ATO Targets Trusts and Trust Distributions

The Australian Taxation Office (ATO) is targeting tax avoidance through family trust arrangements by clarifying rules around certain types of trust distributions.

Recently unveiled new guidance from the ATO directly targets how trusts distribute income and as a result of the increased scrutiny, family groups may face higher tax bills.

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.

Generally, these arrangements involve trust distributions to low-taxed family members or family companies where the cash benefit of the distribution is diverted away from the beneficiary, usually to another family member who would otherwise pay a higher rate of tax if the trustee distributed directly to them.

If trust distributions are caught by section 100A, it typically 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 arrangements that are commonly used by family groups for tax planning purposes. The result is a much narrower boundary on what’s acceptable to the ATO, which means that some family trusts are at risk of higher tax liabilities and penalties.

The Section 100A provision is decades old and was designed to stop trust stripping, where trustees distribute money to individuals with low or zero tax obligations.

Essentially, the ATO guidance makes clear that any financial benefit distributed needs to be legitimately for the benefit of that receiving beneficiary. If the ATO determines this is not the case, it can rely on section100A as an anti-avoidance provision that targets these arrangements.

There are some important exceptions to section 100A, including where income is appointed to minor beneficiaries, and where the arrangement is part of an ordinary family or commercial dealing.

Much of the ATO’s recent guidance focuses on whether arrangements form part of an ordinary family or commercial dealing. The ATO notes that this exclusion won’t necessarily apply simply because arrangements are commonplace or they involve members of a family group. For example, the ATO suggests that section 100A could apply to some situations where a child gifts money that is attributable to a family trust distribution to their parents.

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 (such as 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.

If you need information relating to your personal situation, ring our Accounting & Business Advisory team on 1300 764 200 or email and we will get in touch.