A new bill - Tax Laws Amendment (2007 Measures No. 4) Bill 2007 - seeks to expand the definition of “family” and “family group” for the purposes of the trust loss rules.
The Bill amends Schedule 2F to the Income Tax Assessment Act 1936 to provide more flexibility to familytrusts in relation to the trust and company tax loss, bad debt deductionsand franking credit trading rules. These amendments achieve this byallowing family trust elections (“FTEs”) and interposed entity elections (“IEEs”) to berevoked or varied in certain limited circumstances, and by broadening the definition of ‘family’ and ‘family group’.
Current definition of family
One of the impediments with making FTEs and IEEs has been that the entity making the relevant election could only distribute to the “family” of the test individual specified in the election or else pay Family Trust Distributions Tax at (“FTDT”) full marginal rates.
The “family” was defined narrowly to include the following:
This has created several practical issues. For starters, the family did not include a former spouse. So, when a family law property settlement required assets to be distributed from a trust to the former spouse of the test individual (or the former spouse of another family member), the trustee would be up for FTDT.
Problems also arose with close-knit, multi-generational families. Take the example of two brothers - Tim and Peter - operating a business from a single family trust. If Tim was chosen to be the test individual, the trustee could distribute to Tim’s children and grandchildren and to Peter’s children (i.e. Tim’s nephews and nieces) without triggering FTDT. But if the trustee distributed to Peter’s grandchildren, FTDT would be payable. So, there would be a tension as to who to choose as the test individual.
New definition of family
The Bill introduces an expanded definition of “family” as follows:
Continuing the example of Tim and Peter, now if Tim is chosen as the test individual, the trustee can distribute to his children, grandchildren and their lineal descendents. It can also distribute to Peter’s children and their lineal descendents. So the multi-generational issue is at least partly resolved.
Definition of family group
As previously noted, a trustee was required to pay FTDT when distributing income or property to a former spouse. This issue is to be rectified by expanding the definition of “family group”. Provided distributions are made to people and entities within the “family group” FTDT will not be payable.
The definition of family group in section 272-90 is to be amended to include:
- former spouses;
- former widows/widowers; and
- former step-children,
thereby exempting these people from FTDT. However these people remain an ‘outsider to the trust’ for the purpose of the income injection test in Division 270.
Finally, where trustees of different trusts have made FTEs specifying the same test individual, they are also included within the definition of ‘family group’ exempting them from FTDT. In addition, they will no longer be an ‘outsider to the trust’ for the purpose of the income injection test in Division 270.
Revocation of FTEs
The Bill proposes that in some cases it will be possible for the trustee of a trust to revoke an FTE.
The main criteria for this are that the during the period commencing from the year specified in the FTE, the trustee or another entity must not have utilised tax losses or bad debt deductions they would not have been able to use in the absence of an FTE. In addition, beneficiaries of the trust must not have received the benefit of franking credits attaching to dividends distributed by the trustee if they would have been denied the credits in the absence of the FTE.
There is a time limit for revoking a FTE. The limit is the end of the fourth year after the year of income specified in the FTE. However, as a transitional measure, trustees will be able to revoke their FTEs in the period from the beginning of the year in which the Act containing the new provisions receives Royal Assent and concluding at the end of the following year.
The revocation is to be included in the trust’s tax return for the year the revocation is to take effect.
Revocation of IEEs
An entity can revoke an IEE if at the time the IEE commenced or a later time the entity was or became a member of the “family group” - that is, a wholly-owned entity of the family.
Revocation, in these circumstances, must occur for a year during the period starting at the later of:
- the beginning of the year specified in the IEE; and
- the beginning of the year in which the entity became a member of the family group;
and finishing at the end of the fourth year after the year referred to in 1. or 2.
As a transitional measure, this period will be extended to cover the period from the beginning of the year of Roayal Assent and ending at the conclusion of the following year.
An IEE will automatically be revoked if the FTE to which it relates is revoked.
FURTHER ENQUIRIES
