Lending and/or gifting between beneficiaries in a discretionary family trust

My question is regarding beneficiaries of a family trust that want to gift or lend funds to each other following trust income distribution - in a manner that is legal and does not incur ATO scrutiny over income splitting.

Example
Joseph is trustee of his family trust which has his wife Mary and adult son Tom as beneficiaries. Both Mary and Tom are currently unemployed. At the end of the tax year the trust distributes income of 10k each to Joseph, Mary and Tom. Tom sees that Joseph is in need of funds and decides to gift/lend the 10k he received from the trust to Joseph.

In what legal / ATO-permissible manner can Tom do this?

Apologies if this has been covered before (I tried searching the forum but didn't have any luck). Many thanks in advance.

 

As long as each beneficiary declares their 10k as income to the ato, the later lend/gifting is a totally separate issue and not something that would need to be declared to the ato.

 

People can make gifts to each other

 

But then what's stopping the family from doing this on an ongoing annual basis? Are there additional documents to make it clear the funds are a gift each year such that there is no presumption of tax avoidance

 

Whats the section that says after tax gifts are considered income tax avoidance?

 

Gifting should be documented by a deed.

Also have to consider s100A itaa36

 

If a distribution is made by a family trust to A, distribution is paid in cash to A, A declares everything in their tax return, pays tax.

A then gifts the after tax amount to B.

Does s100A apply to the gift? Or does it only apply if the distribution is not paid out in cash, so it requires a change in the accounts of the trust as to who UPE is to?

 

Well say Joseph earns 200k so is in 45% tax bracket, Tom is unemployed so 0%. Tom getting 10k from the Trust then gifting it to Joseph is more tax effective than Joseph getting 10k which is then taxed at 45%.

Although cash gifts between family members would typically be beyond the jurisdiction of the ATO, however would this scenario trigger any taxation issues?

 

You seem to be suggesting that the trust pays the $10k allocated to Joseph to Tom with Joseph declaring no trust income and Tom $20k to the ato. This would only be possible if the trust deed allowed discretion to the trustee in the makeup of the distribution.

 

S100A was inserted to try to prevent someone other than the beneficiary from benefitting from the income

 

Yes it could

 

Also I should clarify in the example above everyone (Joseph, Tom and Mary) ends up with some proportion of the trust income post the tax year. It's just that Tom then decides (after getting paid the trust income, declaring it to the ATO etc.) that he will then gift all the after tax to Joseph.

Thanks Terry, does a gift deed then circumvent any tax issues?

 

It helps but s100A could still be applied.

 

I think you are getting things out of kilter. From what you write it there are two things happening but they are not connected.

1. The trust pays out its income to the beneficiaries. The beneficiaries then declare the income and pay tax on the income. Once the income is received then it just becomes part of the recipient's assets mingled with cash from other sources - jobs, investment income etc. It isn't able to be separated out.

2. One beneficiary gifts/lends another beneficiary some money. This has nothing to do with the trust income and the only connection possible it that the quantum of the gift/loan is the same or a portion of the trust income received. A gift deed will have no effect on the donors tax position unless the recipient was a charity or some other deductible expense and this is impossible if it is another person?!. Similarly there will be no effect taxwise on the recipient. If you give/lend your partner or a fiend $1,000 then there is no effect on either persons tax liabilities.

All a gift deed will achieve is to ensure that the donor cannot later ask for the money back.

 

Thanks guys you've all been very helpful. Something for Joseph and Mary to think about

 

Legal capacity of the parties?
The deed of gifting isnt a 100% certainty and its possible that the beneficiary may commence legal action against the tustee and the other person arguing there was coercion or other influence to deny them their beneficial rights. And then s100A....

A round robin of payments to discharge the apparent obligation may be more reliable

 

Thanks for your reponse Paul.

Okay let's just assume that no beneficiary is being coerced and litigation will not be one of the outcomes.

Could you please elaborate?

 

Trustee pays X $1,000 income distribution
X pays Y $1,000