Application of the anti-avoidance provision continues
EXAMPLE – Application of anti-avoidance provision
The A Discretionary Trust (‘Trust A’) is a closely held trust, of which Mr A is the sole trustee. Trust A has trust income of $5,000 in the 2019 income year, which also represents its net (taxable) income for the year.
On 30 June 2019, Trust A makes another closely held trust, the B Discretionary Trust (‘Trust B’), presently entitled to all of its trust income (i.e., $5,000). As a correct TB statement has been lodged (as part of Trust A’s tax return) to report the untaxed amount included in the distribution (i.e., $5,000), no TBNT is payable under S.102UK(2)(a).
Does the anti-avoidance provision apply if Trust B makes Trust A presently entitled to this amount on 30 June 2019?
The short answer is yes. The conditions of S.102UM (1) are satisfied, as:
- a share of the net (taxable) income of Trust A for the 2019 income year (i.e., $5,000) is included in the assessable income of Trust B under S.97;
- Trust A becomes presently entitled to an amount that is reasonably attributable to the untaxed part of that share (i.e., $5,000); and
- TBNT is not payable by Mr A (in his capacity as trustee of Trust A) on the untaxed amount under S.102UK(2)(a) (as a correct TB statement has been lodged on time).
The effect of the circular trust distribution is that neither Trust A nor Trust B (nor any other entity) are taxed on the $5,000 of Trust A’s net (taxable) income for the 2019 income year.
However, the anti-avoidance provision negates the tax benefit of this arrangement by imposing TBNT of $2,350 (i.e., 47% of $5,000) on Mr A (in his capacity as trustee of Trust A). For completeness, it should be noted the anti-avoidance provision does not apply to Trust B (despite it engaging in a circular trust distribution by making a distribution to Trust A), as the $5,000 that it distributes to Trust A is not part of its net (taxable) income (i.e., this is excluded from its assessable income under S.102UM(2)(b)).
The application of the anti-avoidance provision is not limited to direct distributions of trust income between a closely held trust and a trustee beneficiary (as shown in the example above). It may also extend to a chain of distributions that results in the closely held trust becoming presently entitled to an amount that is reasonably attributable (whether directly or indirectly) to an amount that should have been assessable income of the trustee beneficiary (i.e., an untaxed amount).
In short, the anti-avoidance provision may apply where a closely held trust makes a distribution to a trustee beneficiary and, following a chain of distributions through one or more interposed trusts, the untaxed amount ends up being distributed back to the closely held trust (i.e., there is a circular trust distribution).