TD 2017/D1 was released on Thur 8.6.2017 and says that a person who is not a beneficiary of the trust is capable of having a distribution made to them, for the purposes of s 272-60 of Sch 2F to the ITAA 1936.
Trusts can be prevented from carrying forward tax losses, in certain circumstances, if it has ‘distributed income or capital to a person … in the person’s capacity as a beneficiary’ (under s272-45). Discretionary trusts that have made the ‘family trust election’ are exempted these trust loss carry forward provisions, but they, in turn, are subject to a special tax if they similarly ‘distribute’ outside the relevantly defined ‘family group’.
There is a wider definition of ‘distributes income or capital to a person’ in s272-60(1), with similar effect for trust losses and the ‘family trust distribution tax’. It deals with a range of transactions that would (effectively) strip value out of the trust.
This section is not expressly limited to these kind of distributions to actual beneficiaries, in their capacity as a beneficiary, but the protection, from overly wide application, is that the taxable amount is reduced by the amount of ‘consideration’ given for the value the things distributed (as a trust beneficiary would not, typically, have given any consideration).
However, the key issue addressed in this Draft Determination, is whether these value stripping provisions should be limited to actual beneficiaries that strip value out of the trust (by these kinds of transactions).
The Commissioner proposes to rule that these value stripping provisions ought apply to transactions with non-beneficiaries, too, saying the definition was intended to be wider than this (see paras 11 & 12 below).
However, this creates a range of problems that casts doubt on the Commissioner’s ‘wider is always better’ approach.
This is a much wider net than is commonly understood as provisions designed to stop trusts distributing outside the ‘family group’ and will come as surprise to many. Having said that, the provisions have been in the Act since 1998.
If this interests you (and it may not) you can read the relevant section and an extract form the Draft Determination below.
DATE OF EFFECT: The Commissioner has previously expressed the view that the extended meaning of “distribution” in s 272-60 does not apply to writing-off a trade debt where the debtor is not a beneficiary of the trust. Accordingly, the final Determination will not apply to distribution transactions which have begun to be carried out before 7 June 2017.
[TD 2017/D1; FJM; LTN 107, 8/6/17]
Section 272-60 of Schedule 2F of the ITAA 1936
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;
exceeds:
(b) the amount or value of any consideration given in return.
Character of distributions
272-60(3) Each thing that is a distribution because of subsection (1) is a distribution of income unless it is clear that the money or property concerned was capital, or that the debt or liability was attributable to capital, of the entity.
Extract from Draft Determination
5. The trust loss measures[5] are designed to prevent the transfer of the tax benefit from deducting tax losses, bad debts and debt/equity swap losses to persons who did not bear the economic loss at the time it was incurred by the trustee.
6. Broadly speaking, a trust that has made a family trust election is an ‘excepted trust’[6] and 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 confers a present entitlement on, or distributes 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)
….
10. In relation to trusts, the only additional kinds of transaction included within the extended meaning of ‘distributes’ are those in paragraph (e).[10]
11. However, the use of the adverb ‘also’ in the phrase ‘[a] company, partnership or trust…also distributes income or capital to a person…’ is clearly intended to extend that meaning of ‘distributes’ to encompass transactions not included within the primary definition of ‘distributes’ in relation to each kind of entity.[11]
12. Significantly, in the context of trust distributions, the application of the extended definition is not limited by reference to the capacity of the person to whom the distribution is made. In this regard, the extended definition may be contrasted with the primary definition, which is specifically confined to distributions to a person in their ‘capacity as a beneficiary of the trust’.[12]
13. It might be argued that the omission of a reference to the person’s capacity in the extended definition does no more than extend the meaning of ‘distributes’ to include benefits given to a beneficiary, but otherwise than in that capacity. That is, it does not extend the meaning to include benefits given to persons who are not beneficiaries of the trust.
14. However, a payment by a trustee which is genuinely in respect of services rendered or property provided by a beneficiary is no more readily characterised as a ‘distribution’ to the beneficiary in the ordinary sense than a payment made to a non-beneficiary.
15. In addition, a view which limited the extended definition to beneficiaries would render that definition substantially redundant in the circumstances described in this draft Determination, given the significant overlap between the kinds of transaction described in the primary and extended definitions.[13]
16. More broadly, a restrictive interpretation of the extended definition would frustrate the effective operation of the trust loss measures by allowing the trustee of a family trust to confer a benefit on a person who is not a beneficiary of the trust without being liable to pay FTDT.[14]
17. The above considerations indicate that the unqualified reference to ‘distributes…to a person’ in the extended definition includes distributions (as defined) to persons who are not beneficiaries of the trust.[15] This interpretation is consistent with the language, context and purpose of the primary and extended definitions. It gives full effect to the words used, enabling the provisions to apply on a consistent rather than conflicting basis.