2018-19 Federal Budget Report: Private Clients and Trusts

A number of integrity measures will impact private groups and trusts.

What was announced

  • Clarifying Division 7A integrity measures
  • Denial of deductions in respect of vacant landholdings
  • Improved integrity for the taxation of testamentary trusts
  • Extending anti-avoidance rules for circular trust distributions
  • Removing luxury car tax for re-imported cars refurbished overseas

Clarifying Division 7A integrity measures

The Government will clarify the operation of Division 7A to ensure that unpaid present entitlements (UPEs) are within the scope of Division 7A. This will now legislate the ATO’s view as previously set out in Taxation Ruling TR 2010/3.

Other Division 7A amendments initially announced in last year’s Budget and originally intended to have effect from 1 July 2018 are being delayed. They will now apply with effect from 1 July 2019.
These amendments are otherwise unchanged and include:
  • Self-correction mechanisms to assist taxpayers in rectifying inadvertent Division 7A breaches;
  • New Division 7A safe harbour rules;
  • Simplified Division 7A loan requirements, including loan duration and minimum interest rates; and
  • Technical amendments to improve the integrity and operational efficiency of Division 7A.

Denial of deductions in respect of vacant landholdings

From 1 July 2019 taxpayers will not be entitled to deductions in respect of vacant landholdings where there is no genuine purpose of the taxpayer to produce assessable income. This includes a denial of a deduction of interest costs and is also designed to prevent taxpayers from land banking which denies the use of land for housing or other developments.

It will then be necessary to determine whether the non-deductible amount can be included in the cost base of the land as these amounts are not automatically included in the calculation of the cost base.  

Exceptions apply, including land being held to carry on a business, such as land used in primary production and for commercial development.

Affected taxpayers will be required to carefully consider whether their specific circumstances allow tax deductions, particularly where it is not clear whether a business is being carried on.

Improved integrity in family group dealings

Testamentary trusts provide benefits for children as recipients of a deceased estate by providing concessional tax rates on the distributed income. That is, children are taxed at adult marginal tax rates rather than punitive minor tax rates.

From 1 July 2019 the concessional tax treatment will apply only in respect of assets of the deceased estate, or proceeds of disposals or investments of the deceased estate. This will prevent the tax concession being available in respect of other assets injected into a testamentary trust which are otherwise unrelated to the deceased estate.

In addition, the Government expects to recoup $20 million over five years in a tightening of specific anti-avoidance measures where multiple family trusts act as beneficiaries of each other’s income under a round robin arrangement. Previously the anti-avoidance measures only applied to closely held trusts (excluding family trusts) but the rules are to be extended to now include family trusts engaging in circular trust distributions.

Luxury car tax changes

From 1 January 2019, the luxury car tax will no longer apply to luxury cars re-imported to Australia after refurbishment overseas, thereby aligning the tax treatment with that for locally refurbished cars.