ATO Focus on Family Trust Distributions

Some of you may have read or heard in the press, of the ATO taking a closer look at Family Trust distributions, which has caused a bit of a stir. So what is all the fuss about?

On 23rd February 2022, somewhat unexpectedly, the ATO released draft guidance material which explained their approach to Section 100A of the income tax act (S100A). S100A essentially is an anti avoidance provision which can affect how trust distributions are taxed. The ATO are not introducing new legislation, but according to them are merely explaining how they interpret S100A.

Whilst the ATO has suggested that their interpretation has not changed since an earlier guidance issued by them in 2014, in practical terms the accounting profession is of the view that the ATO’s views have substantially changed.

What happens with a trust distribution?

Typically, once a year the trustee exercises their discretion to determine which beneficiary is to receive the taxable distribution for the year, and the beneficiary is then said to be ‘Presently Entitled’ to the amount. The Beneficiary then includes this amount in their tax return and pays tax on it accordingly. The amount owing to the beneficiary from the trust is either paid to the beneficiary, or if not paid, is recorded in the trust records, as owing to the beneficiary.

What is the ATO concerned about?

The ATO is concerned that the choice of beneficiary is being tax driven, and is part of a reimbursement agreement (RA), which is in place purely to minimise tax. The ATO has taken quite technical approach to their interpretation, and included a risk rating for how they view various distributions (referred to as being in certain zones)

The example given which seems to have attracted the most media coverage is where a trust distributes income to an adult child (university student), rather than the parents. The student is on a lower marginal tax rate than the parents, therefore the family pays a lower tax bill than they would if the distribution went to mum &/or dad). The student does not receive any of the distribution but instead the funds are received, and used by Mum & Dad.

The ATO does not like this transaction as someone other than the beneficiary has received the funds, so the only reason the transaction was entered into was to reduce tax.

Using S100A, the ATO would consider that the student was never presently entitled to the distribution, and would therefore tax the trust at the highest marginal tax rate on the distribution amount.

The ATO is also concerned where the beneficiary is a company, and again, the funds are not paid to the company, but are in fact used by someone else.

What does this mean for past and future trust distributions?

The initial ATO draft release in February indicated that the ATO would be reviewing trust distributions back to 2014. This flavour of retrospectivity was not received well by the accounting profession, and has resulted in a significant number of submissions from the industry. As a result, the ATO has now delayed the issuing of a final ruling until all such submission are considered.

We are watching this matter closely and will keep you abreast of the outcome and what, if any, impact this may have on prior year trust distributions.

In the meantime, we will need to meet with trustees this year to discuss all current and future distributions, in light of these changes. Each trust has its own set of particular circumstances, so it is not a one-size-fits-all approach. So, where your group has a family trust, as part of our work in attending to your annual compliance requirements, we will specifically address these matters, as they apply to your personal circumstances.

Of course, if you have any questions in the meantime, please contact us accordingly.