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

Discussion in 'Accounting & Tax' started by Terry_w, 15th Jun, 2019.

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  1. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    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.
     
    Last edited: 15th Jun, 2019
  2. SatayKing

    SatayKing Well-Known Member

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    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. :eek:
     
  3. money

    money Well-Known Member

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    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.
     
  4. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    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.
     
  5. Mike A

    Mike A Well-Known Member

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    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.
     
  6. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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

    Mike A Well-Known Member

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    you got it
     
  8. Scott No Mates

    Scott No Mates Well-Known Member

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    AKA the bank of mum and dad.