ATO scrutiny of family trust arrangements

On 23 February 2022, the ATO issued multiple draft guidance documents relating to trust arrangements that anti-avoidance trust tax laws may catch.

TR 2022/D1, PCG 2022/D1 and TA 2022/1 have been released and focus on decisions made by trustees which may ultimately attempt to reduce or eliminate an individual's income tax liability.

Broadly, TR 2022/D1 states that the arrangement concerning trust distributions will not come within anti-avoidance trust tax laws if they constitute ordinary family or commercial dealings.

The draft tax ruling and practical compliance guidelines go into depth about it is, and what is not, an ordinary family or commercial dealings. However, in short, if you are operating your business in a trust structure and you reinvest your earnings back into the working capital of your business, their rules will not affect you.

The ATO has also released a Taxpayer Alert TA 2022/1, which discusses beneficiaries who are adult children of the controllers of a trust. Arrangements where an adult child receives a substantial distribution but does not receive an actual economic benefit, may attract the ATO's attention. To be caught within the Taxpayer Alert, a discretionary trust would resolve to make adult children of trustee entitled to substantial amounts of taxable income. These entitlements do not generally result in the adult children's taxable income exceeding the top marginal tax rate. Finally, amounts are not paid to the adult children but instead paid to their parents (i.e. the controller of the trust) to set off "liabilities" owed. The ATO is aware of circumstances such as adult children repaying expenses incurred concerning their upbringing and other family costs that the parents would ordinarily meet.

In many of these instances, there is no contemporaneous evidence of the claimed obligation. The ATO has advised in TA 2022/1 that compliance resources are being made available to scrutinise these arrangements.

Ensuring you get trust distributions right is a crucial step each year as part of your obligations as a trustee. Please reach out if you wish to speak with us directly about your current year's situation.