Family trust stance upheld

By Vernon Small

political reporter

The Inland Revenue Department is defending its approach to taxing family trusts, despite claims by senior tax accountants that it is operating against the will of Parliament.

KPMG tax partner Craig Elliffe said a law passed this year established that after May 20 family trusts would be assessed for tax on payouts made to anyone other than a person for whom "natural love and affection" existed or a charitable organisation.

"Where they have mucked up the rules is [when] you make a distribution to someone other than an individual for whom you have natural love and affection or a charity, and you have previously made a debt forgiveness between the trust and the creditor."

This applied even if the debt forgiven took place before the accrual rules adopted in 1986. In that case, the payment would be assessable income to the trust. "So it is actually hugely retrospective legislation in terms of its impact."

It is common for a family trust to be set up with money or assets lent to it. The debt is then forgiven over time to avoid gift duty.

Mr Elliffe said there were hundreds of thousands of trusts that could be affected and potentially millions of dollars of tax at risk, possibly from trustees and beneficiaries. The only solution was a law change, but that was unlikely this year.

But IRD's general manager of policy advice, Robin Oliver, said no one was worse off because of the law change and IRD was reflecting the will of Parliament.

"The view was if you actually had forgiven a loan in the past, that should have been taxable. Under the new rules you could avoid that by simply making sure you didn't give a distribution to a non-family member. So you can avoid any tax problems. You are not in a worse position, but a better position."

He said where a loan had been forgiven trustees needed to be careful.

"It seems from our point of view it is a reasonable compromise. The position that these family trusts are in is that they can avoid any tax liability, whereas previously they couldn't.

"They avoid it by simply making sure the company doesn't get a distribution. Give it to the family and then give it to the company in the cases where there has been debt forgiveness," he said.

The chair of Parliament's finance and expenditure committee, Peter Dunne, said it was a concern there was still uncertainty over the changes.

He was not convinced another law change was needed, but IRD should more clearly explain the rules.