BUDGET 08/09: Government reverses family trust concessions

By: Graham Gardiner

The Federal Government has changed the definition of ‘family’ in the family trust election rules, a move that will reduce

The Federal Government has changed the definition of ‘family’ in the family trust election rules, a move that will reduce the ability to nominate beneficiaries to a trust, according to Deloitte Growth Solutions Tax Partner Spyros Kotsopoulos.

Effective July 1, 2008, the family trust can only distribute to the children and grandchildren of the nominated individual and the children of the individual’s siblings, he says.

This revokes legislative changes made by the previous government, effective July 1, 2007, that were aimed at increasing the effectiveness and succession needs of family trusts, namely:

  • Allowing a once-off variation to the test individual nominated in a family trust election
  • Broadening of the definition of the family group to include lineal descendants of the test individual, widows/widowers of group members and former step-children of group members.

The Rudd Government has predicated that the reversal of the former Government’s amendments will save $24 million over four years.

Family trusts that have appointed inappropriate test individuals have only to June 30, 2008 to take advantage of the current legislation to address possible tax and estate planning issues.

While the Budget announcement has confirmed that the prior family trust concessions will be revoked, the Government will include a provision for a one-off variation to the test individual of the family trust following a marriage breakdown. This concession may be a key point in estate planning following marriage dissolution.

"The limiting of beneficiaries means choosing the ‘nominated’ individual becomes critical and is likely to cause great distress to families trying to nominate one sibling over another," Kotsopoulos.

"Income accumulated in old family trusts can no longer be passed through to great grandchildren without suffering an additional tax impost.

"Family groups may choose to wind up the trust and suffer the tax consequences if they wish to pass on benefits beyond the restricted family group."

Any distributions outside the family group are subject to family trust distributions tax and who is in or outside the family group is determined by reference to a nominated individual.

In 2007 the previous Government extended the family group to include lineal descendants of a nephew, niece or child of the nominated individual or the individual’s spouse.

Subscribe to our newsletter

Sign up to receive the ABC e-newsletter, digital magazine and other offers we choose to share with you straight to your inbox

You can also follow our updates by liking us on Facebook