The ATO is taking a hard look at distributions of trust income to adult children, particularly where the distributions have been made to take advantage of lower marginal tax rates, yet some other person obtained the actual benefit of that income. The other person may be other beneficiaries like a parent or parents.
The ATO are doing this through their application of section 100A, for which they have released a number of recentDraft Rulings and Guidance – if you’d like to get technical this might be worth a look.
They have introduced a “traffic light” system for various scenarios which range from low to high risk depending on the circumstances of each case. Clearly, the green zone is low risk, the red zone is high risk and the blue zone is in between.
Whilst these announcements are not new law, extreme care must be taken when considering how trust distributions should be made each year, and perhaps as importantly, whether any past strategies may need to be reviewed.
Section 100A is an anti-avoidance provision and it is what the ATO is using to come after these distributions.
When section 100A applies, the trustee is taxed on the trust income at the top marginal rate – currently 47%, and due to the nature of section 100A, even harsher penalties and interest are generally applied.
Although s100A was originally designed to prevent more historically aggressive tax schemes such as dividend stripping schemes, the ATO have advised that it can also apply to more common family trust distribution arrangements that had been acceptable practice for many years.
The answer is; it depends. The ATO have announced that they will generally not come after previous arrangements unless it is outside the“green zone” but they have left it pretty open, and unfortunately, rather vague.
There is a (potentially common) arrangement that is subject to specific Taxpayer Alert TA 2022/1, where:
The ATO have flagged that this type of arrangement falls within the red zone and they will conduct further analysis of the facts and cases as a matter of priority.
There is no time limit for the ATO to raise a Section 100A assessment, however, they have advised they will generally not go past 2014 in assessing if there is an issue.
First of all, make sure you take extreme care with your trust distributions for the upcoming 2022 financial year – your advisors atAttune will be able to assist with this to ensure you are compliant within the application of section 100A.
Secondly, although the ATO has announced items in the red and blue zones may warrant an ATO review, cases will be assessed on their facts meaning not all will be reviewed. If you have any concerns over past or present distribution arrangements, please contact our team to discuss how this may affect you. Call us on 1300 866 113 or send us an email.