A Week in Review – Transactions between Trustees and Beneficiaries

Monday, 18 June 2018

Recently I have come across a number of clients who were trustees of their GST registered family trusts,where they were contemplating making a distribution of trust assets that were a component of the trust’s taxable activity, to a beneficiary, and they had overlooked the GST implications of the transaction.

In the majority of cases, this was due to the relatively simple reason that there was no third party involved, and consequently none of the usual warning bells had been triggered, that a GST issue may arise. I thought a timely reminder to you all may therefore be useful.

A distribution of assets of a taxable activity, to a beneficiary, is considered a disposal for GST purposes. Often the recipient beneficiary will not be GST registered in their own right, and consequently they will not be acquiring the asset for the principal purpose of making taxable supplies. Additionally, because the trustees are essentially making a capital distribution to the beneficiary, the transfer will not involve any consideration. From a GST perspective, there are two primary issues for your clients to be aware of:

 The association of the parties will, in the case where no consideration has been provided by the recipient, usually deem the distribution to occur at market value. Since no funds have actually been received by the trustees in respect of a GST output tax liability that has now arisen, naturally this can create a cash flow issue for them. Furthermore, while the GST registration is in the name of the trust, most of us are aware that a trust itself is not recognised as a separate legal entity, and instead it is the trustees themselves in their personal capacity (ignoring the use of corporate trustees for now), that are ultimately liable for the GST debt.

 As a result of the transaction involving associated persons (s.2A(1)(f) of GSTA deems trustees/beneficiaries to be associated), there are special time of supply rules to be aware of, which could trigger the output tax liability to arise in an earlier GST period than that contemplated by the parties. As an example, the trustees may consider that the output tax obligation will arise in the GST period during which the distribution resolution is signed, however if the beneficiary has actually removed the goods in an earlier GST period, then the GST output tax liability will actually arise in that earlier period.

Should you discover your client has overlooked their trust’s GST obligations on a beneficiary distribution (which often will not be until you are preparing the annual accounts), a simple voluntary disclosure to the Revenue is usually recommended, mitigating potential shortfall penalty exposures and often with minimal interaction involved – that is, the Revenue does not in my experience, suddenly decide to launch into a full review of your client’s file, the potential threat of which often puts our clients off being so proactive whenever errors are identified.

Updated Commentary on Personal Attribution Rules

For those of you who are relatively new to the world of income tax, you may be unaware that it was not that long ago that we had a top personal marginal tax rate of 39%. Naturally, just prior to the increase of the rate from what was then 33% and equivalent to both the company and trustee rates, a number of individuals attempted to incorporate their existing sole trader businesses, in an effort to mitigate the impact of the 6% increase. They could pay themselves a relatively modest salary to still take full advantage of the lower personal marginal rates, leave any excess profit in the company to be taxed at 33%, and then distribute those tax paid profits to the shareholder trust fully imputed, with no further taxes payable.

To counteract this type of restructuring, the personal attribution rules were introduced. In a basic sense, if your interposed entity (which could also be a trading trust) derived more than 80% of annual income from one customer, you did 80% or more of the work (your spouse/partner treated as being you), and you did not use a certain threshold of assets to perform the personal services, then essentially your interposed entity was ignored for tax purposes, and you were deemed to still derive all of the income personally.

The main issue I have with this regime, is that it did not differentiate in any way between those who already had structures in place well before the new rules came into effect and those who were actively trying to change the way they did things to avoid the increased tax – yet it was argued to simply be an anti-avoidance measure. 

It should be noted that the regime has remained in place post the top tax rate reducing back to 33%, even where arguably there is no avoidance issue any longer. Yes there is a potential timing benefit by retaining company profits to be subject to tax at 28%, but only for as long as the shareholders do not need the cash, at which time a dividend is paid and the Revenue is compensated for the final 5% of our top tax rate.

However the purpose of this narrative was not to express my continued discontent at this regime, but instead to alert you all to the Revenues latest draft interpretation statement, which is to provide guidance on when the attribution rules should be applied.

Farm Worker Benefits & Allowances

For those of you with farming clients, the Revenue’s latest QWBA may be of assistance. QB 18/13 considers what is the correct tax treatment with respect to a range of benefits and allowances that farmers may pay to their workers? A worker in this regard, refers to any person entitled to receive a PAYE income payment, which includes not only employees, but also farm contract workers subject to the schedular payments regime.

The answer to the question, and one that arguably could have application to any employment scenario, is provided in four parts in the document, being:

 A reimbursing allowance an employer pays for expenses that the employee incurs in connection with their employment can generally be paid tax-free. However, a reimbursing allowance of a capital or
private nature is taxable as employment income to the employee and subject to PAYE.

 A benefit allowance an employer pays to an employee are taxable as employment income to the employee and subject to PAYE.

 The expenditure an employer incurs in providing reimbursing allowances or benefit allowances is deductible to the employer, provided the employee’s salary or wages are deductible.

 Non-cash benefits an employer provides to an employee may be subject to fringe benefit tax payable by the employer. Expenditure incurred in providing non-cash benefits to an employee is deductible to the employer, as is any fringe benefit tax paid.”