A family trust is a common structure used to operate a business or hold investments on behalf of a family. It allows involvement of a wider group of family members to possibly share in income and capital whilst control remains, usually with the parents, until they choose for that to change. A family trust often provides income tax savings as well.
The rules on how a family trust is conducted and who has what powers are contained in its trust deed. The laws governing the operation of trusts (particularly the taxation of trusts) and requirements of financiers who lend to trusts are constantly changing.
There have been a number of significant developments in the last 12 months which mean that most existing trust deeds have provisions that are out of date and which may trigger significant tax consequences if the deeds are not amended.
Firstly, some court cases have been decided that may provide significant tax advantages if your trust makes a capital gain – but only if your trust deed has appropriate wording.
If your deed does not have the correct provisions you could miss out on a 50% tax exemption on any capital gains.
The Tax Office has also indicated that it will insist that trustees strictly comply with the terms of their trust deed whereas, in the past, they have generally not had a literal focus on non-compliance issues.
The Tax Office have indicated that any non-compliance with the trust deed provisions could result in the trustee or beneficiaries being assessed at higher tax rates than if there was compliance with the terms of the provisions of the trust deed.
In most cases, amending the trust deed will overcome any potential non-compliance issues. We therefore recommend you have your current deed reviewed and amended where necessary to deal with the risk areas highlighted by recent cases and ATO announcements.
The update will deal with the current issues raised by the Tax Office and will update the trustee powers to reflect current requirements of major lenders.
If you have a family trust you should contact us on 07 3833 3999 or email@example.com to see whether your trust deed should be updated.