The ATO released Draft Taxation Determination 2019/D9. This is over 7 months since it withdrew ATO ID 2003/589 on 6 February 2019.
In TD 2019/D9, the ATO now takes the view that the exclusion for debts forgiven for natural love and affection are only between human beings – not companies or trusts.
The ATO’s new view is that “the creditor cannot be a company or an individual acting in the capacity of a trustee”.
As part of the explanation of the ATO’s view, it notes that “the notion of forgiveness is confined by the use of ‘natural love and affection’. That term serves to identify the motivation for forgiveness. The required connection between that motivation and forgiveness is only satisfied when the creditor feels natural love and affection.” It is a human trait. While you can love your car and your dog, perhaps you cannot love your company and your trust! The ATO has made its way into your home and now into your bedroom. The ATO now claims to know your inner thoughts.
TD 2019/D9 turns on its head the ATO’s old interpretation of section 245-40(e) ITAA 1997.
Have a read of section 245-40(e). There is no requirement that a creditor is a natural person. The only reason for forgiveness is ‘natural love and affection’.
However, the ATO does not “devote compliance resources to debt forgiven prior to 6 February 2019″. However, Deeds of Debt forgiveness for companies and trust after that date may well be legal, but incur the wrath of the ATO. Tread carefully. Family Court decisions since 6 February 2019 may have to be reconsidered if there was forgiveness of debt.
Note the ATO’s position is that neither a trust nor a company, as the creditor, can express ‘feelings’ such as ‘love’ and ‘affection’. It may still be possible for a human being, such as a beneficiary to forgive a debt to a company, or, as is more usually a family trust. We will see what the ATO has in store for us, in due course.
Your Family Trust distributes $30,000 to your daughter each year for 10 years. Your Family Trust pays the tax of $2,000 per year on behalf of your daughter. Therefore, there is an ‘Unpaid Present Entitlement’ (like a debt). Your Family Trust owes your daughter $280,000. An ‘Unpaid Present Entitlement’ is the money that the Family Trust owes the beneficiary. You must get her to forgive Family Trust UPEs regularly.
Your daughter, of course, never gets any of this money. You just used her low marginal tax rates to pay less tax. Your accountant reminds you that your daughter (or her ex-husband or trustee in bankruptcy) can now ask for that money. After all, it is her money.
To get rid of the debt she signs a Deed of Debt Forgiveness. There are no tax issues when forgiving the debt. Get her to sign the same Deed of Debt Forgiveness each financial year. Therefore, if your daughter goes bankrupt, feral, divorces or dies your Family Trust owes her nothing.
Have a son? Have other children? Distributed to yourself? Build a separate Deed of Debt Forgiveness for each of you.
The Borrower owes you money. In the Deed of Debt Forgiveness, you forgive the debt for ‘love and affection’. The debt has gone. The borrower no longer owes the lender any money.
Issues when you forgive Family Trust UPEs:
* is a deduction for the release of debt is available?
* do the commercial debt forgiveness penalties apply?
* any FBT?
The answer to all questions is ‘no’. See the Sample to read our letter of advice.
Division 245 ITAA 1997 sets out the tax for a debtor. This is when a commercial debt is forgiven.
However, when you forgive Family Trust UPEs for ‘natural love and affection’ the commercial debt rules don’t apply (section 245-40). Our Deed of Debt Forgiveness is drafted by us on that basis.
We do not use Reimbursement Agreements to forgive Family Trust UPEs. They don’t work. See the Sample above to read our letter of advice on this.
You do not need to lodge this document in the ACT, WA, VIC, NSW, TAS, NT, QLD or SA. There is no duty payable in those States.
When you forgive Family Trust UPEs there is neither income nor a taxable capital gain. They have no tax consequences. The forgiven amount ends up in the trust corpus. For the accounts, to be true and useful, the accounts should reflect this. The letter of advice provides the Journal Entries.
Update the Family Trust for Bamford streaming only:
Or, update Bamford streaming PLUS update the rest of the Deed:
Or update for Bamford streaming PLUS the Deed PLUS update the Appointor & Trustee:
Or just update the Trustee:
Or just update the Appointor:
To deal with Division 7A (loan or UPE from your company to the Family Trust):
Or, to forgive the ‘loan account’ and UPEs (loans from humans to Family Trust):
Change the name of your Family Trust:
To wind up and vest the Family Trust, when you no longer want it:
Telephone us for legal advice on building this document.
Adjunct Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
National Australian law firm
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