ATO Draft Ruling – Death Knell for Family Trusts?

What does it mean?

The Taxation Office (ATO) has recently published a draft ruling (TR 2022/D1) which appears to be a macabre attempt to put another nail in the coffin for family trusts.

To put it simply, the ATO proposes to make the trustee of a family trust pay income tax on a distribution made to a beneficiary where there is an agreement comprising the following:

• Benefit of the distribution is provided to another person/entity

• Intention to reduce the tax liability of a person/entity

• Arrangement falls outside of ordinary family or commercial dealings

An example provided by the ATO is where a trust makes a distribution to an adult child beneficiary so that their taxable income does not exceed a marginal rate threshold and the benefit is not provided to that beneficiary, but rather to other members of the family, such as the parents (who have a higher marginal rate of tax). Under these circumstances, the trustee would be liable for income tax at a rate of 45%, rather than the beneficiary at their lower marginal rate.

A determining factor will be whether the arrangement falls outside of the phrase “ordinary family or commercial dealings” and needs to be considered on a case-by-case basis.

What is the ATO’s approach?

The ATO has released a guideline (PCG 2022/D1) explaining their compliance approach based on an assessment of the risk factors, as summarized below:

• White (low risk)

• Green (low risk)

• Blue (medium risk)

• Red (high risk)

In practical terms, the review period is endless with the exception of low risk arrangements where the period will generally not extend before 1 July 2014.

Where to from here?

We recommend trustees consider the following:

• Trust distribution resolution for the year ending 30 June 2022

• Ability to provide the benefit of a trust distribution, past and future, to a beneficiary

• Explanation why a beneficiary with a present entitlement to trust income may not receive the benefit of the entitlement

We will provide an update of the ATO’s position once a final Ruling is available. In the interim, if you have any questions please contact DBS Accountants + Business Advisors on 07 3666 0684.