Changes to trust distributions

In this podcast, Robert Giblin from DPM Financial Services gives us an insight into the upcoming changes to trust distribution rules, including what these law changes are, when it might be coming into effect, what you should be doing to prepare and more.

This podcast is brought to you by DPM Financial Services, DPM is a specialist medical financial advice firm that aims to educate doctors of Australia to make the right financial decisions and achieve their financial goals.

DPM Financial Services is all about you getting the right advice that suits your personal and professional needs and making sure you have confidence in your financial future.

You can get in touch with DPM at hello@dpm.com.au or by calling 1800 031 039

  • Transcript
    Please note this is a machine generated transcription and may contain some errors.
    *As always, all in this PODMD podcast is intended for health professionals and the comments are of a general nature. Information given is not intended as specific medical advice pertaining to any given patient. If you have a clinical issue with one of your patients please seek appropriate advice from a colleague with expertise in the area.

    The financial journey of a doctor is unique and complex. DPM Financial Services is a specialist medical financial advice firm that aims to educate doctors of Australia to make the right financial decisions and achieve their financial goals.

    DPM Financial Services is all about you getting the right advice that suits your personal and professional needs and making sure you have confidence in your financial future.

    Today I’d like to welcome to the PodMd studio Robert Giblin from DPM.

    Robert is a Chartered Accountant and Registered Tax Agent who specialises in advising the unique needs of medical professionals in tax compliance, structuring, wealth creation and risk management. Robert provides tax-related guidance and support in building wealth and maintaining financial health so his clients can focus on their professional lives.

    We do hope you enjoy this podcast but please remember that the information discussed here is of a general nature and is not intended to serve as advice. The views and opinions expressed in this podcast are those of DPM, not PodMD.DPM Financial Services recommends you obtain advice concerning specific matters before making a decision.

    Rob, thanks for talking with us on PodMD today.

    Rob: Thank you for having me

    Question 1
    The topic of today’s discussion is the upcoming changes to trust distribution rules.
    Rob, can you briefly explain what these changes are, who will be impacted and why it is causing such as fuss?

    Rob: Yep so firstly, they’re not changes to such legislation. So in Australia we have separation of powers or lawmakers, law enforcers and the law interpreters being the judges, the Ato is the former. So rather than changing their legislation, they’re changing their interpretation of legislation. And who this effects is trustees or directors of trustee companies, and the fuss it is causing is typically in our environment we see that trusts are used to distribute income to a tax effective manner, either for tax effective manners, or for wealth creation.

    And what the Ato is trying to do is trying to tighten their grasp on what was formerly termed as trust stripping and what that meant was that the trustees were distributing income from their trusts to a lower tax environment, but not actually having those lower taxed entities receiving that benefit. Rather, trustees were taking that income themselves and what the Ato is doing is by tightening the changes that we’ve made in this draught ruling is tightening the rules around it so that tey are restricting what has been done formally. The real fuss that’s being caused for trustees of discretionary trusts, or more commonly known family trust, is the attention drawn to reimbursement agreements, unpaid present entitlements and beneficiaries present entitlements.

    Question 2
    Is this the death of Family Trusts as we know them?

    Rob: Not specifically. While it does reduce what can be done with the family trust, it doesn’t necessarily cause the death of the family trust. What it does do is provide a little bit more guidance as to what can and can’t be done.

    Question 3
    Breaking this down a bit further, what is a:
    a. Reimbursement agreement?
    b. Unpaid present entitlement?
    c. Beneficiary’s present entitlement and
    what’s the ATO’s issue with them?

    Rob: So our reimbursement agreement. It generally involves making someone who is presently entitled to trust income in circumstances where both someone other than presently entitled beneficiary actually benefits from that income and at least one of those parties enters into the agreement for the purposes that include getting a tax benefit. So a reimbursement agreement is not actually reimbursement or a return or refund of cash, but rather an agreement where a tax benefit is sort.

    The unpaid present entitlements, that’s typically where a distribution is made to the beneficiary by an individual or a company, but it is not yet paid. So after a year the trust is sitting there saying we’ve distributed this income to you, but not yet transferred the cash and the ATO is looking at that. Again, in line with the trust stripping rules, is talking about well, where is this cash going? Is it staying in the trust? Is it being used for other means? Is it being taken by the trustees? Is it being used by other assets within the trust and as a result the beneficiaries of that company or adult children are not actually receiving that benefit.

    With regards to beneficiary present entitlements, it is possible to make a distribution to a company and these possible make distribution to an adult beneficiary and not pay for it that is the beneficiary aware of that. And are they aware of their rights to actually make a claim on that the Ato is putting guidance together, suggesting that maybe that’s not commonly known, in which case the general intention for it appears to be more about tax minimization as opposed to creating a benefit for the said beneficiary.
    So that’s the ATA issue with the reimbursement agreements, the unpaid present entitlements and the beneficiaries present entitlements, and that’s what these draft ruling is about.

    Question 4
    What does this mean for the average Doctor as Trustee or Director of a corporate trustee of their Family Trust?

