ATO cracks down on trust distributions

The Australian Tax Office (ATO) has tightened its views regarding family trust distributions in situations where someone other than the recipient will benefit from the distribution or the distribution’s purpose was to save tax.

Currently in draft form, the guidance narrows parts of section 100A of the Income Tax Assessment Act (1936) regarding reimbursement agreements and the tax treatment of entitlements from private trusts, especially in relation to parents benefitting from entitlements of their adult children.

Section 100A of the Act is an ‘anti-avoidance rule’ that applies when the trust income entitled to lower taxed beneficiaries is enjoyed by another person who would otherwise have had to pay more tax if they were entitled to the trust income themselves. The rule makes the trustee, not the beneficiary, liable to tax on the income at the top marginal rate.

However, the rule does not apply to arrangements linked to ‘ordinary family or commercial dealings’, where no participants in the arrangements have a tax avoidance purpose, a condition that the ATO has further tightened.

Under the Taxpayer Alert, several types of family trust distributions to adult children of parents who are the trustees are not covered by the ‘ordinary family dealings’ exclusion.

This includes payments made toward expenses related to the children’s upbringing or while they were minors such as school fees, school uniform costs or their share of family holidays. It also includes payments of their share of family costs for the current year above reasonable expectations of cost, including a rate for board or lodgings and car expenses.

One of the draft rulings highlighted gifts from parents to a child, to help fund a home deposit for example, out of their trust distributions where the parent is on a lower tax rate than their child as a particular situation that would be flagged by the ATO.

The guidance package includes Draft Taxation Ruling TR 2022/D1, Draft Practical Compliance Guideline PCG 2022/D1, Draft Taxation Determination TD 2022/D1 and Taxpayer Alert TA 2022/1.