ATO changes rules for trust distributions

The ATO have released four tax rulings that will significantly impact on the ability to make trust distributions to family members and related entities. This is one of the most significant developments for the taxation of trusts in over two decades.

As a result of these ATO rulings:

• Your options to spread your trust income across your family members may be vastly limited
• Your family group overall tax payable will probably increase.

On 23 February 2022 the ATO changed the way that they will be taxing trust. This is a retrospective change that may impact Trust distributions dating as far back as 2015.

The ATO plans to invalidate the trust distribution and tax the trustee of the trust at 47% on the amount of the distribution. This may vastly restrict how your trust distributes profits in the future.

What we can do to minimise the impact

There are different levels of risk associated with different tax planning strategies that involve trust distributions. PKF will work with you to review your current 2022 estimated taxable income for your entire family group, including any companies and trust you have and strategise, and plan to ensure compliance with the updated guidance.

The previous approach

Traditionally, it had been common practice by those that use Family (Discretionary) Trusts to look to spread trust income across family member beneficiaries.

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 % for the family group is lower as a result of the spread of these trust distributions.

The ATO revised approach

However, on 23 February 2022 the ATO issued Taxpayer Alert TA 2022/1 ”Parents benefitting from the trust entitlements of their children over 18 years of age”.

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 rather than pass on the benefit of the distributions to those adult children.

The ATO plans to invalidate the trust distribution and tax the trustee of the trust at 47% 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.

Our plan to help you

1. Review your current 2022 estimated taxable income for your entire family group, including any companies and trust you have. Prior year distributions will also be considered
2. Provide you with an “Estimated Tax Payable” report with trust distributions just in the “green zone” in accordance with the ATO guidance, without breaching any of the new ATO rulings for the 2022 year
3. Meet with you to discuss your options for 2022 tax planning and beyond.

If you need help navigating the impact of these changes, contact the team at PKF today.