The ATO has issued a reminder to trustees about important considerations for making Family Trust Elections (FTE) and Interposed Entity Elections (IEE). An FTE makes the trust a “family trust” for tax purposes, but it must pass the family control test. The election must name a “test individual” and define the family group based on this person. Only one specified individual can be named, and they must be alive when the election is made. FTEs can provide access to certain tax concessions, but it’s often challenging for discretionary trusts to meet the required tests.
- Trust Loss Measures: Family trusts only need to meet the modified income injection test and are exempt from other trust loss tests.
- Company Loss Tracing Concession: A company with a family trust as a shareholder can access a loss tracing concession, treating the trust’s interests in the company as owned by a single notional entity.
- Holding Period Rules for Franking Credits – A family trust’s trustee and beneficiaries who receive a franked dividend may qualify for a franking credit concession, assuming they meet the “qualified person” requirements.
- Trustee Beneficiary Reporting (TBR) Rules – Trusts that have made an FTE or an IEE (among other actions) are exempt from the TBR compliance obligations.
- Small Business Restructure Rollover – Special provisions apply to family trusts when determining whether there has been any material change in ultimate ownership under the small business restructure rollover rules.
Once the election is in effect, family trust distributions outside the ‘family group’ of a specified individual may trigger a 47% Family Trust Distribution Tax (FTDT). Trustees could also face non-disclosure tax for circular distributions. Entities like trusts, companies, or partnerships not automatically in the family group may qualify for an Interposed Entity Election (IEE) to avoid FTDT, as long as they pass the family control test. However, if an IEE entity distributes outside the family group, FTDT is triggered. These rules can be complex, especially for multi-generational or multi-entity groups, and failure to apply them correctly may result in unintended FTDT liabilities. The ATO has highlighted that more vigilance in making elections could help avoid these issues.
FBT for Holiday Celebrations
The ATO reminds everyone regarding the FBT implications related to end-of-year staff celebrations. Providing things like drinks, food, gifts, and recreation can be considered ‘entertainment’, which is liable to FBT unless certain exemptions can apply. Whether the FBT applies will be based on:
- The spent amount on each employee
- When and where the celebration takes place
- Who attends – only employees, or are partners, suppliers or clients also invited?
- The type and value of gifts provided.
Employers must keep detailed records of any entertainment-related benefits, so they can check whether exemptions apply and calculate their taxable value. They must also remember that when entertainment is offered to employees, it won’t be possible to claim GST credits or a deduction for the expenses unless they are liable to FBT.
NFP Self-Review Returns
The ATO has updated its guidance to help not-for-profits (NFP) that are not considered charities with the new requirements to file NFP self-review returns. Non-charitable NFP organisations with an active ABN need to file an annual NFP self-review return to confirm if they qualify to self-assess as income tax exempt.
NFP self-review returns are due by 31 October every year. However, for the first-time lodgment, NFPs have until 31 March 2025 to file for the 2023-24 income year. In return, the NFP must:
- Suggest the exempt category type, the NFP is self-assessing against
- Consider the NFP’s activities and purpose against eligibility requirements under one of 8 income tax-exempt categories
- Estimate the NFP’s gross revenue range as small, medium or large to show the size of the company.
A cultural organisation is allowed to self-assess as exempt from tax if it meets eligibility requirements, including that the main purpose for the company is either encouragement of art, music or literature, or musical purposes. Any other purpose must be secondary to this main purpose.
2024-25 ATO Focus Areas
The key areas of focus have been released by the ATO for privately owned groups for the 2024-25 income year. The list is divided into foundational issues, evolving risks, and targeted focus areas. Foundational issues include:
- Registration, lodgment and payment
- Incorrect reporting
- Division 7A
- International transactions
- CGT
- Property and construction
- Tax advisers and professional firms – failure to file/pay personal returns
Evolving risks include:
- Incorrect reporting
- CGT – Division 149 and pre-CGT assets
- Trust loss trafficking, inappropriate use of private ancillary funds, thin capitalisation rules, share buybacks, and cryptocurrency-based business models.
The target focus areas include:
- Succession planning
- Private equity
- Retirement villages
- GST for the retail and construction industries.
Study and Training Loan Repayment Changes
There have been a few amendments and announcements on study and training loans of late and the ATO has given an update of what is amending and when.
- Retrospective indexation reduction
The HELP indexation rate will be modified to be the lower of either the wage price index (WPI) or consumer price index (CPI). The amending legislation, Universities Accord Bill 2024, passed both Houses on 26 November 2024 and awaits Royal Assent. The relief will be applied automatically with an adjustment to loan balances for both the 2023 and 2024 income years, where the lower WPI rate will be applied instead of CPI.
- Proposed repayment thresholds
New changes have been proposed by the government to the minimum repayment threshold to be maximised from $54,435 in 2024-25 to $67,000 in 2025-26. HELP repayments will only be calculated on the income over the new $67,000 threshold instead of the total annual income.
- Proposed 20% debt reduction
The government is likely to reduce the balance of all study and training support loans by 20% to take effect prior to 1 June 2025.
- Rural doctors and nurses HELP debt eliminated
An initiative introduced in 2022 makes doctors and nurse practitioners live and work in remote, rural or very remote areas of Australia. The changes allow nurses and doctors to minimise their HELP loans if they complete the required amount of eligible work in specific remote areas.
Retirement Village Guidance
The guidance on income tax and GST for retirement village operators has been updated by the ATO. The guidance covers the tax implications related to:
- Occupancy arrangements
- Obtaining or constructing a retirement village
- Operating a retirement village
- Sale of a retirement village.
Tougher Approach to Small Business
The ATO has raised tougher action against small businesses that do the wrong thing.
Each quarter, the ATO will highlight key areas of risk. This quarter, the focus is on:
- Business income vs personal income: Using business funds or assets for personal purposes or benefit.
- Deductions and concessions: Issues related to non-commercial business losses and small business CGT concessions.
- Operating outside the system: GST registration and income reporting for taxi, limousine, and ride-sourcing services.
If a small business intentionally avoids its obligations, the ATO may conduct reviews, apply penalties, or pursue legal action. Small businesses are those with an annual turnover under $10 million, including sole traders, companies, trusts, or partnerships operating for all or part of a financial year.