Smart Trust Planning Navigating Division 7A and Family Trusts

Welcome, to the podcast! Our newsletter made easy! Please note, this podcast features AI-generated voices for your hosts, Mia Taylor and Leo Baker, bringing you expert insights from owner, Ben De Rosa, at Aevum Accounting. Each week, we're here to help you confidently navigate the ins and outs of Australian tax – whether it's for your individual finances, or the complexities of your business. We'll cut through the jargon to give you strategies for compliance, smart planning, and that ultimate peace of mind. So, if you're looking to understand your obligations, maximize your financial position, or simply gain clarity on your money matters, you're in the right place. Let's get started with our review of the week! Bianca says I’m incredibly grateful to Ben at Aevum Accounting for his exceptional support in setting up our new company. From start to finish, he made the process seamless and stress-free with his clear communication, professionalism, and in-depth knowledge. It’s reassuring to know that all of my accounting and tax needs are in expert hands. I look forward to working with him for many years to come and highly recommend his services to anyone seeking reliable and thorough financial guidance." Thank you for the amazing feedback Bianca we love hearing from our clients and a positive review gets our podcast started on the right foot. Over to you Leo. Hello everyone, and welcome back! I’m Leo Baker. And I'm Mia Taylor. Last time, we bravely ventured into the world of ATO Audit Triggers, exploring those red flags that can draw unwanted attention for individuals and businesses. Today, we're building on that by diving into an area that's perhaps a bit less 'scary' and more 'strategically complex' – but equally vital for many businesses and families: Tax Planning for Family Trusts, and the often-debated topic of Division 7A and Unpaid Present Entitlements, or U P Es, to Bucket Companies. You know, Mia, when we talk about family trusts, people often think of them as these mystical entities. But in reality, they're powerful tools for asset protection and tax planning, provided you manage them correctly. And 'correctly' is the keyword, especially with increased ATO scrutiny. It’s like tending to a delicate garden; it needs constant care to flourish! That's a great analogy, Leo! So, let's look at some key strategies to manage tax exposures for family trusts. We're going to kick things off with a provision that sounds like it belongs in a spy novel: Navigating Section 100A. It does, doesn't it? Section 100A is essentially the ATO’s anti-avoidance provision designed to prevent trusts from distributing income to beneficiaries who don't actually benefit from it. The ATO can invalidate a distribution if the benefit is enjoyed by someone other than the named beneficiary. Think of it like this: the trust declares that a distribution is made to, say, a low-income adult child for their tax benefit. But if that money never actually touches their bank account, or it's immediately given back to the parents for their expenses, the ATO sees that as a "reimbursement agreement" designed purely for tax avoidance. Exactly. For example, if a trust legitimately distributes income to an adult child to cover their university fees or reasonable board payments if they’re living at home – that’s generally fine. The adult child genuinely benefits. But if that money is then immediately used to pay for the parents' holiday, or for their mortgage, that's a huge red flag. The ATO wants to see that the distribution is for legitimate expenses of the named beneficiary. The key is to ensure the arrangement is for a "genuine" purpose and that the beneficiary actually has the use and enjoyment of the funds. It's not about blocking legitimate family support, but ensuring the tax outcome matches the economic reality of who is truly benefiting. Honesty and transparency are your best friends here. You have to think: would this transaction occur if everyone was at arm's length? If not, Section 100A might be knocking. Absolutely. Next up, a strategy many consider for the long game, particularly for asset protection and future planning: Removing Beneficiaries from a discretionary trust. This might sound drastic, Mia, like cutting someone out of the family tree! But there are some very valid and strategic reasons to do it. For example, think about asset protection. If a beneficiary is in a high-risk profession, or facing personal financial challenges, removing them can help shield the trust assets from potential claims against them personally. The trust can act as a stronger protective barrier. It can also be crucial for ensuring eligibility for the Age Pension, where trust income or assets attributed to a beneficiary might impact their eligibility. Removing them might help meet those specific criteria. And a very topical one we're seeing now in many states is avoiding foreign owner land tax and transfer duty surcharges. If a beneficiary becomes a foreign resident for tax purposes, their mere inclusion in the trust – even if they never receive a distribution – could trigger significant surcharges on any Australian property held by the trust. Removing them proactively can save huge amounts in these ongoing taxes. However, and this is a huge caution here, you must take great care to avoid something called trust resettlement issues. If removing beneficiaries is done incorrectly, or if the fundamental character of the trust is deemed to have changed too much, the ATO can view it as if the original trust ended and a new one began. This 'resettlement' is treated as a disposal of all trust assets, potentially triggering CGT and stamp duty on their market value, even if nothing was actually sold! It’s a very expensive mistake that undoes years of planning. So, professional advice here is absolutely critical. Definitely! Which brings us to another strategic tool for businesses: the Small Business Restructure Rollover, or SBRR. This is a really powerful relief provision for eligible small businesses looking to restructure their operations without immediate tax consequences. It’s like being able to reorganise your chess pieces on the board without paying a penalty for each move. It allows for tax-effective transfers of active assets between different entity types – say, from a sole trader to a company, or from a trust to a company, or even between trusts. That's exactly right. It's commonly used for purposes like improving asset protection – for instance, separating your trading business from the property it operates from, placing them in different entities to manage risk. Or perhaps to provide ownership to key personnel or a new generation of family members without triggering an immediate tax bill, allowing for