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The recent ATO crackdown on trusts will no doubt have some business owners (and even some advisors) asking themselves the question: Is this structure for business purposes still worth it?

To recap, trust distributions have been under the ATO microscope in recent years. The latest ATO crackdown was in February 2022 when it updated its guidance around trust distributions especially those made to adult children, corporate beneficiaries and entities that are carrying losses. Depending on the structure of these arrangements, the ATO may potentially take an unfavourable view on what were previously understood to be legitimate distribution arrangements.

The ATO is chiefly targeting arrangements under section 100A of the Tax Act; specifically, where trust distributions are made to a low-rate tax beneficiary but the real benefit of the distribution is transferred or paid to another beneficiary, usually with a higher tax rate.In this regard, the ATO’s Taxpayer Alert illustrates how section 100A can apply to the quite common scenario where a parent benefits from a trust distribution to their adult children. Despite this new ATO interpretation and the wider crackdown on trusts in recent years, the choice of a trust as a business structure still has a range of benefits including:

■Asset protection– Limited liability is possible if a corporate trustee is appointed. Usually, when a person owes money and cannot meet their payment requirements, the creditor can access the person’s personal assets to recoup the debt payable. However if a trust is in place, there is no access to beneficiary assets 50% CGT discount– A family trust receives a 50% discount on capital gains tax for profits made from selling any assets the trust has held for more than 12 months. This contrasts with a company structure. Companies cannot access the 50% CGT discount.

■Tax planning– Income that sits in the family trust that is not distributed by year-end is taxed at the highest income tax rate. However, any trust income distributed to the beneficiaries is taxed at the income tax rate of the beneficiary who receives the distribution. The way to definitely get around the ATO’s aforementioned section 100A crack down is to ensure the distributed money actually goes to the nominated beneficiary and is enjoyed by the beneficiary rather than another taxpayer

■Carry-forward losses– A trust does not distribute losses to beneficiaries. This means the beneficiaries will not be called upon to contribute money to the trust to meet any loss. Instead, losses from each year can be carried forward to the following year, subject to certain conditions being met.

Common mistakes made by family trusts that will attract the ATO’s attention include:

• Purported distributions to tax-advantaged organisations, such as charities, that are not beneficiaries;
• The trustee failing to make year-end trust distributions until after June 30;
• The trustee incorrectly calculating trust income, or mischaracterising income and gains; and
• Family trust election not being made in time or failing to properly specify the beneficiary, resulting in tax benefits going outside the family group.

This only a short guide to possible issues that may arise regarding Trust – please contact us for a more tailored approach to your specific needs.

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T: +61 3 9550 6900 E:admin@dekretser.com.au

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Repairs and maintenance

The cost of repairs and maintenance may be deductible in full in the year you incur them if both –
•the expense directly relates to wear and tear or other damage that occurred while renting out the property
•the property either –
– continues to be rented on an ongoing basis
– remains available for rent, but there’s a short time when the property is unoccupied (for example, where unseasonable weather causes cancellations of bookings or all reasonable efforts to attract tenants were unsuccessful).

Repairs
Generally, repairs must relate directly to wear and tear or other damage that occurred while renting out the property and can be claimed in full in the same year you incurred the expense.
Examples of repairs include:
•replacing broken windows
•repairing electrical appliances or machinery
•replacing part of the guttering damaged in a storm
•replacing part of a fence damaged by a falling tree branch.

Maintenance
Maintenance generally involves keeping your property in a tenantable condition. It includes work to prevent deterioration or to fix existing deterioration.
Examples of maintenance include:
•repainting faded or damaged interior walls
•oiling, brushing or cleaning something that is otherwise in good working condition (for example, oiling a deck or cleaning a swimming pool)
•maintaining plumbing.

Capital expenditure that may be claimable over time.

Capital allowances
Depreciating assets are items that can be described as plant, which don’t form part of the premises. These items are usually:
•separately identifiable
•not likely to be permanent and expected to be replaced within a relatively short period
•not part of the structure.

When claiming a deduction for decline in value for each asset, you can choose to use either:
•the effective life the Commissioner has determined for these types of assets
•your own reasonable estimate of its effective life.

Where you estimate an asset’s effective life, you must keep records to show how you worked it out.
Examples of assets decline in value include:
•floating timber flooring
•carpets
•curtains
•appliances like a washing machine or fridge
•furniture.

Capital works
Capital works describes certain kinds of construction expenditure used to produce income. The rate of deduction for these expenses is generally 2.5% per year for 40 years following construction.

Capital works include:
•building construction costs
•the cost of altering a building
•major renovations to a room
•adding a fence
•building extensions such as garages or patios
•adding structural improvements like a driveway or retaining wall

This only a short guide to possible gains – please contact us for a more tailored approach to your specific needs.

To stay and informed and connected, follow us on LinkedIn

Should you need assistance, please do not hesitate to contact us.
T: +61 3 9550 6900 E:admin@dekretser.com.au