CORPORATE FUNDED ASSET TRUSTS An international policy comparison

USA

Corporate funded asset trusts, also known as business trusts or specialized asset protection trusts (APTs), can have varying tax implications depending on how they are structured and managed.

The IRS doesn't have a specific designation for "business trusts" in the tax code. Instead, these trusts are categorized based on their characteristics and operations.

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Essentially the regime is permissive. The standard format is a non-grantor trust, which is also a Complex Trust.

Unlike simple trusts, Complex Trusts can accumulate income, make charitable donations, and distribute trust principal. The tax burden for complex trusts can be borne by the beneficiaries, the trust itself, or a combination, depending on the circumstances

AUSTRALIA

https://www.ato.gov.au/businesses-and-organisations/trusts/trust-income-losses-and-capital-gains/trust-income

Similarly, this is a permissive regime.

The net income of a trust (effectively its taxable income) is its assessable income for the year less allowable deductions worked out on the assumption that the trustee is a resident (even if the trustee is actually a non-resident).

Because the income of a trust is determined in accordance with the trust deed and its net income is determined in accordance with tax law, the two amounts are often different.

Generally, the net income of a trust is taxed in the hands of the beneficiaries (or the trustee on their behalf) based on their share of the trust's income (that is, the share they are 'presently entitled' to) regardless of when or whether the income is actually paid to them.

For example, if the beneficiary has a 50% share of the trust's income, they are assessed on a 50% share of the trust's net income. This is referred to as the proportionate approach.

Special rules apply to franked distributions and capital gains included in the trust's net income.

A beneficiary is presently entitled to trust income for an income year where they have, by the end of that year, a present or immediate right to demand payment from the trustee. The entitlement will depend on the trust deed and any discretion that the trustee has under the deed to allocate income between beneficiaries.

The trustee will need to provide each beneficiary with details of their share of the net income, so that the beneficiaries can include this amount in their tax returns.

Australian taxation has a particular concern for Reimbursement Agreements:

Reimbursement agreement and section 100A

Section 100A is an anti-avoidance rule that can apply where a beneficiary’s trust entitlement arose from a reimbursement agreement. Broadly, a reimbursement agreement involves an arrangement under which a beneficiary is made presently entitled to trust income and:

• someone other than that beneficiary receives a benefit in connection with the arrangement
• at least one of the parties enters into the agreement for a purpose of reducing tax.

Exclusions from reimbursement agreements

There is no reimbursement agreement in any of the following circumstances:

• an arrangement simply involves a beneficiary receiving and using their trust entitlement
• the agreement has been entered into in the course of ordinary family or commercial dealing
• the presently entitled beneficiary is under 18 years of age or otherwise under a legal disability.

CANADA

https://www.canada.ca/en/revenue-agency/services/tax/trust-administrators/types-trusts.html

In Canada, using a trust to hold corporate assets can be a valuable tax planning and wealth management strategy, but it involves specific tax considerations:

• For income tax purposes, a trust is generally treated as a separate taxpayer, meaning income earned on trust assets can be taxed either within the trust or in the hands of the beneficiaries.
• If income is retained within the trust, it's typically taxed at the highest marginal tax rate for individuals.
• If income is paid or made payable to beneficiaries, it's deducted from the trust's income and taxed in the beneficiaries' hands at their individual tax rates, potentially leading to a lower overall tax burden due to Canada's progressive tax system.
• However, Canada has attribution rules to prevent income splitting with close relatives (e.g., spouse or minor children) where the income is attributed back to the person who transferred the assets to the trust.

Transferring corporate assets to a trust

• Transferring corporate assets to a trust is generally considered a taxable transaction, where the settlor (the person transferring the assets) is deemed to have disposed of the assets at their fair market value.
• This means the settlor will report any capital gain or loss on their income tax return for the year of transfer.
• The trust acquires the assets at a cost equal to their fair market value at the time of transfer.

Potential tax advantages

• Capital gains exemption (LCGE): For qualified small business corporation shares, the Lifetime Capital Gains Exemption (LCGE) allows individuals to exclude a certain amount of capital gains from taxation. By having a family trust with multiple beneficiaries, you can potentially multiply the LCGE limit, further reducing the tax burden on the sale of the business.
• Tax deferral (with a corporate beneficiary): If a corporation is a beneficiary of the trust, business profits can flow through the trust to the corporate beneficiary, potentially deferring taxes until the funds are withdrawn from the corporation.

UK

The UK operates an encouragement regime.

CG36000 - Gifts in settlement: Gifts to employee trusts

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg36000

TCGA92/S239

TCGA92/S239 provides relief from Capital Gains Tax if an individual or close company transfers an asset to certain employee trusts that qualify for favourable Inheritance Tax treatment.

The gain is either reduced or calculated on a no gain/no loss basis. Section 239 applies automatically where the conditions are met. It is not a relief that has to be claimed. It therefore applies in priority to gifts hold-over relief because it affects the basic computation.

The relief applies both to outright gifts and to transfers at below market value. The normal Capital Gains Tax rules apply to disposals in which the trustees give consideration which is greater than the costs allowable to the transferor under TCGA92/S38.

IHTA84/S13, TCGA92/S239 (1)(a)

A close company qualifies if the transfer falls within IHTA84/S13 and is therefore not a transfer of value for Inheritance Tax purposes. Any asset can qualify, unlike the position for individuals where the relief is restricted to gifts of shares and securities. However, the same restrictions as in CG36000 apply, except that the trust can as an alternative be for the benefit of most of the employees of the company and of a subsidiary or subsidiaries taken as a single class.

The definition of close company is in TCGA92/S288. TCGA92/S239(8) expands that for the purposes of section 239 to include any company that would be close if it were resident in the UK.

MULTI-JURISDICTIONAL CORPORATE ASSET TRUSTS

Here, we move from the realm of individual government tax policies, and into their unplanned – and unplannable - combinatorial effect.

The taxation of the trust will depend upon the jurisdiction residency of the trustees. Sensible trust management will place the trust in a tax neutral jurisdiction: Bahamas, Belize, Virgin Islands, or any of the many jurisdictions offering tax neutrality.

Corporate asset contributions to the Trust will either take place under a typical permissive, or encouraging regime.

It is quite possible that individual beneficiaries will be working in some other tax neutral jurisdiction: Singapore, UAE, and so on. Or, by benefiting from an immigrant investor status under a special tax regime, such as with Italy.

Corporate asset trust offer government policy sanctioned flexibility in corporate asset planning and benefit management.