smoother succession planning. The crucial part is that the transfer must be part of a 'genuine restructure' of an ongoing business, not just a one-off asset transfer designed to avoid tax. It’s about adapting for efficiency and growth, which aligns perfectly with Aevum’s values of growth and evolution. Alright, Mia, let’s pivot to a topic that has been generating a lot of buzz – and maybe a little bit of anxiety – in the tax world recently: Division 7A and Unpaid Present Entitlements, or U P Es, to Bucket Companies. This is a really hot topic. Oh, the famous (or infamous!) Division 7A! This part of the tax law is designed to prevent private companies from making tax-free distributions of profits or assets to shareholders or their associates. The ATO essentially treats these as unfranked dividends, triggering tax, unless certain strict rules are met. It’s like the ATO saying, “Hold on, is that really a loan you intend to repay, or are you trying to sneak tax-free cash out of the company?” Exactly. And the 'Unpaid Present Entitlement' to a 'bucket company' situation specifically deals with where a trust distributes income to a company beneficiary (often called a 'bucket company' because it's used to 'catch' trust income at the lower company tax rate), but then doesn't actually pay that money to the company. Instead, it remains as an 'unpaid entitlement' owed by the trust to the company. The issue for the ATO is, if this UPE isn't properly dealt with, it could effectively act like a tax-free loan from the company back to the trust or its associates, bypassing Division 7A. Now, this is where it gets interesting, and frankly, a bit contentious due to a recent court case. Despite the Bendel case ruling, which stated that a UPE to a bucket company is not automatically a loan for Division 7A purposes, the ATO has taken an interim stance. They are asserting that they will continue to administer the law according to their published view in TD 2022/11, where they do view these U P Es as loans, until the High Court appeal process is finalized. So, what does this mean for you, the taxpayer? It means even if a court case said one thing, the ATO is still operating under its own interpretation for now. This creates a challenging period of uncertainty. And here's the real kicker: the ATO has also explicitly warned that if taxpayers choose to follow the Bendel decision and don't put those UPEs on complying Division 7A loan terms, there is actually a greater risk of Section 100A applying to those distributions. That's right, the anti-avoidance rule we talked about earlier could come back to bite you! Talk about being between a rock and a hard place! It's definitely a complex situation requiring careful thought and professional guidance. Let's look at it practically: what about Prior Year UPEs, specifically for 2022 and earlier? For those UPEs that were already put on complying Division 7A loan terms – meaning you've structured them as genuine loans and started making the required minimum yearly repayments – it’s really risky to just stop those repayments now. By setting up those terms and initiating repayments, you've likely created a new, binding "obligation to repay" that the ATO will enforce. Just stopping could instantly trigger a deemed dividend from the company to the individual or trust, creating an unexpected tax bill. However, taxpayers who were assessed with a deemed dividend for these prior years may consider lodging an objection to that assessment, arguing based on the Bendel decision. But be warned, the ATO has indicated they will likely pause these objections and appeals until the High Court appeal on the Bendel case is definitively resolved. So, it's not a quick fix, more of a strategic legal play with a potentially long waiting period. And finally, the most recent conundrum: 2023 UPEs. Tax practitioners faced a significant decision point by the 2024 company tax return lodgment date. They had to decide whether to advise clients to follow the ATO's view – which means putting the UPE on a complying loan – or to follow the Bendel decision and take no action, hoping the ATO's view is overturned. Each path carried different, significant risks regarding Division 7A, Subdivision EA (which specifically deals with trust income distributed to companies), and that tricky Section 100A we discussed earlier. The good news is, if the ATO's view is ultimately upheld after the High Court appeal, those who followed Bendel and took no action may face a deemed dividend, but could potentially seek relief under Section 109RB, which offers some discretion to disregard deemed dividends in certain limited circumstances. It's a complex safety net, but a safety net nonetheless. So, as you can hear, while family trusts and U P Es offer incredible planning opportunities and flexibility, they also come with layers of complexity and an ever-watchful ATO, especially with the ongoing Bendel appeal creating uncertainty. This isn't an area for guesswork, or for trying to manage without expert guidance. Exactly. Our advice, especially for these sophisticated areas of tax planning, is always to engage with a qualified professional. At Aevum Accounting, we specialise in navigating these intricate rules, ensuring your trust structures are compliant and optimized for your long-term financial goals, always with that focus on stability and reliability. We want to help you avoid those complex traps and leverage your structures effectively. It's about having that absolute peace of mind, knowing your structure is sound and you're not going to get any nasty surprises down the track, especially when the tax landscape is shifting. And that brings us to the end of another episode! We hope today's discussion has provided you with valuable insights and helps you navigate your financial world with greater confidence. Before we go, a quick but important reminder: The information and strategies shared on this podcast are for general informational purposes only and do not constitute specific tax or financial advice. Everyone's situation is unique, and tax laws are complex and constantly evolving. For personalized advice tailored to your specific individual or business needs, we always recommend consulting with a qualified professional. You can connect with our team at Aevum Accounting – visit our website to learn more about our services, including detailed tax guides for various occupations, and how we can support your financial journey. Thank you so much for tuning in! If you enjoyed this episode, please consider subscribing, leaving us a review, and sharing it with anyone who might benefit. Your support helps us reach more Australians. Until next time, stay savvy, stay proactive, and keep building your financial future! From all of us at Aevum Accounting, goodbye for now!