Tax planning and trusts – things may be more complex this year

In the lead up to tax time, it is important for clients who have discretionary/family trusts to consider the distribution of income received by the trust. This year determining who the trust distributes to may require some extra care. This is because the ATO has released draft tax rulings which are looking to capture tax avoidance regimes and deem tax payable at the top marginal rate in certain circumstances.

The tax rulings are detailed and complex – and something accountants and tax specialists are currently working on getting their head around.

The short of it is that the ATO is looking to crack down on trust distributions where, on the books, the trust is distributing amongst multiple beneficiaries (often one or more family members and/or bucket companies) but the actual benefit of the money isn’t flowing that way.

An example of this is where Mum and Dad are in control of the trust and the trust distributes $100,000 income out among Mum, Dad, three adult children and a bucket company (minimising the tax payable) – but practically all the income gets paid to Mum and Dad. The ATO may consider this a ‘reimbursement agreement’ under section 100A of the Income Tax Assessment Act 1997 and will deem tax as being payable at a higher rate. There is a carve out for an agreement that has been entered into in the course of ‘ordinary family or commercial dealings’ however there is much debate over what this means.

Importantly, the draft ruling is proposed to apply to arrangements made both before and after the ruling. The ATO has, however, indicated that it is unlikely to look back to income years before 2014-15, unless it is already considering income tax affairs prior to 1 July 2014.

If you have a discretionary/family trust in place, we strongly recommend you speak to your accountant regarding the possible implications this ruling could have on your trust. This will depend on how the trust has been operated historically and you may otherwise need to adjust your tax planning into the future.

If you have any questions in relation to trust matters, please contact the Osborn Law team on (02) 4927 2900.