For many years, it has been common practice by all business owners and investors who use Family (Discretionary) Trusts to look to spread trust income across family member beneficiaries. Trust distributions are often made to adult children for asset protection and estate planning purposes. Sometimes, the adult children in a family may have lower tax rates than their parents, so the overall tax rate % for the family group is lower as a result of the spread of these trust distributions.
However, 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”.
It states that the ATO believes that parents who make trust distributions to their adult children and then arrange for their children to give the distribution back to them are only doing this to reduce tax. The ATO plans to invalidate the trust distribution and tax the trustee of the trust at 47% on the amount of the distribution, and they may charge penalties on this as well.
The ATO has stated that they can go back as far as the 2015 tax year to review trust distributions.
Some key points from the new guidance
- The ATO has warned that they are already 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 these 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.
- The ATO’s concern is a manipulation of the tax rate through the use the lower marginal tax rate applying to adult children (e.g. the tax-free threshold of $18,200) in circumstances where the benefit of the income is being enjoyed by the parents (e.g. to meet household expenses). This is a common arrangement.
What happens next?
Taxpayers with family trust arrangements need to consider the new guidance and prepare against a review for section 100A. As a starting point, review larger distributions of income in the last few income years and seek advice on your position and options. If you are documenting and/or considering a current trust distribution, it is prudent that you consider the new guidance.
Speak to one of our accountants today if you have any questions or need assistance with your family trust.