Trusts and companies - resigning control and gifting 043-04080030

On 1 January 2002, new rules were implemented for the way private companies and trusts are treated under the Income and Assets Tests.

A customer who is a controller of a private trust or private company and who relinquishes control of the trust or company after 1 April 2002 will deprive themselves of an assessable asset and a five-year deprivation period will apply.

The deprivation provisions will apply even if the customer previously served a deprivation period arising from the original gift of assets to the trust.

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.

Under pre 1 January 2002 gifting rules, where a customer transferred assets to a discretionary trust, a gift was generally considered to have occurred as the assets of a trust were not usually assessed as belonging to the customer. Similarly, a gift was generally 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.

A customer who was a controller of a private trust or private company who surrendered control of the trust or company prior to 1 April 2002 would have had any possible deprivation assessed under the rules in force prior to 1 January 2002.

This concession was announced by the Minister for Family and Community Services on 20 December 2001. The original date for surrender of control was 31 December 2001 but a Ministerial extension was granted so customers had an extra three months to surrender control. This change relates only to customers surrendering control of private trusts or private companies, and does not affect the implementation of the new trust and company rules brought into force on 1 January 2002.

With the introduction of the new rules, assets transferred to trusts and companies after 1 January 2002 will not be regarded as having been given away under the gifting rules provided the assets are attributed to the customer or their partner.

Individual customers can only gift $10,000 in any one financial year and $30,000 over five financial years commencing from 1 July 2002. Gifts made before 1 July 2002 will continue to be assessed under the $10,000 per pension or allowance year provisions.

Note: a partnered couple are considered to be one unit. Where assets are transferred between the members of a couple, the gifting rules do not apply. If the couple separates, neither of the customers' deprivation determination of 1 January 2002 will be reassessed.

Where assets are transferred to shareholders upon wind up:

• Under the Trusts and Companies rules that took effect from 1 January 2002, it is possible for a customer to be attributed with 100% of a private company (or unit trust), even though that customer may not own all the company shares (or unit trusts)
• This means that there may be a discrepancy between the customer's attribution percentage of a company, and the actual legal entitlement to the company's assets on windup of a company

Corporation law governs the distributions of company assets on the windup of a private company. This will generally provide for all company shareholders (depending on the classes of shares issued) to receive the assets of a company upon its termination.

Where a 100% attributable stakeholder of a company does not own all the company shares, and winds the company up, the customer would be obliged under Corporations law to distribute the company assets (or proceeds from their sale) to all company shareholders (provided the shares owned were of a class that entitled the holder to a share of the company capital on wind up). This will mean that the 100% attributable stakeholder of the company will not receive all the company proceeds they had previously been attributed with, and therefore the company controller's assessable assets will be less as a direct result of the company's winding up.

This has given rise to a suggestion that the deprivation provisions would be invoked if a company controller allowed a company they controlled to be wound up and in the process distributions were made to minority shareholders. This is because on or after 1 July 2000, all distributions of capital or profits to shareholders in a company and all distributions to a beneficiary of a trust are counted as disposals of company or trust assets (SSA subsections 1208L(8) and (9)).

If the above approach were to apply, customers with a controlling interest in private companies (while at the same time not owning 100% of the company shares) would, by simply complying with their legal obligations, be assessed with gifting if they wound up a company with a net surplus of assets.

In the light of the above, where a customer who is an attributable stakeholder in a company or unit trust in which others have a clearly identifiable legal interest, winds that trust or company up, no deprivation will be assessed against the controller if the non-attributable stakeholders receive only the share of the company or trust assets they would be entitled to under law.

The above determination is arrived at under paragraph 1208L(3)(a) of the Social Security Act 1991, which provides that "The Secretary may, by writing … determine that the disposal of a specified asset is exempt from subsection (1)".

Where distributions are made to non-controllers on the termination of a discretionary trust, each case will have to be assessed on its merits. Legal advice may need to be sought.

The above treatment would not apply where customers rearrange their financial affairs in such a way as to transfer others assets in which they currently have a legal or equitable interest, and at the same time or shortly thereafter wind up a company or terminate a trust with the result that they would avoid application of the deprivation provisions.

For example, a customer who owns 100% of the shares of a private company and is attributed with 100% control of that company, passes 40% of his shares to an adult child while retaining the other 60% of the shares and complete control of the company. In other words no deprivation is incurred in this transaction. Shortly thereafter the company controller winds up the company and distributes 40% of the company assets to the child. While the customer would be observing Corporations law in transferring 40% of the company assets to their child, it is reasonably clear in this situation that the customer was seeking to divest themselves of assets while avoiding the social security deprivation provisions. In this case, subject to any countervailing factors, the assessor would not exercise the discretion under paragraph 1208L(3)(a) of the Social Security Act 1991, to "... determine that the disposal of a specified asset is exempt from subsection (1)".

Staff should also be aware of the existence of the anti-avoidance provisions in section 1209D of the Act, which can be applied in circumstances where customers seek to avoid the application of the Trusts and Companies rules.

Where there is an entity with a minority shareholder or unit holder, then they would have certain rights to capital upon windup, even when they have been attributed with nil assets during the time the entity was trading.

If they do not receive assets in line with those capital rights then deprivation should be assessed.