Gifting rules for trusts and companies 043-04080000

Different rules apply to an approved Special Disability Trust (SDT). A contribution to an approved SDT may be exempt from the deprivation provisions if the total contribution amount to the SDT is below the concessional gifting cap and certain criteria are met. A separate procedure covers SDTs.

A customer who is subject to attribution of a trust or company's attributable income (that is a controller) and who receives income distributions that are lower than the amount determined by their attribution percentage, can be considered to have made a gift.

Note: different rules apply to an approved Special Disability Trust (SDT). Gifts to a SDT may be exempt from the deprivation provisions if the contributor is an immediate family member, of Age Pension age and the SDT concessional gifting cap is not used. This procedure does not cover gifting concessions for SDTs.

The customer will only have deprivation applied where the customer's and/or their partner's gift amount from trusts and companies, combined with any other gifts made by them, exceed the $10,000 allowable gift amount each income year to a maximum $30,000 disposal limit over a 5 year rolling period. Only the gift amounts in excess of the limits are assessed as an asset and deemed for a period of 5 years.

Under pre 1 January 2002 gifting rules, where a customer transferred assets to a discretionary trust, a gift was considered to have occurred as the assets of a trust were not assessed as belonging to the customer. After 5 years the gift ceased to be assessed, that is the deprivation period expired. Similarly, a gift was considered to have occurred when a customer transferred assets to a company or fixed trust and those assets were not fully assessable to the customer under the net asset rules.

From 1 January 2002, new rules were implemented for the way private companies and trusts are treated under the Income and Assets Tests. Transferring assets to trusts and companies after 1 January 2002 will not be regarded as gifting provided the assets of the trust or company are attributed 100 per cent to the customer or their partner.

Attributable stakeholder

Where:

• a customer transfers assets to an entity and they are an attributable stakeholder, or
• as a result of the transfer are subsequently attributed with a share of the income and assets,
• the deprivation provisions will not apply as long as valuable consideration has been received

Where valuable consideration has not been received, this is considered a partial gift.

Note: the attribution percentage may change upon gifting due to the application of the source test.

Non-attributable stakeholder

The deprivation provisions will apply to the full amount gifted, where:

• a customer transfers assets to an entity, and
• they are not an attributable stakeholder at the time of the transfer

If the person subsequently becomes an attributable stakeholder, then the deprivation period and amount are not changed, unless the attribution decision takes effect from the date of the disposal or earlier. If this is the case, the disposal should be reassessed and considered as a disposal of assets by an attributable stakeholder.

Other considerations

A partnered couple are considered to be 1 unit. Where assets are transferred between the members of a couple, the gifting rules do not apply.

Where the customer or their partner are less than 100 per cent controllers then a transfer of assets to the entity will result in a partial gift because they will not have received 'valuable consideration' based on their attribution percentage. For example, if the customer transferred $20,000 to an entity they were 50 per cent controller of, then gifting will apply to $20,000 x 50 per cent = $10,000. Note: if the customer and/or their partner are 100% attributable stakeholders, gifting does not apply.

One gift amount is calculated in regard to income distributions per trust, company or group of related entities for any 1 customer in respect of each financial year. The gift amount can only be calculated when final tax returns or financial statements are available. These detail the amounts and beneficiaries or shareholders of all distributions and dividends made by the organisation throughout the financial year.

The Private Company form (MOD PC) or Private Trust form (MOD PT) asks for details of any gifts made by customers to the trust or company. The answers provided in these Modules as well as documentation provided by the customer must be examined to determine if it is necessary to consider gifting.

If any of the following actions are taken, an assessment may be required to determine whether or not gifting has occurred:

• Action by the entity:
• Sale of trust or company assets not at arm's length, for example sale of real estate to a family member, sale of a business that does not include a value for goodwill
• Issue of more units or shares
• Waiver, write off, or forgiveness of debts owed to the trust or company
• Distributions to beneficiaries, unit or shareholders who have not been assessed as attributable stakeholders or genuine investors
• Distributions to stakeholders not in proportion to their asset or income attribution percentages
• Action by the customer:
• Transfer of assets or income to an entity, for example transfer of the customer's home to a trust
• Sale of assets to a trust or company for less than market value
• Transfer of units or shares in a trust or company to a family member
• Sale of trust units not at arm's length
• Forgiveness of an amount owed to the customer by the trust or company
• Resignation from a trust or company
• Gifting will not apply:
• When the distribution made by the trust or company is to a genuine investor
• For any distributions made by the trust or company prior to 1 July 2000
• Where the customer and/or partner are the only attributed stakeholders of the entity, any gift (or loan forgiven) between themselves and the entity is not deprivation. The customer should seek taxation advice before forgiving any loans, as there may be taxation implications