Gifting rules for trusts and companies 043-04080000

If assets are sold for less than their market value this effectively reduces the asset attribution amount for the trust or company and as a result the asset attribution amount for an attributable stakeholder. The market value of the asset at the time the gifting occurred would be used to assess the amount of gifting.

For example the sale of real estate to a family member or the sale of a business that did not include a value for goodwill.

If an attributable stakeholder disposes of the assets of a trust or company and they do not receive adequate financial consideration for those assets, the deprivation rules apply based on the attribution percentage of the attributable stakeholder.

For example, Denise and Barbara are attributed with 50% each of the assets and income of a private company. They decide to sell an asset of the company to Denise's daughter. The asset is valued at $100,000, but they sell it for $25,000. Deprivation applies for the difference between the market value and the sale value of the asset of $75,000. Their individual deprivation amounts are subject to their attribution percentages.

If the issue of more units or shares reduces the income or asset attribution percentage of an attributable stakeholder who is a customer, and in turn reduces that customer's income or asset attribution amounts, gifting would need to be considered.

However, we do not normally allow dilution of control. For a genuine resignation to be accepted, the customer must transfer/sell all their shares or units. See Resigning/relinquishing control of a trust or company or beneficial interest in a trust for more information.

For example, if a partnered couple owed all 100 shares of the company, and they attributed 100% and the company then issues another 100 shares to a third party at a later date, the attribution would remain at 100% to the partnered couple.

If a trust or company is owed an amount of money this amount may be recorded on the balance sheet under the heading of assets as a loan or receivables. If the trust or company forgives part or all of these amounts the trust effectively reduces the value of its assets and in turn its asset attribution amount.

For example, if the entity is controlled by a partnered couple and the entity forgives a loan (whether in part or full) it has made to them, then there is no gifting (same assessment as per Step 5). If the couple are attributed with less than 100%, then the value of the gift will be the inverse proportion to their attribution percentage as per Step 5.

Debts, such as bad debts, written off for tax purposes would not be affected by gifting.

If a customer is owed an amount of money by the trust or company, this amount may be recorded on the balance sheet under the heading of liabilities as a loan or payables. If the customer forgives part or all of these amounts, deprivation may apply.

Where the customer or their partner are less than 100% controllers, forgiveness of their loan results in deprivation based on their percentage of attribution.

For example, Jenny is attributed with 30% of the assets and income of a family trust. On 10 July 2020, Jenny forgives her loan of $50,000 to the trust. Jenny's deprivation amount is $35,000 ($50,000 - 30% of $50,000 = $15,000). She serves a 5 year deprivation period from the date of the gift.

If customer and partner are the only attributable stakeholders, gifting does not apply.

Note: the customer should seek taxation advice before forgiving any loans, at there may be taxation implications.

Genuine Forgiveness

It is important to determine if a genuine forgiveness has occurred. For more information see Loans.

If the loan forgiveness is identified at the annual review stage, the CAO should check the income tax return (ITR) and financial statements. The forgiveness of the loan should be reflected in the entity tax return either as income and/or as a reduction of the prior year losses. The loan forgiveness must also be reflected on the balance sheet.

If the documents do not reflect the loan forgiveness, request the accountant or customer provide a letter advising how the forgiveness has been accounted for.

If the loan forgiveness is identified outside the annual review stage, set a discretionary review to follow up the next ITR and financial statements to check if the loan forgiveness is genuine. If there is no reason to doubt the loan has genuinely been forgiven, no additional review is required.

If the loan forgiveness does not appear on the next ITR and financial statements, and there is not an acceptable reason for this not appearing, code the loan back onto the record from the date it was removed.

CAO's also need to be aware that a loan may be zeroed by being converted to the equity accounts, and that this is different to loan forgiveness,

Loan forgiveness showing as income on the tax return is not assessed for income support purposes.

For example, Dan and Jan have been determined to be the only attributable stakeholders of a private trust with an attribution percentage of 50% each.

The trust has distributed a total of $20,000 for the financial year. These distributions were not allocated to either Dan or Jan but instead allocated to 4 beneficiaries who are not considered to be genuine investors.

These distributions of $20,000 are considered to be a gift of an asset by Dan and Jan.

Where a customer transfers an asset to a trust or company it will be necessary to determine if they have received adequate consideration for the transfer.

Consideration may take various forms including:

• units or shares in the trust or company that are considered a genuine investment of capital in return for equity
• a granny flat right - a right to accommodation for life
• a stake in the attributable income and/or assets of the trust or company

Where a person who is a part controller of a private trust or private company entity independently injects capital into the entity, they will be assessed with deprivation in proportion to their level of control in the entity.

For example, Jenny is attributed with 30% of the assets and income of a family trust. On 10 July 2020, Jenny gives $50,000 to the trust. Jenny's deprivation amount is $35,000 ($50,000 - (30% of $50,000 = $15,000). Jenny serves a 5 year deprivation period from the date of the gift.

A SDT allows immediate family members and certain close relatives to make provision for the future care and accommodation for their children with a severe disability. 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.

For more information, see Gifting concessions to a Special Disability Trust (SDT).