct TB statement? What if a TB provides incorrect information? Dangers with financing trust operations Problems specific to discretionary trusts Recent case highlights dangers with interest-free loans to discretionary trusts Facts Were the taxpayers presently entitled to distributions of trust income upon the making of the Early Resolutions? What strategies can be used to shore up interest deductions? Get the trust itself to borrow Get the beneficiary of the trust to borrow and lend it to the trust (at interest) Other strategies for funding trust operations New law reinstates access to income averaging and FMD provisions for primary producer trusts Accessing the income averaging and FMD provisions from the 2011 income year The loss trust is a fixed trust The loss trust is a discretionary trust Dealing with CGT event E Overview of CGT event E When does a capital gain arise under CGT event E4? Adjustments to the non-assessable part Checklist of impact of non-assessable amounts on cost base Tips to consider when applying CGT event E National Tax & Accountants Association Ltd: March April 2012 v

6 ASSET PROTECTION AND TRUSTS Asset Protection and Trusts How 'protected' are assets in a discretionary trust? Can discretionary trust assets be property of a beneficiary under the Corporations Act? Can discretionary trust assets be property of a beneficiary under the Family Law Act? Can discretionary trust assets be property of a beneficiary under the Bankruptcy Act? What if a discretionary trust is sued whose personal assets are at risk? Do individual trustees put their own assets at risk? What are the risks for directors of a corporate trustee? CGT SMALL BUSINESS CONCESSIONS CGT small business concessions Introduction Tips and traps with satisfying the active asset test Exclusion of assets used mainly to derive rent Assets used in the business of another entity Ensuring a trust is connected with the business or asset-holding entity i.e., establishing control Can passively-held trust assets qualify for the SBCs? The relevance of a significant individual Determining an individual s SBPP in a trust Discretionary trusts and significant individuals Who is the payment made to under the retirement exemption? Payments for stakeholders aged 55 or over Superannuation-related considerations When does a taxpayer make a choice? The requirements for distributing an exempt amount under the 15 year exemption Distributing the exempt amount vi National Tax & Accountants Association Ltd: March April 2012

7 GUIDE TO LOSSES AND FAMILY TRUSTS Understanding the ins and outs of trust losses and family trust elections A step by step guide to navigating the trust loss provisions An overview of the trust loss provisions The 50% stake test The control test The pattern of distributions test The income injection test Satisfying the trust loss rules using family trust and interposed entity elections The reasons for making an FTE or an IEE How to make, vary or revoke an FTE or an IEE The meaning of family and family group Using FTEs and IEEs to access tax losses applying the modified income injection test National Tax & Accountants Association Ltd: March April 2012 vii