According to the recently released TD 2017/20 a family trust that owns a holiday home will be liable to pay family trust distribution tax (FTDT) at 47% where friends of the family stay in the holiday home.

 

How can this arise you may ask?

A trust may make a family trust election (FTE) for a number of different reasons including:

  • to assist it in claiming prior year losses and debt deductions;
  • to allow beneficiaries to claim franking credits on franked dividends distributed to them; and
  • to help pass the no change in underlying economic ownership requirement in the new small business restructure roll-over relief.

If a trust has made a FTE then any ‘distribution’ of income or capital to a person who is not a member of the primary individual’s family group will be subject to FTDT.

 

What constitutes a distribution?

The definition of distribution to a person is expanded in section 272-60 and includes paying or crediting money to the person, transferring property to them, allowing the person to use the trust’s property and releasing or forgiving a debt owed by the person to the trust.

Prior to issuing TD 2017/20 the ATO essentially took the view that FTDT was only payable where a distribution was made to a person who was a ‘beneficiary’ of the trust but was not a member of the primary individual’s family group. It did not, however, apply to persons who were not beneficiaries. For example, where a trust writes-off a trade debt owed by a person who is not a beneficiary of the trust – refer ATO ID 2012/12 (now withdrawn).

The ATO has now changed its view. In TD 2017/12 it says that a person who is not a beneficiary of the trust is capable of receiving a distribution for the purposes of section 272-60 and the trust losses rules.

According to the ATO where a person who is not a beneficiary receives a benefit from a transaction of the kind described in section 272-60(1) that benefit is a distribution to the extent that its amount exceeds the amount or value of any consideration given in return (refer section 272-60(2)). For example, where a family trust allows friends of the family to stay for free in a holiday house owned by the trust.

 

The business exemption

Fortunately, where the trust carries on a business and the relevant transaction occurs on arm’s length terms and is an ordinary incident of the business the ATO will infer that the amount of the benefit does not exceed the amount of consideration given in return. As a result no FTDT is payable. This would apply to benefits given to employees, gifts to suppliers as well as discounts provided to customers.

But if the trust is not carrying on a business and is just an investment trust then this is where the ATO’s change of view will catch unwary taxpayers. The ATO provides the following example in TD 2017/12.

 

Example 2 – use of holiday home, not an incident of a business

The Wonder Family Trust has made an FTE and Diana Prince is the specified individual. The trust owns a holiday home. The holiday home is used by Diana’s friends, for no consideration, for four weeks in the year.

This transaction is not on arm’s length terms nor an ordinary incident of a business being carried on by the trust. As no consideration is given in return for the use of the property, the full value of that use is a distribution within the extended meaning of ‘distributes’.

As a result the trust must pay FTDT on the value of the use which presumably will be the amount the trust would have received if Diana’s friends had paid an arm’s length rent.

 

As a result of the issue of TD 2017/12 advisors need to take extra care where a trust has made a FTE. If you believe this information may impact your clients, it would be prudent to seek advice. Please contact Rob Warnock if you require advice.