New ATO ruling on Trusts

Have a family trust? You could be affected by a new ATO ruling

The Australian Tax Office (ATO) have just released four tax rulings that will stop commonly used trust distributions to related entities like family members. It’s one of the most significant developments for the taxation of trusts in over two decades.

The key impact from these ATO rulings on your trust are:

  • The ability to spread trust income across family members with a lower tax rates will be limited if not totally denied, consequently
  • A family group’s overall tax payable will probably increase

We need to let you know about this now, so that you can plan for the extra tax payments you may need to make. Consequently, if your trust is directly affected, we will be contacting you over the next two weeks as we recommend scheduling a meeting sooner than, and in addition to, your scheduled Interim Tax Planning Meeting in April/May. The purpose of this meeting will be to discuss how these new rules will affect you in this 2022 tax year, and in future years.

The following explains in more detail the ATO rulings.

Distributing income to adult children changes

For many years, it has been common practice by all business owners and investors who use Family (Discretionary) Trusts to look to spread trust income across various family member beneficiaries.

These trust distributions are often made to adult children for asset protection, estate planning purposes and tax reduction (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).

This is about to get harder and more expensive.

On the 23rd of February 2022, the ATO issued Taxpayer Alert TA 2022/ targeting parents benefitting from the trust entitlements of their children over 18 years of age, by treating any income if the main aim is to reduce tax, at 47%.

This is a game changer.

It 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 this 47% rate on the amount of the distribution.

The ATO have stated that they can go back as far as the 2015 tax year to review trust distributions. Past distributions caught by these new rules will end up being taxed at 47%. In addition you will more than likely be hit with penalty tax between 50% – 200% of the tax avoided  plus interest charged on the above from the date the amended tax should have been paid. All in all it could be very expensive!

A helping hand

There are different levels of risk associated with different tax planning strategies that involve trust distributions, and the ATO has classified these risks as white, green, blue and red.

We want to help you to understand how these ATO tax law changes affect you, discuss new strategies that you might be able to use, and estimate your tax payable for 2022 and 2023 so you can carefully plan for it.

Our assistance will give you peace of mind that the way you are using your Trust, will satisfy the ATO and not draw audit attention to yourself.

Our plan to help you

Our recommendations are to:

  1. Review your current 2022 estimated taxable income for your entire family group, including any companies and trusts
  2. Provide you with an “Estimated Tax Payable” report with trust distributions, without breaching any of the new ATO rulings
  3. Meet with you to discuss your options under the new rules for distributions and your   2022 tax planning

Please note that this is initial advice for your 2022 tax planning to advise you on the new ATO Tax Rulings and how they affect you.

After the 2022 Federal Budget on 29 March 2022 and the Federal Election before June 2022, we believe we will need to give you further tax planning advice for 2022 to take advantage of further Government announcements.

Next steps

If you are impacted by these new rules we will contact you to book a time to discuss your response and plan moving forward.

02 4228 4877


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