TAX TRAPS IN THE SOCIAL SECURITIES ACT AMENDMENTS

Changing the family trust deed to avoid the consequences of new amendments to the Social Securities Act could have a serious unintended impact.

Amendments to the Social Security Act, effective 1 January 2002, mean that the income and assets of private companies and private trusts will be attributed to individuals for the purposes of the means testing provisions of the Act.

The Department of Family and Community Services ("FACS") will allow potential beneficiaries to resign from a discretionary family trust by renouncing or surrendering their interest in the trust.

In doing so the beneficiary must sign a Deed of Renunciation and the Trust Deed must be amended to include a provision similar to the following:

"We (the trustee/s) recognise the renunciation of (Z) as a beneficiary of the trust, and will honour it as irrevocable and will exclude (Z) from any income or capital distribution or the receipt of any other benefit"

Resigning as a beneficiary in such a way may well amount to a resettlement of the trust in question for income tax purposes. (In South Australia in most cases there will not be a resettlement for stamp duty purposes as advisers will be able transact the resignation to as to attract an exemption in the legislation)

A resettlement to which the income tax act applies will constitute the creation of a new trust; a capital Gains Tax Event. This could result in a capital gain equal to the market value of those assets in the trust less any cost base. Hardly a desirable result.

Further a resettlement for income tax purposes potentially affects the availability of carried forward losses which may no longer be available.