The source test for a private trust and company
The source test in relation to a controlled private trust and a controlled private company is to be applied where:
- an individual transfers assets to a structure after 7.30pm 9 May 2000, and
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- the individual did not receive adequate financial consideration for those assets.
However, a person could refer to the source of capital that was placed in a structure before 7.30pm 9 May 2000, if they wished to demonstrate that attribution percentage was unreasonable.
Reason for source test
The source test recognises that persons who transfer assets to a structure generally retain some means of control. Taking the origins of the assets into account complements and strengthens the attribution process and circumvents potential avoidance mechanisms.
Factors to consider in the source test
It is not the intention that the source test be absolute. Whether or not a person who has placed assets in an entity is attributed those assets will depend on the circumstances of the case. Where the matter is unclear, issues such as the level of contributions made and whether the person who made the contribution can exhibit control will need to be investigated. If a person can show that a genuine gift or genuine loan has been made to a private trust or private company, and that they have no on-going involvement in the structure, attribution would generally not be made to that person.
Example of source test for a private trust
George, aged 54, has decided to set up a family trust. The assets of the trust will consist of George's investment portfolio and holiday house worth $600,000. The family home worth $150,000 will also be part of the trust assets. He attends an investment seminar in June 2000 and learns that from 1 January 2002 he may be attributed with the assets and income of the trust, which will make him ineligible for a Service Pension when he turns 60. He seeks to circumvent the new rules by setting up the trust with his son David as the appointor.
David undertakes to act in accordance with George's wishes and agrees that George will be the unofficial beneficiary of the trust income. While George trusts his son he decides to keep substantial assets out of the trust. These assets are used as an additional incentive for David to acquiesce ie they will eventually become David's if he abides by their agreement. (In fact George could also be considered to be in control via the associates rule). Under the source test, George will still be attributed with the trust assets and income and would not have an entitlement to pension.