On 8 June 2017 the ATO published a new draft Taxation Determination that alters their previous published interpretation of the meaning of “distributes” for the purposes of the family trust distribution tax (FTDT).
One consequence of making a family trust election or an interposed entity election is that any conferral of a present entitlement or “distribution” made by the family trust to a person outside the test individual’s family group (an outsider) will be subject to FTDT.
FTDT is imposed on the amount or value of the “distribution” or present entitlement at the rate of 49% for 2016/17 year (being the top marginal rate plus the Medicare levy plus the Temporary Budget Repair levy).
Section 272-60 of ITAA 36 extends the meaning of “distribution” to a range of transactions such as a forgiveness of debt or allowing the use of trust property.
Despite that extended meaning of distribution, in ATO Interpretative Decision ATO ID 2012/12 the ATO stated that the meaning of “distribution” only applies to beneficiaries of the trust, not to entities that are not beneficiaries.
At the National Tax Liaison Group (NTLG) Trust Consultation Sub-group meetiong on 24 April 2012 the professional bodies requested that the Interpretative Decision be converted to a public ruling or determination.
The Interpretative Decision has now been withdrawn and the prior ATO position reversed with effect from 7 June 2017 with the release of Draft Taxation Determination TD 2017/D1.
Use of the holiday home
Example 2 in TD 2017/D1 illustrates the potential scope of this new interpretation and the problem this presents to trustees of trusts that have made a family trust election.
“Example 2 - use of holiday home, not an incident of a business
31. The Wonder Family Trust has made an FTE and Diana Prince is the specified individual. The trust owns a holiday home. The holiday home is used by Diana's friends, for no consideration, for four weeks in the year.
32. This transaction is not on arm's length terms nor an ordinary incident of a business being carried on by the trust. As no consideration is given in return for the use of the property, the full value of that use is a distribution within the extended meaning of 'distributes'.”
Genuine commercial dealings
The ATO do provide some limitation to the potential scope of this new interpretation.
They achieve this by deeming certain transactions that they consider are “genuine commercial dealings” as giving rise to consideration being provided for the benefit. If there is consideration equivalent to the benefit provided, then there is no amount to which the FTDT would relate.
Whilst acknowledging that the issue is a question of fact to be determined in each case, the ATO states in TD 2017/D1:
“ …in practice the Commissioner will infer that the amount or value of a benefit provided to a person does not exceed the amount or value of the consideration given in return where the relevant transaction:
· occurs on arm's length terms, and
· is an ordinary incident of a business being carried on by the trust.”
TD 2017/D1 includes a series of examples of situations where the Commissioner would consider that the benefit provided to a person does not exceed the amount or value of the consideration given in return. The examples include:
- interest-free loans by a business;
- entertainment expense for arm's length clients of a business;
- discounted fees for services provided by a business; and
- written-off bad trade debts.
The due date for comments on this draft is 23 June 2017. It is unfortunate that there is such a small window of time for comments on such a significant reversal in position.
As the interpretation applies from 7 June, it is important to immediately consider what arrangements are in place between any trusts that have made family trust elections and any outsiders to the family group.
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