Tax Tip 213: Can a Trust distribute to a private school so you can save tax?

A school could be a beneficiary of a Discretionary Trust if it meets the definition of beneficiary under the deed. This means it could receive income from the trust.


Many people think this is a way to save tax – have the trustee pay the school fees with pre-tax income. The school is a tax advantaged entity and would likely be exempt from paying tax on the distribution. Good all round, except for the ATO.

Example

Homer’s son Bart is in a private high school and the fees are $30,000 p.a.

To pay this Homer needs to earn about $50,000, pay $20,000 in tax and then pay the school.

Homer hatches an evil plan one night. He will get the trustee to make an income distribution to the school as a beneficiary of the trust and pay it directly. This will save Homer $20,000 per year.


But, bad news – if the trust pays money to the school on behalf of the beneficiary it will be either the beneficiary that is taxed or the trustee that is taxed at the top marginal tax rate because of s100A ITAA97. This is because it is essentially a reimbursement agreement because the school is providing a benefit to the beneficiary in return for the income.

 

Ah the benefits of convincing the dear, departed grandparents to set up a DTT for the benefit of their beneficiaries. And then insisting the GP's do the right thing to bring it into effect.

 

In your example above isn't the private school the beneficiary of the trust? So that means the private school will be taxed and have to pay the ATO? How would the school be providing a benefit to the beneficiary when the school is the beneficiary? This above quote has me confused.

 

The school is a tax exempt entity likely no tax
The school is providing a benefit in return for the income so it is considered a reimbursement agreement.

 

very few accountants are even aware of what a Section 100A reimbursement arrangement is.

Speaking with a barrister recently the ATO argued in one matter that a distribution to the mother was subject to Section 100A as she immediately gave the funds (after tax) back to the son. Currently they are arguing it is part of a normal family arrangement.

 

There is an exemption for ordinary family transactions, but i guess their argument was that this is not ordinary!

 

you got it

 

AKA the bank of mum and dad.

 

I think many more are aware now!

 

funny how 2 years ago i posted this and all of a sudden the profession is in an uproar.

 

Its bizarre how long standing tax laws suddenly get attention when the ATO republishes its views.

I am still waiting for the draft property consultation to see a range of rulings issued. Watch all the people suddenly surprised when it adopts the view isolated profit making sale isnt a CGT event and that GST applies to a supply by a enterprise. And that land banking demonstrates intentions to produce profits perhaps even in cases where rental income has been produced while the owner waits it out. None of which is new.

 

There is been no change in the law in this area either. Prob shows how many were abusing the sydtem

 

ive always advised against the 416 dollars to the kids. creates a myriad of issues for such a tiny benefit.

 

I just picked up a client who had been doing this thinking they were clever. The kids each also had VAS ETFs each going back and hadnt lodged as the parents said its under $416 each...They didnt could the trust $416 as well ? Each had income closer to $750 for thre + years. And thats how the ATO asked for them to review if they should lodge returns for the children. The kids share of income was credited to the parents incl the VAS !!!! The parents said...oh we are their guardians. Breach of trust to start with.

 

Not with minor children. The trustee can pay the guardian or the parents of the minors who can use the funds for expenses relating to the children. This shouldn't have any s100A issues either. But grossed up income exceeding $416 will be taxed at penalty rates.

 

problem with distributing to the kids is if taxable income of the trust is amended. creates potential adverse tax issues. to save a measily few hundred bucks you create all other sorts of issues.

 

Yes, but this will depend on the wording of the resolutions - I haven't watched that webiinar from vincent yet, but did he cover this?

 

yes he did those deeds which word it to change the resolutions during audit are effectively useless.

 

Family Trust deed states " to directly or indirectly provide financial assistance to varying degrees for the maintenance, education and benefit in life of any one or more of the Beneficiaries; "

• What form of financial assistance with regard to education can the trust provide to Children (beneficiaries) - preschool to university?

• Does education also include HECS debt, travel, cost of living away from home, uniforms, textbooks, electrical devices etc?

Keen to read your (or your client's) experiences about family trust assisting education - loans, education bonds, direct tuition expenses, scholarship funds etc.

 

If 'education' is not defined it takes its ordinary meaning. That could include travel to study, hecs, etc.