In the last few weeks the ATO has issued a new Draft Ruling that focuses on Trust Distributions. Essentially they are trying to reduce who you can issue Trust Distributions to so they get the taxpayer paying more tax.

The result is that family groups will need to reconsider who Trust distributions recipients will be.

CONSEQUENCE

If the ATO does not agree with who receives the Trust distribution, they will assess the Tax to the Trustee at the top marginal rate of 45%, instead of the intended beneficiary who would have likely been taxed at a lower rate.

Broadly, section 100A can apply where:

  • A beneficiary is presently entitled to a share of the income of a trust
  • There is an agreement (whether formal or informal, written or unwritten) whereby a person other than the beneficiary will benefit from the amount, and
  • A purpose of the agreement is that less income tax will be paid.

Section 100A does not apply if the agreement is entered into as part of an ‘ordinary family or commercial dealing’. It is this ‘ordinary family or commercial dealing’ aspect that the ATO is clamping down on. In particular, the ATO’s view is that the carve out does not operate merely because all parties to the arrangement are family members, or that the practices are widespread.

PROBLEMATIC DISTRIBUTIONS

  • Distributions to adult children that effectively ends in the hands of the parents eg adult children at university and earning no other income have the full benefit of the marginal tax rates.
  • Distributions to Private companies where the cash has been retained by the Trust to invest or use in business activities.

The ATO makes specific mention of their view that a particular situation is not an ‘ordinary family or commercial dealing’ merely because it is common practice of the family or the community. Taxpayers cannot rely on their arrangement being ‘ordinary’ merely because ‘everyone else does it’.

CAN I STILL USE MY TRUST?

If you have a family trust, it is important to consider whether any of the new ATO views could be problematic for you. If your trust is distributing to a range of family members, or to companies, then you should review your situation in detail.

While some of the ATO view has been released in draft form, or is not proposed to apply until 1 July 2022, other parts of the ATO view are intended to apply retrospectively. Accordingly, considering the issues and addressing them well before 30 June 2022 will be vital.

Trusts will continue to be an effective structure for managing family wealth, but the tax planning aspect will become more complex and tailored. Most family groups will need to revisit their tax planning in the lead up to 30 June 2022.

RETROSPECTIVE VIEW

The revised ATO position will apply from 1 July 2022, so for FY23 distributions.

Whilst the revised ATO position does not apply to FY22 distributions, we see FY22 as a transitional year for tax planning given these changes and the section 100A changes. Most family groups will need to reconsider their existing tax planning strategies starting with FY22.

The ATO has indicated they may go back and look at prior year distributions. It is still early days to look at this, and I will pass on further information if I receive anything further on this point.

Should you have any concerns, please contact Mark or the team.