2. The source test
The source test, on the other hand, seeks to attribute capital invested in a trust or company with the person(s) who originally transferred assets (which can include non-tangibles, such as services), into the company or trust. If there has been no consideration paid for these assets, then there is necessarily an assumed retention of control by the transferor, unless in the case of a genuine gift.
If, after applying the above tests, a person is attributed with a share of the assets and/or income of a private trust or company, then the person’s share of the market value of the attributable assets, or the portion of net attributable income, will be assessed as being his/hers.
Strategy considerations
There are some positives and negatives when applying the attribution rules.
Negatives
Many would consider it a negative to be assessed in the first place. In addition to this, not all deductions allowed under the Tax Act will be allowed by Centrelink/DVA as a deduction to reduce income. These non-allowable deductions can include:
• prior year losses;
• losses from unrelated businesses;
• deductions caught up in the definition of reportable employer superannuation contributions (RESC); for example – salary sacrifice, and certain capital expenses.
Positives
There are some positive aspects, however. On the assets side, a principal residence owned by a family trust will not be assessable. Also, assets are net of liabilities (if those liabilities are attributable to assessable assets). If a person is deemed not to be the controller of the trust or a private company, the person will not have the market value of the assets assessed against him/her, but will be assessed on the actual distributions or dividends (including imputation credits) made by the private trust or company for 12 months after the date of distribution.
However, the strategic advantage of the attribution of private trust/company income comes from the fact that private trusts and companies are not deemed for income, as are other financial assets, such as listed shares, term deposits and managed equity trusts.
This provides for the ability to manage the amount of income that is assessed to the age pension applicant. It can also have a positive outcome in planning for aged care as the use of a private trust may be useful in reducing the income-tested fee, with only the actual (taxable) income of the trust assessed under the income test.
The following is an extract from the Guide to Social Security Law, 4.12.7.10, which contains the general rules regarding the attribution of income to an attributable stakeholder:
Attribution of the income of a private trust or private company.
The basic approach for the attribution of the income (section 8(1)-‘income’) of a private trust or private company is as follows:
• If the assets (1.1.A.290) of an entity are attributed to a person (the attributable stakeholder) then all of the income (adjusted net profits) generated by those assets will also be attributed to them (subject to the percentage of attribution of the assets).
• Income from the entity for an attributable stakeholder will NOT be deemed; actual income will be used and will generally be assessed on an annual basis from the income tax return.
• If the attributable stakeholder(s) choose to distribute entity capital or income to other people, the amounts distributed are to be treated as gifts by the attributable stakeholder and are subject to deprivation (1.1.D.110).
Exception: Distribution of the income of an entity to the partner of an attributable stakeholder is NOT treated as a gift of the stakeholder and is NOT subject to deprivation.
Note: An income support recipient who is an attributable stakeholder of a controlled entity can request a reassessment of their circumstances at any time.” (See Note 2.)
Therefore, in order to manage assessable income, a non-interest bearing deposit (or an insurance bond purchased by a private trust where there are no withdrawals) will generate zero assessable income for tax purposes. This means that while the value of the insurance bond will continue to be assessed under the assets test in full, there will be no assessable income, thus resulting in minimising the assessable income of the trust.
Of course, the benefits of the treatment of income from a private trust or company as opposed to the deemed income from financial assets needs to be weighed up against the reporting and other associated costs of running a separate investment structure.
But what about the Mum and Dad with a loan to a defunct company, or the elderly parents who are trustees or minor beneficiaries of their children’s family trust?
Other options
According to Centrelink, any person who has a loan to a private trust or company will be assessed under the deeming provisions, irrespective of whether he/she is a controller or non-controller. On the surface it sounds fairly black and white. This is, however, where the “Special Assessments” area of Centrelink earns its stripes. In the case where a private company has a debt to the directors that will never be repaid (because the business that the company ran ceased to be a going concern a long time ago), it is worth going the extra step to push past the initial bureaucracy and appeal the decision. I have seen instances like this where the loan was ignored, pending the winding-up of the company, without the amount being seen as a gift and deemed for a period of five years (as might normally happen).
