ATO Cracks Down On Family Trust Tax Planning
While the ATO have released new tax planning rules aimed to stop commonly used trust distributions to family members, what do the changes mean in the long term?
While paying tax is regarded as somewhat of a necessary evil in Australia, you do have some degree of control in regards to how much you pay. When queried about the tax minimisation schemes he deployed during a federal investigation into the media industry in 1991, the late Kerry Packer managed to articulate his opinion on the tax in a way that many Aussies identified with at the time - and still do now. “Of course I am minimising my tax. If anybody in this country doesn’t minimise their tax, they want their heads read because as a government - I can tell you you’re not spending it that well that we should be donating extra!”
For many years, a common tax planning practice that has been deployed by all business owners and investors who use Family (Discretionary) Trusts, is to look to spread trust income across family member beneficiaries. However, the ATO has launched a range of new initiatives that are going after these practices, and is regarded as one of the most significant developments for the taxation of trusts in over two decades.
How To Navigate The New Family Trust Tax Rules
As one of the more common tax planning methods used in Australia, 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 percentage for the family group is lower as a result of the spread of these trust distributions. Although long anticipated, the Australian Tax Office has moved to crackdown on such practices, and is now focusing its attention on a specific part of the tax law, known as section 100A. Where 100A applies, the trust distribution will be taxed to the trustee of the trust - at the top marginal rate - rather than the beneficiary to whom it was to be taxed to, or who would have likely paid considerably less tax than the trustee.
As a general rule, section 100A can apply where:
A beneficiary is presently entitled to a share of the income of a trust
There is an agreement (whether formal or informal, written or unwritten) whereby a person other than the beneficiary will benefit from the amount, and
A purpose of the agreement is that less income tax will be paid.
Section 100A does not apply if the agreement is entered into as part of an ‘ordinary family or commercial dealing’ - but it is this ‘ordinary family or commercial dealing’ aspect that the ATO is really clamping down on. In particular, the ATO’s view is that the carve out does not operate merely because all parties to the arrangement are family members, or that the practices are widespread.
According to Taxpayer Alert TA 2022/1 released by the ATO on February 23 2022, the update 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, and they may charge penalties on this as well. In addition, the ATO has advised that they have the power to go as far back as the 2015 tax year to review trust distributions.
For business owners and investors who have long used their family trust in this fashion, the options to spread trust income across family members may be vastly limited, and the family group overall tax payable will likely increase. Many industry experts believe the approach of the ATO to be grossly unfair, as it goes against common practices implemented over many years, and may vastly restrict how trusts distribute profits in the future.
While tax laws change all the time, 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 blue zone risks, and will not investigate white zone or green zone risks.
If you have a trust, it has net income to distribute this year and has distributed income to beneficiaries in any financial years from the 2015 tax year onwards, it is extremely important that you review your exposure to this new approach from the ATO.
To protect yourself, your business and your family against the wrath of the Australian Tax Office, partnering with a reputable accountant who knows the ins and outs of tax planning is a must. To get yourself prepared for the upcoming end of financial year submissions, it’s important to review your current estimated taxable income for your entire family group along with any companies and trusts, do everything in your power to stay within the green zone, and assess your options for moving forward into the next financial year. Thankfully, Muro can help with all of this and more.
Sourcing Help With Managing Your Tax Obligations
Whether you’re starting a business, purchasing an existing one, or even revaluating where your current enterprise stands - all require some form of financial know-how if you hope to successfully navigate your legal tax requirements as well as hitting your financial and business goals.
However, if understanding the legalities that surround your business or finances isn’t your strong point, then it may be reassuring to know that you’re not alone. In fact, many businesses (big and small) enlist the services of an accountant in order to free up their time while knowing that their financial obligations are already taken care of by the professionals.
Ultimately, the team at Muro believe that every business owner is an entrepreneur. However, accounting does not discriminate - finances break down barriers and are not territorial. If you would like to take a deeper look into your finances, please get in touch with us at Muro today to ensure that you’re on the right path for success.