Some newly released guidelines by the Australian Taxation Office (ATO) have clarified their position on situations where family trusts distribute to family members, but don’t tangibly pass on that distribution on to them.
The matter in question is around Section 100A. This is an anti-avoidance provision designed to stop arrangements where a trust distribution is made to a beneficiary, but the economic benefit of the distribution is effectively transferred to a person other than the beneficiary. When this occurs the ATO can disregard the distribution, and the trustee is assessed on that income at the top marginal rate.
A practical example of this would be a family trust distributing to an adult child, which creates an unpaid entitlement to the adult child. Historically, the trust may have recorded a reduction in the child’s entitlement in the trust by expenses paid by parents for the children. Alternatively the child may have entered into an arrangement to gift the unpaid entitlement to the parents which extinguishes the unpaid entitlement.
The ATO at this stage have not approved the reductions to the entitlement in either of these methods under the guidelines, and so unfortunately does not alleviate their concerns around the beneficiary receiving the economic benefit of the trust distribution.
Importantly, ‘ordinary family or commercial’ dealings are excepted – examining where your circumstances fit into the guidelines is paramount. It therefore becomes crucial to examine all transactions when making distributions. It is critical that records support those transactions would ordinarily occur in a family setting, or in the course of usual commercial actions.
The three items released by the ATO with respect to section 100A are as follows:
- A draft Taxation Ruling TR 2022/D1
- A draft Practical Compliance Guideline PCG 2022/D1
- A Taxpayer Alert TA 2022/1
These documents outline the circumstances when the ATO will not accept that a distribution is effective. They have also laid out a risk framework in a traffic light style format to determine whether your situation is high, medium or low risk.
It is imperative that you understand and review where you fall in this risk matrix. It is recommended that you discuss with you advisor to understand your risk exposure and the actions items you need to undertake.
Please do not hesitate to contact us if you require further assistance or if you wish to discuss your particular circumstances.