    Rob: So what does this mean for the average doctor as a trustee or director of a corporate trustee of Your Family Trust? We need to understand what a reimbursement agreement is, what an unpaid present entitlement is, and what issue the Ato has with beneficiaries’ present entitlements. I would encourage all trustees who are historically or are currently considering making distributions to adult beneficiaries or to corporate beneficiary, is to get in touch with your accountant to discuss what it is you’re trying to do.

    What you plan to do with the cash within the trust and to talk through the transactions at hand to see whether: A) reimbursement agreement is in place or likely to occur. What are the results of producing an unpaid present entitlement? Both historically or moving forward and with any beneficiaries present entitlements, how you might consider managing those accounts moving forward.

    Question 5
    Can you give some examples that are likely acceptable and others that might attract the ATO’s attention?

    Rob: OK, so typical example, that might be normal. Let’s say you have an adult beneficiary being a child over the age of 18, they’ve left high school and they’ve attended university. If you were so inclined to assist your child with their education and you wanted to pay those university fees and absolutely the obligation for the liability of university fees sit with the child.

    They sign up to the course themselves. They’re liable for the debt themselves. So if you make a distribution as trustee from your family trust to your child for the equivalent amount, and I’d suggest dollar for dollar and then those fees are paid direct from the trust, then that is likely to be acceptable. However, under the same situation, if you were to make a distribution for the same dollar amount and keep those fees yourself as the trustee.

    Your child then incurred a HECS debt. There is no benefit to the child and it is highly likely at this stage and even though we’re in a draft ruling, to get the attention, and once you’ve drawn the ATO’s attention, it opens up Pandora’s box for them to go back to 2014, and if anything continues, any misbehaviours prior to going on during that period, they can even go back prior to 2014 to look at trust behaviour.

    Question 6
    When is this happening?

    Rob: So the draft ruling, it came out mid February. It is just the draft ruling, it is the ATOs view of what they’re likely to do with regards to interpretation of the act. However, there is a pending case that in February went against the Commissioner of Taxation on this topic, likely to be appealed. We’re likely to see that sometime in the next six months, but at this stage the accounting profession is looking at dealing with it now. Paying attention to its clients, knowing that 30 June 2022 is on the horizon and that trust resolutions need to be applied.

    So at this stage we anticipate it will be happening in the next six months and we’ll be discussing with our clients, watching intently, discussing with CPA, CA ANZ and the Tax Institute with regards to the ongoing discussion with the ATO as to ensuring that the drat ruling and the ATOs compliance guides are more in line with their intention athe legislation.

    Question 7
    Where to from here – What is the ATO doing, what are Accountants doing and what do our listeners need to be doing moving forward?

    Rob: So the Ato is they are consulting with industry. They are waiting the outcome of this, well, actually they’re considering whether they should be appealing the ruling, with regards to what is called section 100A and Division 7A and identifying within themselves and within the market, guidance on reimbursement agreements, unpaid present entitlements and beneficiary present entitlements and accountants at the same time are also trying to engage with the ATO and with their peak bodies so they might get some a more informed and a more focused approach so as to better advise our clients.

    Moving forward, listeners need to actually go back and have a look at their trusts. Have a look at how they’ve been distributing to their children to see whether the children have actually benefited from the trust distributions. They need to pay attention to unpaid present entitlements and division 7A loans. To see again whether the benefit is actually sitting with the intended beneficiary or the benefit is otherwise, I guess outside of scope and potentially more inclined with tax avoidance or tax deferral or trust stripping activities.

    Concluding question
    Thank you for your time here today in the PodMD studio. To sum up for us, could you please identify the three key take home messages from today’s podcast on the pending tax distribution changes:

    Rob: Yeah, look, talk to your accountant. I’d hold off on doing any of your resolutions until you’ve done so. There’s a fair amount of water to go under the bridge. And if you’ve had a look at your trusts and you’ve gone back historically, and you’ve identified some negative behaviours that we’ve discussed and you need to stop those moving forward, which your accountant can help with, and that that will likely assist with avoiding the ATO spotlight moving forward.

    Concluding question
    Thank you for your time here today in the PodMD studio. To sum up for us, could you please identify the three key take home messages from today’s podcast on the pending tax distribution changes:

    Rob: Yeah, look, talk to your accountant. I’d hold off on doing any of your resolutions until you’ve done so. There’s a fair amount of water to go under the bridge. And if you’ve had a look at your trusts and you’ve gone back historically, and you’ve identified some negative behaviours that we’ve discussed and you need to stop those moving forward, which your accountant can help with, and that that will likely assist with avoiding the ATO spotlight moving forward.

    Thank you for your time and the insights you have provided

    Rob: My pleasure, thank you for having me

DPM Financial Services
*As always, all in this PODMD podcast is intended for health professionals and the comments are of a general nature. Information given is not intended as specific medical advice pertaining to any given patient. If you have a clinical issue with one of your patients please seek appropriate advice from a colleague with expertise in the area.