This article explores the structures our clients use to manage their wealth and the ongoing debate surrounding their use, particularly in light of increased regulatory scrutiny.

Topics covered in this article:

• Division 296 – Additional tax on superannuation balances exceeding $3 million
• Division 7A – Unpaid trust distributions
• Family Trust Elections

With major superannuation reforms in 2007 and 2017, multiple changes to contribution and pension caps, and the previously announced Division 296 tax likely to become law following the recent election, astute investors and family groups are increasingly turning to discretionary trusts to hold a major portion of the family’s wealth.

We have long advocated for the use of discretionary trusts, given their benefits in asset protection, flexibility, and the taxation advantages available through their flow-through structure.

For example, consider a scenario where, in FY2025, Trust A makes a capital gain and receives franked dividends. Subject to the trust deed and appropriate distribution resolutions, the trustee could distribute the capital gain to one family member (perhaps with a capital loss) and split the dividends between two other family members. There is no mischief in distributing trust income in this way. In fact, the ATO’s position was clarified in the landmark High Court decision in Bamford's case. However, these arrangements are increasingly subject to ATO scrutiny.

It is therefore essential that trustees make their trust distributions before the end of the financial year and maintain thorough records. The ATO has been known to use forensic and other investigative techniques to ensure compliance. More recently, the ATO has also focused its resources on Division 7A and Family Trust Elections.

Division 7A

Division 7A applies where a trust distributes income to a corporate beneficiary (which benefits from the 30% corporate tax rate) but does not physically pay the amount – referred to as an Unpaid Present Entitlement (UPE). Our preference is to ensure that distributions are physically paid to avoid triggering Division 7A. We then tailor the investment portfolio across the trust and company to take advantage of their differing tax profiles.

The ATO has held since 2009 – and reaffirmed in its 2022 taxation determination – that UPEs constitute financial accommodation by the company to the trust, thus invoking Division 7A.

Division 7A requires that a loan agreement (typically seven years at the ATO benchmark rate of 8.77%) be put in place, with principal and interest repayments made to the company. If these rules are not followed, the UPE may be deemed an unfranked dividend, potentially taxed at 47% when paid to individual beneficiaries.

However, this position is currently uncertain following the ATO’s recent loss in the Full Federal Court in Bendel's case. The ATO has applied for special leave to appeal to the High Court. Deputy Commissioner Louise Clarke has confirmed that the ATO will maintain its current stance until the appeal process concludes. She also noted that the reimbursement provision under Section 100A may be applied in certain circumstances.

We will provide updates as new information becomes available. In the meantime, we recommend discussing your position with your tax adviser.

Family Trust Elections

A discretionary trust becomes a family trust once a Family Trust Election (FTE) is made. Without this election, prior year losses may be forfeited, and beneficiaries may be denied the benefit of franking credits attached to distributed dividends.

Making an FTE requires nominating a ‘specified individual’ – typically the family’s matriarch or patriarch. The ‘family group’ includes this individual’s spouse, parents, grandparents, siblings, children, nieces, and nephews. Distributions outside this group are subject to Family Trust Distribution Tax at 47%.

The ATO has increased its review activity, particularly for large family groups, to ensure FTEs have been made and distributions are consistent with the election. We recommend confirming with your tax adviser that a valid FTE is in place and that documentation is readily available in the event of an ATO review.

Division 296

We anticipate the reintroduction of the bill enacting Division 296, which imposes an additional 15% tax on a portion of the income and unrealised gains of superannuation balances exceeding $3 million.

We advise clients to remain patient until the bill is reintroduced into Parliament. At that point, we will assess any legislative amendments, especially the effective start date. This will provide clarity on the time available to implement effective strategies.

Any response should be informed by the broader family group structure, members’ tax profiles, and financial goals. For instance, those under 60 may have limited options for withdrawing superannuation benefits. However, where possible, transferring benefits to a child’s super account could improve tax efficiency. For clients with self-managed superannuation funds (SMSFs), admitting a family member as a fund member may allow continued control of the capital within the existing investment strategy.

Members will have until 30 June of the relevant financial year to implement plans to manage the new tax.

Conclusion

Superannuation funds and discretionary trusts remain important structures for long-term wealth creation. But as the regulatory landscape continues to evolve, having a trusted team of advisers to navigate changes in the law and ATO interpretation should be a top priority for large family groups.

If you would like to discuss any of the points covered in this article, please contact Wilsons Advisory.