Currently, trustee beneficiary non-disclosure tax applies to circular trust distributions in certain circumstances. The tax is levied at the top marginal tax rate plus the Medicare levy (currently, 47%).
Circular trust distributions occur when a trustee of a closely held trust becomes presently entitled to an amount that is attributable to an amount that the closely held trust had previously distributed to a trustee beneficiary of that closely held trust. An example of a circular trust distribution would be as follows:
- Trust 1: the trustee of Trust 1 makes the trustee of Trust 2 presently entitled to a share of the net income of Trust 1
- Trust 2: the trustee of Trust 2 makes the trustee of Trust 1 presently entitled to a share of the net income of Trust 2
Under the rules currently in-force, the trustee beneficiary non-disclosure tax applies to closely held trusts but does not apply to “excluded trusts”. The definition of excluded trust for these purposes includes a family trust. As a result, this created the potential for circular trust distributions to occur involving family trusts which would result in entitlements going around in a never ending cycle with the trustee of the family trust avoiding liability for tax on such distributions, and no ultimate beneficiary being assessable either.
Following on from its announcement in the 2018-19 Budget, the Government has released an Exposure Draft entitled Treasury Laws Amendment (Measures for a Later Sitting) Bill 2018 (Exposure Draft) which seeks to impose trustee beneficiary non-disclosure tax (at 47%) on circular trust distributions made by a family trust where that family trust becomes presently entitled to the income it had previously distributed to a trustee beneficiary.
Interestingly, the Bill as currently drafted does not require the trustee of a family trust to make a TB statement on the basis that “such reporting would impose unnecessary compliance costs on family trusts”. As a result:
- the trustee of family trust would not be subject to trustee beneficiary non-disclosure tax merely because it has not submitted a TB statement (this is different to the position for other closely-held trusts that are not family trusts); and
- the trustee will not be a guilty of an offence under section 8C of the Taxation Administration Act 1953 (dealing with failure to comply with requirements under taxation law) if it fails to submit a correct TB statement.
The amendments will apply from income years starting from 1 July 2019. Private groups will need to consider the impact of this change on any potential circular distributions made within their structure. It may be an appropriate time for private groups to revisit any standard year end distribution practices, to ensure that they will not fall foul of these new measures.