The ATO has updated guidance for trust distributions made to adult children, corporate beneficiaries and entities with losses. Depending on how arrangements are structured, there is potential for significant level of risk.
Released in February 2022, the updated guidance directly targets how trusts distribute income. As a result of the ATO’s more aggressive approach, many family groups will now (and potentially retrospectively) pay higher taxes.
Family trust beneficiaries at risk as ATO redrawing the boundaries of what is acceptable
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. If trust distributions are caught by section 100A, then this generally 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 some arrangements that are commonly used for tax planning purposes by family groups. The result is a much smaller boundary on what is acceptable to the ATO which means that some family trusts are at risk of higher tax liabilities and penalties.
What is Section 100A?
Section 100A is an anti-avoidance provision.
Section 100A has been around since 1979 but to date has rarely been invoked by the ATO except where there is obvious and deliberate trust stripping at play.
The ATO’s latest guidance suggests that the ATO is now willing to use section 100A to attack a wider range of scenarios.
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.
When section 100A applies, the trustee is taxed on the trust income at the top marginal rates.
The ’Risk Zones’
The ATO’s guidance sets out four ‘risk zones’ – referred to as the white, green, blue and red zones. The risk zone for a particular arrangement will determine the ATO’s response.
How can Walsh Accountants help?
If you have any concerns about your trust distributions and exposed risk to Section 100A, we encourage you to contact our accounting team for a confidential discussion based on your personal circumstances.
If you are looking for further information, particularly in relation to distributions of trust income to adult children, we highly recommend you refer to an article written by CGW Lawyers – Were my trust distributions OK? Or is the ATO coming to help with section 100A?