Trusts have been a recent target of the ATO after they released new guidelines on what’s known as Section 100A. The law is not new, but recent changes to the guidelines and the ATO’s application of the law are looming over accountants and their clients and may impact the way trusts distribute income moving forward.
The underlying objective of Section 100A is to deter scenarios where a trust allocates income to a beneficiary at a favourable tax rate but the funds associated with the income are enjoyed by some one else.
The most common example of this is where the trustees of a trust allocate income to an adult child beneficiary (or even a niece, nephew, uncle or aunt), therefore making them entitled to the income. However, instead of paying the income across to this beneficiary, the parents draw the money out of the trust and use it for personal purposes, and may have no intention of ever paying the debt to the beneficiary. This is the type of tax avoidance scenario the new guidelines are bringing into question.
If it is found a trust has not met the requirements of Section 100A, the trustee is taxed on the income at the top marginal tax rate (47%), instead of the beneficiaries’ marginal tax rates.
There’s many other scenarios that could trigger Section 100A in the new guidelines, which are unfortunately very grey in various areas, but in principal, if a trustee has a genuine intention to pay a trust entitlement to a beneficiary, the risk of Section 100A applying is much reduced.
As a first step we recommend that trustees keep evidence of how adult child beneficiaries might receive an economic benefit from their income entitlement from the trust. Did you pay for your child’s tax payments or help out with their first car or house deposit? Keep record of these payments (or even better, pay them from the trust) as they will help support your case if the distribution is questioned by the ATO.
Apart from evidencing expenditure and being clear on your intentions, there is no clear cut change to make moving forward as every trust scenario may be different to the next. Included in the guidelines are a number of scenarios which are considered lower to higher risk. When determining who the income of the trust should be allocated to, discuss with your accountant to see where you might fall in the risk categories and the expectations associated with allocating income to a beneficiary.
Other related blogs
ATO guidance for distribution of professional firm profits
Why use a family trust?
Author: Allan Edmunds
Email: allan@faj.com.au
