The ATO has recently released guidance that may impact how you administer your family trust and its distribution strategies for the 2022 and future years. This change may also have an impact on retrospective distributions subject to ATO activity in this area.

In a nutshell, the ATO are concerned with practices whereby a trust distribution is recorded against one beneficiary for all administration purposes (i.e. a distribution on paper), but the cash or economic benefit associated with the distribution goes to another beneficiary.

Common examples highlighted by the ATO are focused around, but not limited to, the distribution of profits to adult children beneficiaries who are assessed on a share of trust income at their marginal tax rates but the cash and benefits associated with the trust are controlled and utilized by the parents. In these scenarios the parents will likely have higher tax rates and would be subject to a larger tax liability if they were to declare the distribution instead of their adult children.

Whilst ATO commentary is centered around arrangements involving parents and children, it should be noted that the application is broader than this and would involve all beneficiaries, including other family members and entities where the marginal tax rates are lower than that of the controlling individuals.

The ATO’s draft guidance outlines that where a beneficiary’s entitlement to trust income arises out of, or in connection with, an arrangement that:

  • involves a benefit being provided to another person;
  • is not an ordinary family or commercial dealing; and
  • the arrangement was entered into for a purpose of reducing someone’s tax liability;

then section 100A of the Income Tax Assessment Act 1936 may apply. 

What are the consequences of Section 100A?

The consequence of this application is that the trustee will be deemed to be presently entitled to any amount captured under this provision and will be assessed at penalty tax rates on the said determined amount.

The guidance released by the ATO is currently in draft form and is their interpretation of how the law is to be applied.  It is important to understand that this is not a change in law and that section 100A has existed for 40+ years in its current form. Given its current draft status, this guidance is subject to change prior to it being finalised.

What is clear from this ATO guidance is that the steps and decisions you take in preparing your distribution strategies for this and future financial years must be completed diligently and in line with the rules in place.

We are here to support you

The team at Davidsons is well versed in this topic and will be working with our trust clients closely during this interim planning period to ensure compliance in this area in order to minimize any ATO scrutiny.

If you have any questions on this announcement, please either contact your Davidsons team member, phone our office on 03 5221 6399 or email us at info@davidsons.com.au.

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Disclaimer: This information is of a general nature and should not be viewed as representing financial advice. Users of this information are encouraged to seek further advice if they are unclear as to the meaning of anything contained in this article. Davidsons accepts no responsibility for any loss suffered as a result of any party using or relying on this article.

This article was written by Davidsons Director Kylie McEwan.