ATO scrutiny of family trust distributions

On 23 February 2022, the Australian Taxation Office (ATO) issued multiple draft guidance documents relating to trust arrangements that may be caught by anti-avoidance trust tax laws. The ATO guidance focusses on decisions made by trustees which may ultimately attempt to reduce or eliminate an individual’s income tax liability.

When the ATO applies the anti-avoidance laws, the trust distribution is deemed invalid, making you pay tax at the penalty rates of 45% plus Medicare levy.

How do I avoid the penalty rates?

Broadly, the ATO’s preliminary view is that the anti-avoidance rules will apply if a beneficiary of your discretionary trust is presently entitled to income, and the entitlement:

  • meets a connection requirement (commonly known as a reimbursement arrangement)
  • actually benefits someone other than the beneficiary
  • has a tax reduction purpose, and
  • is not excepted as an ‘ordinary family or commercial dealing’.

Ordinary family of commercial dealing

The ATO’s announcements do not go into depth about what is, and what is not, an ordinary family or commercial dealing. However, in short, if you are operating your business in a trust structure and you reinvest your earnings back into working capital of your business, these rules will not affect you.

Also, the ATO has stated that distributions made equally to spouses who themselves have a shared financial responsibility of the family unit and ultimately enjoy the shared benefits are acceptable.

What is not OK?

The ATO has released a Taxpayer Alert which has an example of beneficiaries who are adult children of the controllers of the trust.

Arrangements where an adult child receives a substantial distribution but does not receive an actual economic benefit may attract the ATO’s attention.

Getting it right

Making sure you get trust distributions right is an important step each year as part of your obligations as a trustee. If you wish to speak to us directly about your current year situation, please reach out.

We would be happy to discuss your optons for this financial year.


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