For the last 20 years or so Family Trusts have come under the scrutiny of every government. With an election looming, attention has again turned to Trusts and how they operate.
Last month, the Australian Taxation Office (ATO) released a package of new guidance material that directly targets how trusts distribute income. Many family groups will pay higher taxes, now and potentially retrospectively, as a result of the ATO’s more aggressive approach.
Rest assured we are giving this much attention and seeking expert advice to ensure we are across every aspect of this issue and that we do not expose any client to undue ATO risk.
Family trust beneficiaries at risk
The tax legislation contains an integrity rule, section 100A, which is aimed at situations where income of a trust is appointed in favour of a beneficiary but the economic benefit of the distribution is provided to another individual or entity. If trust distributions are caught by section 100A, then this generally results in the trustee being taxed at penalty rates rather than the beneficiary being taxed at their own marginal tax rates.
The latest guidance suggests that the ATO will be looking to apply section 100A to some arrangements that are commonly used for tax planning purposes by family groups. The result is a much smaller boundary on what is acceptable to the ATO, which means that some family trusts are at risk of higher tax liabilities and penalties.
ATO redrawing the boundaries of what is acceptable
Section 100A has been around since 1979 but to date, has rarely been invoked by the ATO except where there is obvious and deliberate trust stripping at play. However, the ATO’s latest guidance suggests that the ATO is now willing to use section 100A to attack a wider range of scenarios.
Who is likely to be impacted?
The ATO’s updated guidance focuses primarily on distributions made to adult children, corporate beneficiaries, and entities with losses. Depending on how arrangements are structured, there is potentially a significant level of risk. However, it is important to remember that section 100A is not confined to these situations.
Distributions to beneficiaries who are under a legal disability (e.g., children under 18) are excluded from these rules.
For those with discretionary trusts it is important to ensure that all trust distribution arrangements are reviewed in light of the ATO’s latest guidance to determine the level of risk associated with the arrangements. It is also vital to ensure that appropriate documentation is in place to demonstrate how funds relating to trust distributions are being used or applied for the benefit of beneficiaries.
Companies entitled to trust income
As part of the broader package of updated guidance targeting trusts and trust distributions, the ATO has also released a draft determination dealing specifically with unpaid distributions owed by trusts to corporate beneficiaries. If the amount owed by the trust is deemed to be a loan then it can potentially fall within the scope of another integrity provision in the tax law, Division 7A.
You have all heard us talk at length about division 7A and our concerns to cover all bases.
As part of our tax planning process this year we will be even more diligent to ensure we get the best tax outcome for you but also making sure we do not to place your family group under any increased risk of attack from the ATO.