The Australian Taxation Office has recently issued a draft taxation ruling (TR 2022/D1) and a practical compliance guide (PCG 2022/D1), outlining its view of the operation on the income tax laws with respect to trust distributions.
The draft ruling explains how the Tax Office will seek to apply Section 100A of the Income Tax Assessment Act (1936) with regards distributions made by trusts. Section 100A was enacted to limit tax avoidance arrangements, where trust distributions were made to beneficiaries that paid little or no tax.
The ATO has identified what it considers to be high risk arrangements that it will be focusing its audit activity on are as follows:
- Distributions to Adult Children
If adult children (or family members) are made presently entitled to trust income, but do not receive that income, then the ATO will seek to apply Section 100A and have the income taxed at the top marginal tax rate.
- Distributions to Loss Entities
Where beneficiaries with tax losses are made presently entitled to trust income, but they do not receive that income, then the ATO will seek to apply Section 100A and have the income taxed at the top marginal tax rate.
The ATO has also provided several safe harbour arrangements which will not require further investigation:
- Distributions amongst spouses
Where a trust distributes income amongst spouses and that income is shared between those spouses.
- Retention of Funds for Working Capital of a Business or Investment
Where a trustee retains the funds made presently entitled to a beneficiary, then provided those funds are used for the working capital of the trust business or for improvement of investment of assets.
We also note that the ATO is currently appealing a Federal Court decision (Guardian AIT Pty Ltd v Commissioner of Taxation) which would appear to be at odds with some of the views expressed in the Commissioner’s ruling and guidance. As such, we recommend that taxpayers take a balanced assessment of the ATO’s views as to the application of trust laws.
If you have any questions or wish to discuss these matters further please contact Brad Ryan on (07) 3910 575 or [email protected].