The ATO issued TD 2017/20 on Wed 15.11.2017. It contains guidance on, when family trust distribution tax is payable under Div 271 of the ITAA36. This arises when trustee of a trust, that has made a family trust election and then makes a ‘distribution’ outside the ‘family group’.
‘Family Trust Elections’ are significant in that they are an excluded from the measures that restrict the use of tax losses and other deductions. However, family trust distribution tax (FTDT) is imposed on a trustee of a family trust, or certain interposed trusts, partnerships or companies, that confer a present entitlement on, or distribute income or capital to, an entity that is not a member of the family group of the individual specified in the family trust election (FTE).
There is a primary definition of ‘distribute’ in s272-45 of the ITAA36 (which is set out below). Importantly, it only applies to a trustee’s transactions with a person “in the person’s capacity as a beneficiary of the trust”.
But there is an extended definition of ‘distribute’ in s272-60 (which is also set out below). It is wider, in that it applies to things like mere use of the Trust’s property, though it is limited to only those stated types of transactions, that exceed the value of any consideration given.
Importantly, the extended definition provision does not say that it is only transactions with a person in their “capacity as a beneficiary” begging the question about whether such a limitation should be implied into the provision? Without such an implied limitation, the provisions could be dangerous and suck in all manner of things raising large amounts of Family Trusts Distributions Tax.
In TD 2017/20, the Commissioner rules that he will apply the extended definition without any ‘in their capacity as a beneficiary’ limitation, but he does go on to rule that ‘genuine commercial dealings’ are not inappropriately caught up in Family Trusts Distributions Tax.
In particular, he rules as follows.
19. In the context of the trust loss measures, and having regard to the language used in the legislation, it is considered that this limitation on the extended definition is designed to ensure that genuine commercial dealings do not inappropriately give rise to a liability to pay FTDT.
Consideration for a distribution made as an ordinary incident of business on arm’s length terms
20. The amount or value of consideration given for a distribution transaction is a question of fact. However, 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 consideration given in return where the relevant transaction:
- · occurs on arm’s length terms, and
TD 2017/20 includes 6 examples concerning business-related transactions, the use of a holiday home for non-business purposes, an interest-free loan, entertainment for arm’s length clients, a discounted fee for services and the writing off of bad trade debts.
The ATO separately advised that TD 2017/20 “will have no adverse impact on those trusts being used appropriately to benefit members of the relevant family group”.
DATE OF EFFECT: applies to transactions begun to be carried out from 8 June 2017 (the date TD 2017/20 was released as a draft).
[ATO website: TD 2017/20; FJM; LTN 219, 15/11/17; Tax Month Nov 2017]
Primary definition of ‘distribute’
(a) pays or credits the income or capital in the form of money to the person; or
(b) transfers the income or capital in the form of property to the person; or
(c) reinvests or otherwise deals with the income or capital on behalf of the person or in accordance with the directions of the person; or
(d) applies the income or capital for the benefit of the person;
in the person’s capacity as a beneficiary of the trust.
Expanded definition of “distribute”
272-60(1) A company, partnership or trust (an entity ) also distributes income or capital to a person in circumstances not covered by section 272-45, 272-50 or 272-55 if it:
(a) pays (including by way of a loan) or credits money of the entity to the person, or reinvests such money for the person; or
(b) transfers property of the entity to, or allows use of property of the entity by, the person; or
(c) deals with money or property of the entity for or on behalf of the person or as the person directs; or
(d) applies money or property of the entity for the benefit of the person; or
(e) extinguishes, forgives, releases or waives a debt or other liability owed by the person to the entity. Limit on distributions
272-60(2) However, subsection (1) only applies if, and to the extent that:
(a) the amount paid, credited, reinvested or applied, the value of the property transferred, or the value of the other thing done;
(b) the amount or value of any consideration given in return.