Private trusts and private companies
If you are involved in a private trust or private company, your share of the income and assets may be used to work out your rate of income support payments.
For our purposes, a private company is a company that meets at least 2 of the following 3 criteria in relation to the last financial year:
- the consolidated gross operating revenue for the financial year of the company and its subsidiaries is less than $25 million
- the consolidated gross assets at the end of the financial year of the company and its subsidiaries, are less than $12.5 million and the company and its subsidiaries have fewer than 50 employees at the end of the financial year, or
- the company came into existence since the end of the last financial year
Private trusts include:
- family trusts
- testamentary trusts, and
- fixed trusts with fewer than 50 members
They do not include:
- fixed trusts with more than 50 members
- self managed superannuation funds, or
- any public trusts, such as listed property trusts or equity trusts
A testamentary trust can be established in your will and is activated when you die.
If a testamentary trust is activated as a result of your spouse dying, you will be attributed with the assets and income of the trust if:
- you directly control the trust, or
- an associate has control and you are a potential beneficiary
If you are attributed with any portion of the assets or income of a private company or private trust, those assets and income will be treated as yours.
If you are involved in a private trust or private company, the assets and income of private companies and private trusts may be attributed to you based on:
- a control test including control via an associate, and
- a source test
The control test is used to decide who has effective control of a private company or private trust.
Although a trustee often takes care of the day to day management of a trust, effective control of a trust generally rests with a person who can:
- dismiss and appoint a trustee
- veto a trustee's decision, or
- change the trust deed
This person could be the appointer, principal or guardian, or an associate of the trustee.
The trustee of a trust may also hold some of these powers. A person may also control a trust by being able to influence the trustee to act in their favour or in some cases, the trustee could be expected to act in accordance with their wishes.
The source test may apply where a person has transferred assets or services to a company or trust.
The source test recognises that if a person transfers assets or services to a trust or company and they have not received adequate consideration in return, they generally retain some means of control.
Where a person can clearly show a genuine gift has been made and they have no ongoing involvement in the structure at all, attribution would not be made, though the gifting of those assets may need to be assessed.
When you are attributed with control of a private trust or private company, a portion of the net income of that private trust or private company will be assessed as being yours to the level of your control.
Not all expenses which may be allowed under taxation law will be allowed as a deduction to reduce the gross income. Examples of expenses which are not allowed include:
- prior year losses
- offsetting losses from unrelated businesses
- superannuation deductions above the superannuation guarantee levy amount for controllers and their associates, and
- certain capital expenses
Where private trusts or private companies lodge financial statements under the Small Business Entity Concessions, we may still disallow some of expenses that the Australian Taxation Office allows.
Read more about small business entity concessions on the Australian Taxation Office website.
When you are attributed with control of a private trust or private company, your share of the current market value of the trust or company assets will be assessed as being yours to the level of your control.
The value of your family home, if owned by a private trust or private company, is an exempt asset.
Not all liabilities may be allowed. Liabilities that are secured against exempt assets, for example your home, will not reduce the value of the other assets owned by the private trust or private company.
Noncontroller income assessment
If you are not attributed with any control of a private trust or private company, you will be assessed on any actual distributions or dividends including imputation credits made to you, for 12 months after the date of distribution.
Loans to private trusts or companies
If you have a loan to a private trust or private company, it will be assessed as a financial asset under the deeming provisions irrespective of whether you are a controller or a noncontroller. Under the deeming provisions, the outstanding balance of any type of loan will be added together with your other financial assets and then deemed.
If you relinquish control of a private trust or private company, you will be considered to have gifted the assets held by the trust or company. A 5 year deprivation period may apply. The deprived amount will be based on the market value of the deprived assets and your level of control.
We will accept a genuine resignation from a private trust or private company as having occurred where both the controller and their partner:
- relinquish all formal roles and control in respect of the trust or company
- relinquish all beneficial interest in the trust or company, and
- make a written declaration they will not exert any control over, or benefit in any way, from the trust or company
Relinquishing all formal roles and control means resigning as the appointer or trustee of a trust by amending the trust deed. For a private company, relinquishing all formal roles means relinquishing all shares and directorships.
Relinquishing all beneficial interest can be satisfied by either:
- amending the trust deed to remove you and your partner as beneficiaries of the trust, or
- creating a separate deed to renounce you and your partner's beneficial interest in the trust
A corporate trustee is where a company is the trustee of a trust. If this is the case:
- you and your partner must relinquish all shares and directorships in the company, and
- make a written declaration that you will not exert any control over, or benefit in any way from the company
We must be satisfied that you and your partner are not exerting any informal control over the trust.
Where you and your partner continue to exert informal control over the trust, it will not be accepted that control has been relinquished. For example:
- ongoing use and enjoyment of trust assets, apart from a life interest in your own home, or
- leaseback arrangements
If you are considering relinquishing control of a private trust or private company, you should contact us before taking any action to discuss the possible effect on your income support payments.
You should always seek independent advice about the possible taxation implications of relinquishing control of a trust.
There is a special concession for primary producers who wish to hand over the primary production enterprise to the next generation, while retaining the power to ensure the farm is not sold.
Read more about concessions for rural customers and primary producers.