ATO crack down on family trust distributions
TRUST RULING SECTION 100A
On 23 February 2022, the ATO released a number of documents that outline new and very aggressive approach to the taxation of trusts, particularly where trust distributions have NOT been actually paid to the beneficiary (ie when you allocate profits to adult children or parents (which main reason is to minimize tax)), but the trust distribution has not actually been paid to the beneficiary. Which the ATO are advising that if not paid, they will effectively reverse the allocated distribution, and tax these amounts in the trust at 47% tax.
So we have been in communication with our accounting bodies to get practical guidance on how distributions need to recorded and paid, if distributing to other family members or entities, and note that:
- Any profit distribution recorded to anybody outside of the husband or wife in the business, will initially be recorded as an unpaid distribution liability to that beneficiary;
- Which then you need to record any actual payments to that person to reduce this liability (but if beneficiary (adult child, grandparent, brother, etc) actually receives economic benefit, via way of bank transfer to their bank account, they cannot then refunded/gifted back to parents that own the business)
- And also record any benefits that you have paid on their behalf – which the following is a summary of what can reduce the profit liability, and what can’t be:
|CAN reduce unpaid profit liability||CAN’T reduce unpaid profit liability|
– adult child’s university fees, tafe fees, books, etc
– uni boarding costs
– apprentice’s tools or other work expenses
– holiday costs
– home boarding costs (need to be a signed agreement)
– home food costs (need to be a signed agreement)
– telephone bills
– car running costs
– car purchase costs
– private health insurance cover
– medical bills
– an allowance/pocket money
- The above would need to be summarised each year, and signed off by the beneficiary, to confirm their understanding of why they are not receiving this portion of the trust distribution.
- So there will be the initial profit allocation, less any prior payments made, less any other benefits made, with a balance owing that needs to be paid within a year of tax return being lodged.
What is the ATO expecting?
- That unless distributions are actually paid to the beneficiary, that the profit should stay with husband/wife who run the business, and pay the extra tax.
- The ATO understands that the main reason is for tax minimisation, but they are saying the main focus should be the beneficiary receiving the economic benefit.
What if I don’t pay the remaining amount?
- The ATO have stated they will audit you, and review the distribution, and assess as income to the trust and pay 47% tax on it.
- Which they then could go back and look at previous tax years, that you haven’t paid the profit allocation.
Can I pay the profit to the beneficiary as bank transfer, who then pays it to the husband/wife of the of the trust?
- The ATO will deem the beneficiary as not having received the economic benefit of the income, so will tax the trust at 47% tax.
- the ATO can have the powers to look at bank accounts of by both the beneficiary, and the business or parents
Can the beneficiary who receives the paid distribution, then pay the husband/wife an expensive gift for Christmas/birthday/etc?
- The ATO may question this, if this is not a normal pattern of gifting.
TRUST DISTRIBUTIONS MINUTES
Our clients with Trusts will be sent an email from us regarding their panned Trust Distributions for this year. We are also calling some of them to discuss this.
We will need to get an estimate of the profit for the 2021-2022 year, but the main part is what % or $ is planned to go to which family trust beneficiary which we then need to prepare a trust minute that you will need to sign off.
|This trust minute will nominate specific amounts to specific family members (like $400 to each child), and the balance to go to a final person (or the final balance split between 2 people, like husband and wife).|
|So what we need you to do is:|
|1. Please consider your profit estimates for the 2021-2022 year;|
|2. Consider any abnormal events that have occurred in the 2021-2022 Financial Year in your business or personal names that may affect your usual income levels such as: Sale of Shares, Property or any other asset; extra high income levels in business or wages; etc|
|3. Please email me if there are any significant changes compared to the 2021 year. I will try to call or email you to discuss the preferred profit distribution, which we need to consider:|
- your estimated 2021-2022 profit figures
- your current business and family structure
- Profit distributions of previous tax returns completed
|We will then email you a trust distribution minute and related paperwork to sign off and return to us for our records.|
|Distribution to Minors|
|We can still only distribute $416 to minors, as above this will be taxed at the highest tax rate of 47% tax. This $416 includes any other non-working income which will need to be taken into consideration like interest, investment income, etc. My usual practice is declare the trust distribution to be $400 to allow for minor income such as interest in bank accounts. However, if they have received more than the $16 estimate, please let me know.|
|Children Turned 18, or New Adult Beneficiaries (or an U18 child but finished school and working full-time)?|
|If your child has turned 18 since 1 July last year (or this year will be the first year we have distributed family trust profits to them as adults, or they are U18 and working full-time), we can only distribute more than the $416 if they have their own Tax File Number set up. We must then complete a report and send this to the ATO, within a month after the year ends (so by 28 July). If you think this relates to you, please let us know so we can complete the additional papers and lodge with the ATO.|
|Issues if we do nothing:|
|If a Resolution is not made in writing and signed before 30th June, the ATO may deem that no beneficiary will be made presently entitled to the income of the Trust. If no beneficiary is made presently entitled to the Trust income as at the 30th June, you (the Trustee) will be assessed on the Trusts income at the highest marginal tax rates plus Medicare levy at (47%).|
|Cost & Benefit to you:|
|We are happy to complete this work for you to ensure you satisfy ATO compliances and discuss with you your trust distribution preferences (& other pre-30 June tax plans like super contributions). The cost for this service is $190.00 + GST which we feel is a minor cost to review your income year, make any necessary 30 June changes and satisfy the ATO requirements and minimise tax.|
If you have any questions, please call us to discuss.