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ATO Scrutiny of Family Trust Arrangements

three generation of family standing on beach with arms around each other

The ATO recently announced increased scrutiny of how discretionary trusts distribute their income to beneficiaries – and who then ultimately receives the economic benefit of those distributions.

Scott Vollmerhause, PVW Tax Counsel observes, “These changes are likely to impact some longstanding trust income distribution practices, especially those within family groups.”

The legislation the ATO is now looking to apply with more rigor does not apply to arrangements that constitute an ‘ordinary family or commercial dealing’. However, what you might consider to be ‘ordinary family dealings’ in a general sense, such as distributing trust income ‘on paper’ to adult children but where the cash is never actually paid to those adult children, may not fall within this exemption.

Ordinary family or commercial dealing

For your trust’s distributions to be considered an ‘ordinary family or commercial dealing’, the transactions between your trust, your family members and their associated entities must be explainable as achieving family or commercial objectives (other than merely serving to minimise tax payable across your family group).

Examples of ordinary family or commercial dealings that the ATO has indicated it won’t be seeking to review include:

  • A family trust distributes income equally between spouses who themselves have a shared financial responsibility of the family unit and ultimately enjoy the shared benefits of the distribution from the trust.
  • A family trust distributes to beneficiaries who are controllers or responsible for the management of the trust when funds are retained by the trust for working capital or reinvestment.
  • A family trust makes a distribution to a low-income adult child of the trustee and that adult child is able to access or apply that entitlement at their discretion in a timely manner (the ATO expects that cash to be paid out to the adult beneficiary, or applied for their benefit, within two years).

ATO compliance

Arrangements connected to trusts that have or more of the following feature may attract the ATO’s scrutiny:

  • Gifts of funds by the beneficiary of a trust to another person or entity.
  • Amendments to the trust deed that might create better taxation outcomes.
  • Distributions to loss companies or trusts in certain circumstances, including where the beneficiary entity has tax losses or involve a private company that use that distribution to fund a distribution to a non-resident.

This list is not exhaustive and if your arrangement has any of these features, the ATO will be expecting to see contemporaneous documentation to explain why the arrangement was undertaken in a particular way.

Trustees must also keep in mind the general anti-avoidance provisions if any transaction or arrangement is done with the sole or dominant purposes of obtaining a tax benefit.

What, if any, actions should Trustees of trusts be taking?

Mr Vollmerhause concludes, “While trustees have always had to exercise due care in resolving how trust income is to be distributed, this recent guidance from the ATO may give rise to new considerations for trustees when they come to distribute trust income for the years ending on or after 30 June 202.”

Please contact PVW Partners or your usual Partners advisor should you have any questions in relation to the ATO’s guidance and how it may have application to your trust and its income distributions (past or future).

Read more from PVW Partners with our recent article Injecting Private Equity into your Business.



Compiled by the BDmag editorial team


Compiled by the BDmag editorial team