A draft ruling was issued in February 2022 where the ATO has targeted common transactions many trustees might have entered into in the past. This ruling seeks to stop commonly used trust distributions to family members.
In the past, it has been relatively common practice for business owners and investors who utilise Family (Discretionary) Trusts to spread income across family beneficiaries. These distributions, usually to adult children, are often made in the interest of asset protection and tax planning.
In many circumstances, the adult children in a family will have a lower taxable income and therefore lower tax rates than their parents. Spreading trust distributions their way, lowers the family groups overall tax rate. However, it is also common for parents to benefit from the distributed funds, rather than give it to the children.
The updated ruling seeks to put an end to this practice, which may have a significant impact on 2021 and the future of trust distributions.
The ATO have stated that they believe parents who make these kinds of trust distributions to their children and arrange for the children to return the distributions (in the form of a gift or loan), do so to reduce their Family tax.
The ATO’s updated ruling seeks to invalidate these trust distributions and tax the trustee at 47% of the amount of the distribution. In contrast, if the children physically get the benefit of the funds, (and keep them) there is no issue.
Please note, the ruling is far more detailed and therefore, we will be publishing more information to our clients shortly.