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TR 98/4 situations 4 and 5 are about non-arm’s length income and arrangements.
TR 98/4 Situations 4 and 5
In the last episode, we covered situations 1 to 3 listed in TR 98/4. We discussed:
- Property Not Transferred Beneficially to the Child
- Not from the Investment of Property
- Not Transferred as the Result of a Family Breakdown
In this episode, we cover situations 4 and 5 with Patrick Ellwood of Clover Law in Brisbane.
Here is what we learned but please listen in as Patrick explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
TR 98/4 Situations 4 and 5
TR 98/4 situations 4 and 5 cover transactions that are not at arm’s length and transactions that result from an agreement.
Situation # 4 – Not at Arm’s Length Return
“…it derives from the investment of property but exceeds an arm’s length return on the investment of the property”
s102 AG already outlines the issue of not being at arm’s length in para. (3).
s102AG
“(3) …if any 2 or more parties to:
(a) the derivation of the excepted trust income …; or
(b) any act or transaction directly or indirectly connected with the derivation of that excepted trust income
were not dealing with each other at arm’s length in relation to the derivation, or in relation to the act or transaction, the excepted trust income is only so much (if any) of that income as would have been derived if they had been dealing with each other at arm’s length in relation to the derivation, or in relation to the act or transaction.”
s102AG already clearly excludes non-arm’s length income. What TR 98/4 does in para. 14 is adding three examples.
Example 1
“wherever only nominal property is transferred to the CMT, but substantial amounts of income flow to the trustee by way of distributions from a discretionary trust of which the CMT is a beneficiary and to which the CMT has lent its property”
An example would be the CMT giving a loan to a discretionary trust (DT) and the DT pays interest to the CMT.
Example 2
“where the CMT subscribes a nominal amount for units in a unit trust, which receives income by way of distributions from a discretionary trust; the excess over an arm’s length rate of return on the amount subscribed to the unit trust is not excepted trust income”
An example would be the CMT trustee holding units in a UT. A DT distributes to this UT which then distributes to the CMT.
Example 3
“where the trustee’s share of partnership income from any share of such income transferred to the trustee, or from any partnership entered by the trustee with property transferred to the trustee, is only excepted income up to an arm’s length share of the partnership income.”
An example would be the trustee of the CMT being a partner in a partnership. As long as the trustee receives the same share of income matching the partnership split (e.g. 50/50), all is fine.
Situation # 5 – Result of an Agreement
“…it is derived as a result of an agreement entered into or carried out to secure the assessable income as excepted trust income”
Just like for non-arm’s length transactions in situation 4, s102 AG already outlines the issue of agreements.
There it says:
“(4) Subsection (2) does not apply in relation to assessable income derived by a trustee directly or indirectly under or as a result of an agreement that was entered into or carried out by any person for the purpose, or for purposes that included the purpose, of securing that that assessable income would be excepted trust income.
(5) In determining whether subsection (4) applies in relation to an agreement, no regard shall be had to a purpose that is a merely incidental purpose.”
So for s102AG you need a purpose other than deriving excepted income. And this other purpose is obvious. You want to provide for your children. That is what this is about in the end.
That was s102 AG. What TR 98/4 does in para. 15 is just adding examples.
So para. 15 of TR 98/4 says:
“distributions from an existing discretionary trust are made, or could be made, directly to a child, but following a family breakdown, distributions are made instead from the discretionary trust to a CMT which is then established, or to a unit trust or other entity in which the CMT has an interest.
Another example is where income is to be paid, and a trustee receives property but must use it only to purchase an annuity producing income of the agreed amount.”
So that is the plain text of para. 15 in TR 98/4 about situation 5. Now to the examples outlined for situation 5 in para 15 of TR 98/4.
Listen to the Episode Please
So this was a very short write-up about situations 4 and 5, but please listen to the episode, since Patrick Ellwood goes into a lot more detail.
And this is the last episode in our mini-series about the excepted income in child maintenance trusts based on s102 AG and TR 98/4. If you haven’t done so yet, please listen to episode 387 A, 387 B and 388, before you listen to this episode 389.
MORE
Child Maintenance Trust Income
TR 98/4 Child Maintenance Trust Arrangements
Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 25 May 2023
Tax Talks spoke to Patrick Ellwood - Director at Clover Law - for more details.
