In recent years, the status of family trusts as the generally preferred vehicle for business owners and private investors alike has been under attack from many sources. In particular, the status of family trusts (and for that matter, hybrid trusts) as an effective investment structure from both tax planning and asset protection perspectives has faced constant threats.

Around 10 years ago, Treasury pushed to have trusts taxed as separate entities (the ‘entity taxation regime’) and draft legislation to implement the change was prepared - for some time this failed initiative was seen as the high water mark of the attack on trusts. The entity taxation regime was ultimately rejected by the then government, due largely to sustained and unified lobbying from the accounting and legal professions and the business community as a whole.

Since then, some of the challenges to the effectiveness of the trust structure that have taken place have included:

• amendments to the bankruptcy legislation to widen the situations in which trust assets might be exposed in the event of an individual associated with the trust becoming bankrupt
  
  
• continuing attempts (to date unsuccessfully) by trustees in bankruptcy to argue that the power of appointment over trust assets is of itself an asset of a bankrupt capable of being exercised by the trustee in bankruptcy
  
  
• numerous changes to the application of the Division 7A regime to capture and tax many arrangements where unpaid present entitlements had arisen following a distribution from a discretionary trust
  
  
• the Richstar decision which calls into question the level of asset protection a discretionary trust can provide if one of the core people involved in the trust individually becomes bankrupt. The Richstar decision took on further significance when the judge who issued the decision, Justice French, subsequently became Chief Justice of the High Court
  
  
• various family law cases which have continued to significantly undermine the trust structure where there is a personal relationship breakdown - perhaps the most high profile of these cases was the High Court decision at the end of 2009 in Kennon v Spry
  
  
• the Government’s decision to abolish the capital gains tax exemption for trust cloning in late 2008, which stripped the owners of many family trusts of the ability to restructure their trusts to achieve asset protection or succession planning objectives, and
  
  
• the Bamford High Court decision and recent Decision Impact Statement released by the Tax Office in relation to the issues associated with making effective trust distributions.

While all of the above issues have required (in some instances significant) additional planning, family trusts have often still been the structure of choice for many business owners and private investors, for a combination of reasons.

The most recent issue posing a threat to the family trust structure is the Tax Office’s now ‘clarified’ position on unpaid present entitlements. At this stage, the issue looks likely to cause more concerns than any of the other changes outlined above, particularly since some parts of the draft ruling will have retrospective effect.

As has been extremely well publicised, the concept of a trust continuing to reinvest funds where distributions have been made to a corporate entity (to cap the tax rate at 30%) is standard for most trusts and is a strategy that has been used across Australia for many years.

For many trusts it appears for the moment there will be no choice other than to abide by the interpretation announced by the Tax Office and perhaps hope that in a federal election there is a political solution, as there was when entity taxation was abandoned.

For further assistance or enquiries please contact:

Matthew Burgess on 07 3233 8918
Patrick Ellwood on 07 3233 8870.