ATO changes the rules for Family Trusts!

You may have recently seen some stories in the press or on social media circulating surrounding the ATO’s attack on Family Trusts.

In late February, the ATO released three new pieces of guidance that formally provides their aggressive position on discretionary trust distributions. The guidance is comprised of:

• A draft Taxation Ruling (TR 2022/D1) – this is the long-awaited draft ruling from the ATO on section 100A;
• A draft Practical Compliance Guideline (PCG 2022/D1) – this sets out the sorts of arrangements which the ATO would dedicate compliance resources concerning section 100A; and
• A Taxpayer Alert (TA 2022/1) that applies section 100A immediately where parents benefit from trust entitlements to children over 18 years of age.

In addition, the ATO released a draft Taxation Determination (TD 2022/D1) on when an unpaid present entitlement or amount held on a sub-trust is the provision of “financial accommodation” by a private company under Division 7A of the Income Tax Assessment Act 1936 (Cth).

The ATO’s crackdown on trust distributions is now officially underway.
For many years, it has been common practice by all business owners and investors who use Family (Discretionary) Trusts to look to spread trust income across family member beneficiaries.

Trust distributions are often made to adult children for asset protection and estate planning purposes.

Sometimes, the adult children in a family may have lower tax rates than their parents, so the overall tax rate % for the family group is lower as a result of the spread of these trust distributions.

However, the ATO in issuing Taxpayer Alert TA 2022/1 ”Parents benefitting from the trust entitlements of their children over 18 years of age”. is a game changer.
It states that the ATO believes that parents who make trust distributions to their adult children and then arrange for their children to give the distribution back to them are only doing this to reduce tax. The ATO plans to invalidate the trust distribution and tax the trustee of the trust at 47% on the amount of the distribution, and they may charge penalties on this as well.

The ATO have stated that they can go back as far as the 2015 tax year to review trust distributions.

We believe this is very unfair. It goes against what has been commonly done for many years and may vastly restrict how your trust distributes profits in the future.

Tax laws change all the time, and it’s our role as your accountants and advisors to keep you alert to important changes that affect you.

There are different levels of risk associated with different tax planning strategies that involve trust distributions.

The ATO has classified these risks as white zone, green zone, blue zone and red zone. The ATO will be investigating all red zone risks and some blue zone risks and will not investigate white zone or green zone risks.

We want to help you to understand how these ATO tax law changes affect you, discuss new strategies that you might be able to use, and estimate your tax payable for 2022 and 2023 so you can carefully plan for it.

This is still a watch this space with the Accounting bodies and many key partners of the Accounting Industry in consultation right now with the ATO – however it is important we assess your personal situation right now.
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To get started and assess where you stand, call us to book an appointment.