Important changes to ATO policy on discretionary trusts
By David Downie, Partner
28 February 2022
Last Wednesday the ATO released four new pieces of guidance in relation to discretionary (family) trusts that demonstrate a much more aggressive position in relation to the taxation of trust distributions to related companies and family members.
The documents show that the ATO’s policy on the use of discretionary trusts for family tax planning has fundamentally changed, and that the ATO will be focusing on this area in the future.
The ATO will be tackling what advisers have traditionally considered to be a cornerstone of tax planning – distributions of trust income to children over 18. For trusts caught out under the ATO’s new ruling, the distributions of income will be taxed to the trustee of the trust (at the top marginal rate) rather than the beneficiary to whom it was purportedly distributed.
In Taxpayer Alert TA 2022/1 entitled “Parents benefitting from the trust entitlements of their children over 18 years of age,” the ATO set out that they are currently reviewing trust arrangements where parents enjoy the economic benefit of trust income appointed to their children who are over 18 years of age. The common feature of the arrangements is that trust income is appointed between members of the family group but in substance it is the parents who exercise control over and enjoy the economic benefit of the income. They are also concerned about similar arrangements involving other family members of controlling individuals that would have lower marginal tax rates than those of the controlling individuals.
The ATO state that:
- “We are currently reviewing these arrangements and are engaging with taxpayers who have entered into, or are considering entering into, these and similar arrangements.”
- “Taxpayers and advisers who enter into these types of arrangements will be subject to increased scrutiny.”
- “Penalties may apply to participants in, and promoters of, this type of arrangement. Registered tax agents involved in the promotion of this type of arrangement may be referred to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agent Services Act 2009.”
In other words, the ATO are looking to apply maximum pressure to attempt to outlaw tax planning via the use of trust distributions to low income family members. There may still be the potential for such distributions to occur, however such arrangements will be subject to much closer scrutiny in the future.
The ATO also released new draft guidance on unpaid present entitlements of trusts and the “Division 7A” rules, and their interpretation of the rules on “reimbursement agreements” for trusts.
If you have a family trust, it is important to consider how the new ATO views will impact you. If your trust distributes income to adult children, or to companies, then you should review your situation in detail.
Whilst some of the ATO views were released in draft form, or are not proposed to apply until 1 July 2022, other items apply retrospectively. As such it will be vital to consider the issues and address them as part of the 2022 tax planning for all discretionary trusts. In the coming weeks we will be reviewing the ATO publications in detail. The professional bodies are providing feedback on the ATO publications by early April, and we will be keeping abreast of any developments.
Trusts will continue to be an effective structure for managing family wealth, however tax planning regarding distributions will be more complex in the future. Please contact us if you have any questions.
IMPORTANT NOTICE
This blog post contains general information only and has been prepared by Allworths without reference to your objectives, financial situation or needs. Allworths cannot guarantee the accuracy, completeness or timeliness of the information contained here. By making this information available to you, we are not providing professional advice or recommendations. Before acting on any of the information contained here, you should seek professional advice.
