If you have a family trust there are two recent major (very major) things that have happened that will affect the way they will be taxed in the future.

The first is the announcement in the Budget that trust income will now be taxed to the trust at a minimum rate of 30% – regardless of how it is ultimately distributed to beneficiaries. 

However, under the proposed measures, individual beneficiaries to whom that trust income is later distributed will get a credit for the tax paid by the trust – to prevent double  taxation. But a credit will not be available where this trust income is distributed to a corporate beneficiary.

These measures are due to start on 1 July 2028 – but no doubt will be subject to tremendous scrutiny in the meantime before any final legislation is passed.

Nevertheless,  it is never too early to start looking at things and making some plans.

The other major thing that happened that affects family trust was a decision of the High Court in Bendel’s case. And that decision applies immediately.

In that case the High Court ruled that where a corporate beneficiary of a trust is made entitled to trust income, but this income is not paid over to them, then the ATO cannot say that this is a taxable dividend paid back to the trust from the company. 

Rather, in this case, where the income is  “set aside” for the corporate beneficiary and retained by the trust (ie where an “unpaid present entitlement” arises) there will be no income tax consequences for the trust and the ATO cannot claim that a “deemed dividend” has arisen.

However, it seems that this decision is dependent on the corporate beneficiary not calling for this debt owed to it to be paid.

Also, in the light of this case, it may be that you are entitled to an amended assessment and a refund of tax if the ATO has now werongly applied these “deemed dividend” rules in the past few years.

It should also be emphasised that the proposed Budget changes to taxing trust income will presumably make distribution of trust income to corporate beneficiaries no longer viable or tax effective (if the Budget measures  proceed in their current form).

In any event, regardless of how the Budget reforms for trust income pan out, it is the time to come and speak to us about how your family trust operates so that you can be satisfied that all bases have been covered  – and all possible impacts planned for (as far as possible). 

The proposed budget changes – when to realise a capital gain  

With the first of the Budget legislation having been introduced into Parliament, perhaps it’s time to consider more closely how they may affect you,  and what you can do about it – especially in relation to the CGT discount changes.

So, looking at the CGT discount first, if you already own an asset you won’t be denied  whether or not you sell before or after the key changeover date of 1 July 2027.

If you sell before that date, you will continue to get the full 50% CGT discount (provided you are and have been a resident of Australia for tax purposes) .

If you sell on or after that date, you will continue to get the full 50% CGT discount up to its market value on that date – and for any gain that accrues thereafter you will be subject to the indexation method of calculating your gain (and the new minimum 30% tax rate).

In short you won’t be really penalised if you own an  asset now and sell before or after that key date – you will still get the discount up to that date. 

But then  you will be subject Io the new indexation method of calculating any gain – and, more importantly, the new minimum 30% tax rate.

And that is where you may get penalised. 

Therefore, if you are looking at realising a gain on an asset (eg shares) in an income year when you have little or no other assessable income  – so that your capital gain will get taxed at less than the 30% marginal tax – then you may want to think of doing that before 1 July 2027… because after that the minimum 30% tax rate will be imposed on your “raw” capital gain. 

It’s a simple bit of planning – but invaluable (assuming in the year ending 30 June 2027 you can order things in a way to reduce your normal taxable income).

So come and have discussion with us about this – before perhaps you lose the opportunity to do something advantageous.

Again, a foreign resident cannot get a CGT exempt Home

It is important to stress that if you are a foreign resident for tax purposes when you sell a home you own in Australia, you cannot get the CGT exemption on that home – regardless of how long you lived in it, or of the fact that you may have only been a foreign resident for a short time. 

And there is no apportionment. It is an all or nothing thing.

And what’s more your capital gain will not be entitled to a full CGT 50% discount (under the current rules). Rather, you will only get an apportionment for the time you were a resident.

And to make matters worse you will be taxed on the gain at higher foreign resident tax rates.

Oh, and because the home is real property in Australia, it will be easy for the ATO to chase things up and capture the sale transaction through its data matching processes – and matching that with, say, your new foreign address.

So, its important to get things right if you are going to become a foreign resident and you intend to sell your home. And don’t forget, the time of the sale is when you make the contract of sale (ie exchange contracts) and not when you settle on the sale.

However, there are several important exceptions to this rule

The first, involve where a person has been a foreign resident for less than 6 years and they sell the home because of serious illness or a death in the immediately family (as such “life event” exceptions are strictly defined in the legislation).

There is also another important “life event” exception – and that is  where there is a marriage or relationship breakdown within 6 years of becoming a foreign resident and the CGT rollover for this relationship breakdown would be available.

But even in this case, the exception operates on a narrow basis.

It only applies if one of the spouse’s interests in the home is transferred to the other spouse and, further, this transaction would be entitled to the CGT rollover under the relevant means set out in the legislation.

However, it must be stressed that this exception does not apply if there is a marriage or relationship breakdown and the former home is sold to a 3^rd party as part of the settlement of matters. This is simply because the CGT rollover would not apply in this case, as it only applies to appropriate transfer of assets between the spouses – and not to third parties!

So, it’s a big trap to be aware of – especially in circumstances where say a separating spouse leaves the country to start a new life without yet dealing with the former matrimonial home.

If you find yourself in this type of situation, please speak to us before you head overseas – so something can be arranged before you become a foreign resident. It may be too late otherwise.

Likewise, come and speak to us if you are ensure what your residency status will become – as this is the crucial variable