Arrangements to exploit mismatches between trust and taxable income

The trust is a discretionary trust. The beneficiaries are members of a family group. One family member controls the trust. 2. Trust income is defined in the trust deed to be equal to the trust's taxable income, unless the trustee determines otherwise. 3. During the year, the trustee sells a capital asset, which results in a capital gain. The trust also derives a small amount of ordinary income. 4. A newly incorporated company, controlled by a family member, is made a beneficiary of the trust. 5. The trustee exercises its power under the trust deed to: (i) determine that the capital gain is excluded from trust income; and (ii) distribute all of the trust income remaining to the new company beneficiary. 6. The result is that whilst the company is only entitled to receive the small amount determined to be trust income, it is assessed on the trust's entire taxable income (comprising both the net capital gain and the ordinary income). 7. In the following income year, the trustee makes a capital distribution of an amount equal to the capital gain to an individual family member. 8. There is no prospect of the company paying its tax liability, as its only material asset is an entitlement to the small amount of trust income. 9. liquidator is appointed to wind up the company. 10. There is no evidence of any commercial, familial, or charitable reason for carrying out this arrangement. 11. The net effect of the arrangement is that all parties avoid the payment of tax on the capital gain.