ATO Changes Rules on Trust Distributions

The ATO have released 4 tax rulings that will stop commonly used trust distributions to family members. It’s one of the most significant developments for the taxation of trusts in over two decades.

As a result of these ATO rulings:

  • Your options to spread your trust income across your family members may be vastly limited; and
  • Your family group’s overall tax payable will probably increase.

We want to let you know about this now, so that you can plan for the extra tax payments that you may need to make.

Making trust distributions to family members

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”.

This is a game changer.

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.

The ATO have stated that they can go back as far as the 2015 tax year to review trust distributions.

It goes against what has been commonly done for many years and may vastly restrict how your trust distributes profits in the future.

What is the value to you (Benefit)

Tax laws change all the time, and it is our role as your accountants and advisors to keep you alert to important changes that affect you.

There are different levels of risk associated with different tax planning strategies that involve trust distributions.

The ATO has classified these risks as white zone, green zone, blue zone and red zone. The ATO will be investigating all red zone risks and some white zone risks and will not investigate white zone or green zone risks.

We can help you to understand how these ATO tax law changes affect you, discuss new strategies that you might be able to use, and estimate your tax payable for 2022 and 2023 so you can carefully plan for it.

How we can help you

We can:

  1. Review your current 2022 estimated taxable income for your entire family group, including any companies and trust you have.
  • Provide you with an “Estimated Tax Payable” report with trust distributions just in the “green zone”, without breaching any of the new ATO rulings.
  • Meet with you to discuss your options for 2022 tax planning.

After the 2022 Federal Budget on 29 March 2022 and the Federal Election before June 2022, you may need further tax planning advice for 2022 to take advantage of further Government announcements.

Please contact us and let us know that you would like us to get started on your 2022 Tax Planning.  

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