Trust and Family Foreign Income

[ryan4321]

Hello Guys n Gals,

I am a newly formed family trust with the trustee as the company.

My question is...
My father receives a pension from the US Navy in USD which at the current exchange rate equates to about 70000AUD. He does not receive any Australian income. This is not taxed by the ATO and he doesn't claim this 70K on his returns. If i distribute money to him to pay less tax will his foreign income be ignored? Or will the ATO catch on to this?

I have asked my accountant this question but she seems not to really know the answer. Thought I'd ask a second opinion.

Thanks in advance for any replys
Sincerely
Ryan

[McAdam Siemon]

Hi Ryan,

Tough subject with may factors to consider.

I would suggets you get specific advice on this subject as foreign income can be tricky.

I would also suggest if there is any doubt at all you get a private tax ruling from the ATO. You can apply for these online and the outcome can be relied on for tax purposes.

Simply due to the fact that currently the pension is not taxed in AUS when your father receives it would indicate to me that it would probably not be taxed if you further distributed income to him. There is a double tax agreement in place with AUS and the US which I think would cancel this income out of his AUS taxable income.

If you are going to be distributing income to your father for tax purposes make sure you consider PSI rules and also try and keep down the beneficiary loans to reduce liability. Try a round robin of cheques.

Good luck and I hope this helps a bit.

Sam

Please note this is general advice only, you must seek professional advice prior to making any deciaions. McAdam Siemon do not claim any responsibility for decisions based on the general advise offered above.

[ryan4321]

Thanks a million for your response.

I contacted the ATO and they said if it is taxed in the US (which it is) then it will not be included in his income. We can then distribute money to him as if he is earning nothing (which he isn't). Woo Hoo!

What do you mean by 'keep down beneficiary loans to reduce liability'?

Also why do I need to consider the PSI rules. Don't they only apply to contractors/people doing work directly for the business?

Sincerely
Ryan

[McAdam Siemon]

Hi Ryan,

The PSI rules may relate if the income in your trust is derived solely from your personal effort etc (have a look on the ATO website for the rules). You did not say what you did or how your business operated so just wanted to make sure you (and your accountant) were aware of this provision. If the PSI rules apply it does not matter who you try and distribute the trust profit to, the ATO will deem it income to you and tax it in your name.

The problem with distributing to related and non related parties from a trust for tax purposes is that it gives them a beneficial entitlement to what ever has been distributed to them. Unless the profits are paid out in cash each year a beneficiary loan will be created in the trust, the beneficiary is entitled to draw/request this money at any time. For example: You distribute $30,000 every year for 3 years to your father. You dont actually pay any money to your father as you are only doing it for tax purposes and need the profits to stay in the trust to run and grow it. After 3 years the your father has a beneficiary loan in the trust of $90,000 which he is fully entitled to and can legally draw at any time. Now because you are family there is probably no problem with this as he understands that he is helpoing you out for tax and would never want the money. However, what happens if your father passes away (not a nice thought I know but something you need to think about)?? His estate will wind up all of his affairs and collect/sell all of his assets for distribution as per his will and wishes. The estate will ask for the loan balance to be paid back to your fathers estate and it will be distributed as per his will. See the problem that arises??

You need to speak to your accountant about strategies to reduce these loans.

Thanks Ryan hope this helps

Sam

Please note this is general advice only, you must seek professional advice prior to making any deciaions. McAdam Siemon do not claim any responsibility/liability for decisions made based on the general advise offered above.

[ryan4321]

Thank you very much for the help.

It's all clear to me now.

We are actually manufacturing cosmetics and selling them through our website. So we should be ok with regards to PSI. I will mention this to my accountant also (who hasn't advised me about this stuff). My sister and I are sole benificiaries to my fathers estate so I'll have to just mention this to my sister if one day (heaven forbid) something happens to the old man :-)

Sincerely
Ryan