iscover Lawyer offers practical tips for FTEs amid ATO crackdown
TaxWith a tight compliance framework around family trust elections, including freezing a family group upon the death of the test individual, a tax lawyer has broken down ways to navigate the FTDT system.
Amid a complex, compliance-focused FTDT system, a tax lawyer has identified ways family trust owners can make further family trust elections, nominate the right test individual, and what to watch for when selling trusts with FTEs.
At The Tax Institute’s Tax Summit on 2 September, Sladen Legal principal and tax lawyer Neil Brydges said that interposed entity elections (IIEs) can be used to make an election into a family group.
“There might be another trust in the group that doesn’t really do much, that doesn’t make distributions. The interposed entity can use that trust to make the election into the family group, which means you are not having to deal with those other distributions,” Brydges said.
“The solution would be no surprise.”
Before doing this, however, Brydges stressed that taxpayers with trusts must first check whether any former elections can be revoked for the pre-2007 elections, and try to map out whether all the intended recipients of the distributions fall within the two groups.
Instead of nominating a grandparent as a test individual, he said, nominating a younger person can result in a wider practical group.
“[One option is that you can] nominate your son, or your daughter. The grandfather is captured, so is the daughter and the siblings, the grandchildren, nephews or nieces, but [if] the son is 45, the group may go on for 30, 35, 40 more years, which means that death is a lot further down the track,” Brydges said.
One caveat that Brydges raised was that family trust elections may impact purchaser appeal.
“Commercially, often, purchasers, if they are aware of an election, would say, ‘I am not buying the company, I am not buying the trust’,” he said.
“When the unit trust makes a distribution, or the company pays the dividend, [since] it is no longer owned by the vendor family, [and] the purchaser [will] control the company or trust - [it will be] liable for FTDT.”
Brydges stressed that although the FTDT system is overdue for reform, until reform is made, trust owners will need to work with the system in place.
“The commissioner has [had a] compliance focus in the last couple of years. The rules have been there, but now there is a compliance focus which makes people look over the rules themselves,” he said.
“Because of the compliance focus … there are long-tailed liabilities, the rules are very inflexible, there is limited or no discretion to the commissioner, and then more recently, the GIC that can accompany the tax is no longer deductible from July last year.
“So it’s all sort of like a perfect storm in some ways; it will be laying on top of the trust changes of the budget.”
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