ATO cracks down on Trust Distribution Schemes
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Section 100A guidance now finalised.
The Australian Taxation Office (ATO) has released final guidance on section 100A of the Income Tax Assessment Act, which deals with trust distributions.
Following an extensive period of consultation with the tax community, the final guidance approach has been developed to support trustees and their advisors, who have been requesting clearer guidance to help them manage their tax obligations.
The guidance aims to clarify tax obligations for trustees and their advisers, and follows an extended consultation period with the tax community.
The ATO is closely monitoring trust distributions made to beneficiaries, specifically when these distributions are used to gain a tax advantage by redirecting the funds away from the intended beneficiary or back to the trustee or other parties.
It applies to arrangements where a beneficiary is entitled to trust income but agrees that the income will be shared with another person, with the intention of reducing or eliminating income tax; and the arrangement is made outside of regular family or commercial activities.
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What is Section 100A?
Section 100A is a part of the tax laws in Australia that allows a trust (a legal arrangement where one person manages money or property for another person) to give some of its income to a beneficiary (the person who receives the money or property) without the beneficiary having to pay tax on it.
In some instances, this might be advantageous since it permits the trust to give money to the beneficiary without the recipient having to pay tax on the money.
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What are the significant changes?
The finalised guidance contains a few modifications to the previous draft documents, including the elimination of the "blue zone," an expansion of "green zone scenarios" regarding distributions, including the provision of a two-year timeframe to pay distributions, and an expansion of the individuals/entities to whom distributions can be made with less stringent requirements to pay.
In certain cases, it is regrettable that the final guideline still applies retroactively to trust entitlements that originated prior to 1 July 2022.
We take notice that the ATO has affirmed that it will not spend compliance resources to evaluate "low-risk" trust arrangements created prior to July 1, 2014.
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Broadly, this guidance will affect previous arrangements to circumstances where:
A beneficiary has become now entitled to trust income, but it has been agreed that the income would be shared with another individual;
such arrangement is formed with the intention of causing someone to pay less or no income tax as a result;
the agreement was made outside of the course of 'regular family or commercial activities'.
Some common transactions that could now be at risk are:
Applications of trust income by a trustee on behalf of an adult beneficiary with a lower marginal tax rate to pay for expenses attributable to them (for example, a trust distribution to an adult child who then pays back their parents for college fees or vacation costs);
Trustee entitlements gifted to a trustee, which happen when a beneficiary is given the right to trust income for a certain year but then decides to give their right back to the trustee (or someone else).
These examples are not meant to be all-inclusive, and the ATO does not think they are the only situations where section 100A could be used.
It is important to remember that the underlying law (in section 100A) has been in place for more than 40 years, and the ATO has accepted some (or all) of these examples as acceptable family arrangements up to this point.
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HERE are links to help you identify if you are at risk for ATO audit:
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