As you may or may not have read, the ATO has recently released several tax rulings that seek to limit commonly used methodologies surrounding trust distributions to family members.
It is one of the most significant developments for the taxation of trusts and family groups.
As a result of these ATO rulings:
- Your options to spread your trust income across your family members may now be limited; and
- As a result, your family group’s tax payable may significantly increase
For many years, it has been common practice by all business owners and investors who use Family (Discretionary) Trusts to look to distribute trust income across several adult family member beneficiaries.
Trust distributions are often made to adult children for asset protection and estate planning purposes and as a result, tax minimisation may be achieved.
On 23 February 2022, the ATO issued Taxpayer Alert TA 2022/1 ”Parents benefitting from the trust entitlements of their children over 18 years of age”.
In summary, the ATO are now of the opinion that trust distributions to adult children without physical distribution of cash is a tax avoidance measure. The ATO has even warned against cash payments being paid and then transferred back by the beneficiary.
The ATO has suggested the following;
- As a result of this scheme, the ATO may void the trust distribution and tax the trustee of the trust at the top marginal rate of 47% on the total distribution. Furthermore, penalties and interest may be applied.
- The ATO have stated that they can go back as far as the 2015 tax year to review trust distributions.
It has also been highlighted by the ATO that 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.
What to do next:
Should any of this concern you, we recommend that you/we review your distribution strategy for the year ending 30 June 2022. Timing will be crucial in handling these matters, particularly with the close review by the ATO.
Please contact our office on 08 6323 7000 to discuss tax planning.
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