A new way of defining Trust Income for fixed trusts – AMIT

A new way of defining Trust Income for fixed trusts – AMIT

The Federal Government is kindly giving Trustees of fixed trusts a new way of calculating trust income, distribution and attributions. This is under the AMIT (Attribution Managed Investment Trust) rules.

It starts 1 July 2016, but you have to opt into the system first.

What is an Australian ‘fixed trust’?

Most fixed trusts, that elect to join up to the new regime, get greater income entitlements and increased flexibility – than under the more rigid Division 6. You can even create multiple class trusts without triggering a resettlement. New products will be created that have never been seen in Australia. It is an exciting time.

To opt into the AMIT regime fund members or beneficiaries must currently have a ‘clearly defined’ set of rights to income and capital. The trust must also allocate trust attributes on a ‘fair and reasonable’ basis.

Should you make your trust a ‘fixed trust’?

Should your trust enter into this new world? Yes, if it helps your beneficiaries. No, if it does not. If you don’t join then you merely continue to be subject to Division 6. The ATO is threatening to give you a harder time if you don’t opt in to the system in the first few years.

Legal Consolidated Barristers and Solicitors can work with you to amend your trust deed and prepare the necessary motions and resolutions for unitholders and trustees. We work with your Responsible Entity, accountants and lawyers to ensure that you don’t suffer a resettlement.

We do full due diligence section 601GC Corporations Act sign off.

Fixed trust vs discretionary trust

Fixed trusts vs discretionary trusts for Australian international tax are considered in:

  • Greensill (Peter Greensill Family Co Pty Ltd v FCT [2020] FCA 559
  • N & M Martin Holdings Pty Ltd v FCT [2020] FCA 1186

The Greensill decision on ‘fixed trusts’

In Greensill, an Australian family trust (“Family Trust“) makes a capital gain.  This is for 30 June 2015, 30 June 2016 and 30 June 2017. The CGT is from selling shares.

The shares are not “taxable Australian property”. The trustee of the Family Trust does a trust distribution minute. The Trust makes Mr Greensill “presently entitled” to the income of the trust. Mr Greensill is a foreign beneficiary,

The ATO reads:

  • ATO ID 2007/60
  • Draft Taxation Determinations TD 2019/D6
  • TD 2019/D7

Based on the above the ATO argues:

  • the Family Trust made a capital gain
  • through the trust capital gain provisions (Subdiv 115-C of the ITAA 1997), the capital gain is attributed to Mr Greensill
  • Mr Greensill cannot apply Division 855 ITAA 1997. Division 855 permits non-residents to disregard capital gains arising from non-taxable Australian property to this attributed capital gain
  • Division 855 is not available as Mr Greensill’s attributed capital gain is not “from a CGT event”. Instead it is “from” the construct of Subdivsion 115-C)

Mr Greensill is not happy. He argues that:

  • Division 855 applies to disregard the attributed capital gain
  • that is despite that the legislation provides for a specific exemption for capital gains arising from “fixed trusts”. See section 855-40
  • it does not provide for any specific exemption for capital gains arising from non-fixed trusts

Australian family trusts are bad for non-resident beneficiaries

Greensill shows that Australian family trusts are bad for non-resident beneficiaries for non-real property assets. Such as shares.

The trustee of an Australian discretionary trust pays tax at 45% because:

  • the trustee is subject to withholding obligations under section 98; and
  • the general 50% CGT discount does not apply to a non-resident beneficiary

How to convert to a ‘fixed trust’

Many Australian trusts hold unrealised capital gains. Consider these strategies:

1. Fixed trust vs Australian resident

The overseas beneficiary moves to Australia. You are now an Australian resident for tax purposes. Do this well before the CGT event. You get at least the general 50% CGT discount.

2. distribute the trust income and CGT to an Australian resident

Legal Consolidated discretionary trust deeds allow the trustee to distribute the income and capital of the trust to a wide range of persons.

The family trust makes an individual who is an Australian resident presently entitled to the income of the trust. For example, the parents or children of the non-resident. This income amount may or may not include any capital gain. It depends on how the trustee determines income. You then claim the entire benefit of the general 50% CGT discount.

3. distribute to an Australian company

Make an Australian company presently entitled to the income of the trust. Australian companies cannot claim the general 50% CGT discount. But the corporate tax rate applies.

The Australian company pays tax at either 26% (if it is a base rate entity, noting that capital gains are considered passive income) or 30% on the taxable income. To the extent that dividends are declared to a non-resident, no further tax would apply in Australia (on the basis that those dividends are fully franked). In other words, tax could be capped at the corporate tax rate.

4. become a fixed trust?

Division 855 provides a specific exemption for non-residents who derive a capital gain from an Australian “fixed trust” (s 855-40). A “fixed trust” is a trust where entities have fixed entitlements to all of the income and capital of the trust. Clearly, this is inconsistent with the very notion of a “family trust” (ie where beneficiaries usually do not have fixed entitlements, and the trustee may determine who the income and capital of the trust is paid to).

However, the Trust Deeds to most “family trusts” contain variation powers. Some variation powers are narrowly constructed, and some are extremely wide (eg, the ability to vary all of the provisions of the Trust Deed). Further, the cases of FCT v Commercial Nominees of Australia Ltd [2001] HCA 33 and FCT v David Clark [2011] FCAFC 5 support the view that even widespread changes to a trust deed will not result in CGT event E1 or CGT event E2 occurring (colloquially called a “resettlement”). This is also (perhaps begrudgingly) supported by the ATO in Taxation Determination TD 2012/21.

Keeping in mind that the terms “discretionary trust“, “family trust“, “unit trust” and “fixed trust” are merely labels to describe the attributes of a particular trustee-beneficiary relationship, one alternative strategy may be to vary the provisions of a “family trust” to qualify the trust as a “fixed trust”.

See Private Binding Rulings1051328095804. This is where a discretionary trust was varied to satisfy the criteria of a fixed trust. This is under s 3A(3B) of the Land Tax Management Act 1956 (NSW)). If possible, this could remedy the decision in Greensill entirely, allowing for a CGT-free capital gain for non-resident beneficiaries. But we worry about whether the variation is permitted, the resettlement issue, whether any other CGT “E” events could occur (eg CGT event E5) and whether the general anti-avoidance provision (Pt IVA) applies.

For more information on building trusts please telephone us.

Adjunct Professor Brett Davies,  CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
Email:         [email protected]

See: Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015, Income Tax Rates Amendment (Managed Investment Trusts) Bill 2015, Medicare Levy Amendment (Attribution Managed Investment Trusts) Bill 2015 and Income Tax (Attribution Managed Investment Trusts – Offsets) Bill 2015.

Leave a Reply