The ATO has recently published its final position (TR 2022/4) on trust distributions that pose a risk to the integrity of the tax system. Specifically, the ATO has clarified how section 100A, an integrity rule that aims to prevent distributions of trust income being used to shift tax liability to lower-taxed individuals or entities, will be applied. As a result, trusts distributing to adult children, corporate beneficiaries, and entities with losses may face higher taxes due to the ATO’s more aggressive stance.

To trigger section 100A, a “reimbursement agreement” must be in place at or before the time the income is appointed to a beneficiary. This rule does not apply to distributions to minor beneficiaries or those under a legal disability. If section 100A applies, the trustee is taxed on the income at penalty rates instead of the beneficiary being taxed at their own marginal tax rates.

Previously, section 100A exceptions protected beneficiaries under a legal disability or those receiving distributions as part of an ordinary dealing. However, the ordinary dealing exception is now under scrutiny, leaving some vulnerable to higher taxes. For example, a university student who is presently entitled to trust income may reimburse their parents for expenses incurred when they were a minor. This arrangement is high risk if the student has a lower marginal tax rate than their parents, as the parents are ultimately receiving the income’s real benefit. Circular distributions, such as when a trust distributes income to a company owned by the trust, which then pays dividends back to the trust, are also considered high risk by the ATO. Other scenarios identified as high risk include when a beneficiary is a company or trust with losses that is not part of the same family group as the trust making the distribution, or when trustee of the trust issue units for the distribution owed to the beneficiary and the subscription price of the units is much higher than the market value. In these cases, the ATO views the arrangements as high risk from a section 100A perspective.

To ensure compliance, those with discretionary trusts should review all trust distribution arrangements in light of the ATO’s guidance and ensure that appropriate documentation is in place to demonstrate how funds relating to trust distributions are being used or applied for the benefit of the beneficiaries. The ATO’s new approach applies to entitlements before and after the publication of the new guidance, but entitlements arising before 1 July 2022 will not generally be pursued if they comply with the ATO’s previous guidance on trust reimbursement agreements or are low risk under the new guidance.

Should you please have any question in regards to above, please feel free to contact our friendly team in Pitt Martin Tax at 0292213345 our info@pittmartingroup.com.au.

The material and contents provided in this publication are informative in nature only.  It is not intended to be advice and you should not act specifically on the basis of this information alone.  If expert assistance is required, professional advice should be obtained.