188.8.131.52 Resignations from a Controlled Private Trust or Controlled Private Company On or After 01/01/2002
Date of effect
This topic has effect to controlled private trusts and controlled private companies from 1 January 2002.
This topic contains the following information:
- general provisions relating to resignations from a private trust or private company on or after 1 January 2002,
- assessment of income upon resignation,
- when a resignation is accepted as genuine, and
- mortgages and resignations.
An attributable stakeholder who resigns control of a private trust or private company ON or AFTER 1 January 2002 will be treated in a manner comparable to other people who gift or relinquish assets. That is, the deprivation (1.1.D.110) provisions will apply from the date of resignation (subject to the percentage of the assets of the structure attributed to the stakeholder).
Example: Colin is the sole attributable stakeholder of a private family trust with assets of $300,000. On 2 April 2002 he resigns from the trust. Colin's children become the new attributable stakeholders. Colin is subject to the deprivation provisions of the SSAct for the assets he has 'gifted' to his children ($300,000).
Assessment of income upon resignation
An attributable stakeholder who receives a final distribution on resigning control of an entity on or after 1 January 2002 will not have any attributable income or distribution income from this final distribution assessed against them.
If prior to resignation an attributable stakeholder receives an income distribution it continues to be assessed for 12 months from the date of receipt.
Explanation: Once a non-remunerative lump sum (such as a distribution from a trust), has been apportioned over 12 months, it must continue to be maintained for the full 12 months.
Act reference: SSAct section 1208M Individual ceases to be an attributable stakeholder of a company or trust, section 1073 Certain amounts taken to be received over 12 months
A genuine resignation will be accepted as having occurred where both the attributable stakeholder and their partner:
- relinquish ALL formal roles and control in respect of the entity, AND
- if applicable, relinquish their shares and directorships, AND
- relinquish all beneficial interest i.e. they cannot be income or asset beneficiaries of the entity. This could be evidenced by an alteration to the trust deed stipulating that they could not be an income or asset beneficiary or by creating a separate deed to renounce the beneficial interest of the person and their partner in the trust, AND
- make a written declaration that they will not exert any control over, or benefit in any way from, the entity.
This requirement can be satisfied in one of 2 ways:
- by amending the trust deed to remove the person and their partner as beneficiaries of the trust, or
- by creating a separate deed to renounce the beneficial interest of the person and their partner in the trust. (A separate deed for each person is required.)
Acceptable wording for a deed to relinquish beneficial interest is as follows:
'I (name of beneficiary) renounce my interest in the (name of trust) and my entitlement to any further benefits from the (name of trust), whether those benefits be income or capital or of any other nature. I request that the trustee of the (name of trust) recognise my request that I receive no further benefits from the (name of trust) and furthermore recognise this renunciation of my beneficial interest in the (name of trust) as irrevocable.'
Signed sealed and delivered
<< Signature of beneficiary >>
<< Signature of trustee/s >>, and
<< Signature of witnesses for both the beneficiary and the trustee/s. >>
Note: Taxation Determination TD 2001/26, which was published in the Government Gazette on 31 October 2001, indicates that where the latter method of relinquishing all beneficial interest is adopted, i.e. by renouncing the beneficial interest of the person and their partner, there may not be Capital Gains Tax consequences. It is very important that the income support recipient seeks independent advice about the possible taxation implications of relinquishing control of a trust.
Exception: The resigning attributable stakeholder/s will also be able to retain a life interest in their principal residence if the residence is part of the assets of the trust or company.
Note: If new attributable stakeholders are associates, the associate rule will NOT apply.
Explanation: The 'old' attributable stakeholders will not be held to be in control simply by operation of the associate rule.
Example 1: George is the sole attributable stakeholder of a private trust with assets worth $550,000, which includes his principal residence valued at $120,000. In March 2005 George decided to retire and resigns from the trust. He transfers appointorship to his child Jerry. George's deprivation amount is $420,000 ($550,000 LESS $120,000 principal residence LESS $10,000 free area). George serves a 5-year deprivation period from his date of resignation. As George retains a life interest in his home the value of the principal residence is taken off the deprivation amount.
Example 2: Barry and Sue, members of the same couple, are attributed with 75% of the assets and income of a private company. The total value of the company is $400,000. Barry and Sue's attributable asset amount is $300,000 (75%). Barry and Sue decide to resign control of the company with the third stakeholder gaining 100% control. Barry and Sue's deprivation amount is $290,000 ($300,000 LESS $10,000 free area). They serve a 5-year deprivation period from their date of resignation.
Mortgages & resignations
If a resigning stakeholder holds a mortgage over an asset of the entity, then the issue of whether the stakeholder has genuinely ceded control of the entity must be investigated. The mortgage documents should be examined to ascertain the nature of the mortgage. Issues to examine would be:
- Does the mortgage contain an 'at call' facility?
- Does the mortgagee (the current attributable stakeholder) have the facility to repay the mortgage on demand?
- Explanation: Does the mortgagee have other entity debts that reduce their ability to repay the mortgage on demand?
- Is the mortgage of sufficient size to allow the resigning stakeholder to continue to exercise informal control?
Example: John and Molly control a family trust, which owns and operates the family farm worth $600,000. They decide to retire and claim Age. Before doing so, they formalise a mortgage which in effect means that the trust owes John and Molly $250,000. This mortgage is in addition to the existing $300,000 mortgage in favour of the bank. Clearly as a result of this position they are able to exert control (informal) over the entity when they transfer the formal control of the trust to their child Richard. In this situation John and Molly would be regarded as controllers of the trust and have 100% attribution applied.