ATO crack down on Trusts

The ATO has announced a major crackdown on the taxation of family trusts. In a long-awaited series of draft rulings, the ATO has focused on common tax planning strategies involving distributions to private companies and family members. This crackdown means that family groups will urgently need to reconsider how they are using their family trust.

What is the ATO focusing on?

The ATO is focusing its attention on section 100A of the tax law. Where 100A applies, the trust distribution will be taxed to the trustee of the trust at the top marginal tax rate (currently 47% including medicare levy) rather than the beneficiary to whom it was to be taxed to. This beneficiary would have likely paid less tax than the trustee.

Section 100A can apply where:

• A Beneficiary is presently entitled to a share of income of a trust
• There is an ‘reimbursement’ 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.

What type of distributions are an issue?

The draft rulings are quite wide and the ATO have released guidance in their draft rulings using a colour coded risk zones – White, Green, Blue and Red. Red is the highest risk.

Distributions that fall into the ordinary family or commercial dealing

For example, a trust which distributes all its income to a husband and wife, who uses that money to pay for their household expenses, will fall into the green zone and unlikely to be problematic.

If the trust is distributing to adult children, but the funds from that distributions end up back with the parents, then this is likely to be an issue and fall into the higher risk blue or red zones. An example of this is where an adult child at university is earning no other income and the trust distributes $180,000 of income to them. The family could save around $30,000 in distributing to them, but do not want to pay the $180,000 into the young adult’s bank account.

Unpaid distributions to companies are also a focus of the ATO crack down.

Is this the end of distributing to children or other family members?

Not necessarily, but it does mean that you need to strongly consider what distributions are made, as the ATO will be scrutinising them. If the distributions generally take place and the family or commercial basis can be explained, then it may fit into the ‘ordinary family or commercial dealing’ exclusion.

Just because you have done the distribution before, or it is common practice, does not mean it is an ‘ordinary family or commercial dealing’.

What do I have to do with my trust now?

If you have a family trust, it is important to consider whether any of the new ATO views could be problematic for you. While some of the views of the ATO do not apply until 1 July, other parts apply retrospectively. 

Trusts will continue to be an effective structure, but the tax planning aspect will become more complex and tailored. 

To discuss how these changes impact you, and the best way to manage your situation going forward, please contact your Mulcahy & Co Advisor.