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FIND YARRA RANGES | MARCH 2022
findyarraranges.com.au
Family Trusts in the ATO Firing Line ACCOUNTANT By Warren Strybosch
The ATO has released a suite of new guidance products that is set to have a major change on family trust distributions and tax arrangements. The ATO has released new draft public advice and guidance (PAG) products relating to section 100A reimbursement agreements and division 7A of the Income Tax Assessment Act 1936. The Draft Taxation Ruling TR 2022/D1 suite is open for consultation and clarifies the ATO’s position on reimbursement agreements under section 100A, and identifies arrangements that will not attract ATO compliance resources. Draft Taxation 2022/D1 outlines
Determination
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when “financial accommodation” arises under division 7A whilst Taxpayer Alert TA 2022/1 highlights arrangements of concern from the ATO where taxpayers are using adult-child beneficiaries of family trusts to avoid tax on income. The draft Ruling means the ATO may charge Trusts up to 47% tax where a trust distributes funds to adult children and it is found the parents are using those funds instead of the intended beneficiaries, in this case, the adult children. It has been common practice for family trusts to be set up and income splitting to occur between spouses and other family members e.g., adult children. The ATO is aiming to stop or at least restrict this practice by using section 100A arguing that the beneficiary never used the funds and therefore was not actually entitled to the trust money that was paid to them. If this is found to be the case, then the ATO can tax the trust at the maximum rate of 47% (45% tax + 2% Medicare levy).
The guidance will be relevant to any trustee (or controller) of a closely trust that may have concerns about whether the trust anti-avoidance provision in section 100A may apply when trust income is distributed to relatively favourably taxed beneficiaries, but the benefits of that income are enjoyed by others. It also addresses trusts that intend to, or have in the past, made a private company beneficiary presently entitled to trust income but not paid the amount on the basis that the amount is held in a sub-trust for the benefit of the private company and the arrangement avoids the application of division 7A. “The vast majority of small businesses operating through a trust will not be affected by this public advice and guidance,” the ATO explained. If the ATO begins to enforce section 100A, all trustees of family trusts will need to review their income-splitting strategies and how they distribute funds to beneficiaries. It will be important for trustees to have written document in place which adequately explains the justifications as to why a beneficiary is entitled to the revenue generated by the trust. This is going to be paramount for business owners who run their business through a family trust where the main business owner is the key person generate the revenue flowing through the trust and for those who have set up trusts to pass on funds to adult children. The ATO’s further guidance in PCG 2022/ D1 specifically calls out children-parent arrangements. It is likely these types of arrangements will be targeted resulting in future penalties applying if the ATO conducts an audit. An example might be where a beneficiary has a significant difference between their entitlement to taxable ‘net income’ and their ‘trust income’ in specific year (not that uncommon) and the ATO thinks the gap
is contrived to pay less tax. Again, it will be important to have carefully documented reasons as to how the adult children are using these funds for their own personal use e.g., pay board, petrol, etc. Another area the ATO will be looking closely at is where a trust pays money to a company in a circular way between a Trustee that holds shares in a Company and then the Company is also a beneficiary that pays dividends to the Trust. The idea being the Company becomes entitled to trust money which the Trustee is really using for its benefit (and which the Trustee should instead be accumulating and paying tax at 47%). It is advisable that these arrangements cease immediately. Family trusts have always been in the firing by the ATO and more so since Labor limited the ability of trustees to distribute funds to minors. These new developments, whilst they might add another level of complexity for trustees, does not mean trusts hold no value. They are still a good vehicle for asset protection, and when set up correctly, with the right documentation in place, can still provide a good way of distributing funds to adultchildren, and used for income-splitting purposes. At Find Accountant, we provide SMSF tax advice. Our senior accountant is also an award-winning financial advisor. If you require SMSF advice or are considering whether or not to wind up your SMSF, then speak to Warren Strybosch at Find Accountant Pty Ltd.
Warren Strybosch You can call them on 1300 88 38 30 or email info@findaccountant.com.au www.findaccountant.com.au
“The draft guidance sets out the ATO’s preliminary but considered views on the interpretation of the relevant law, as well as guidance on how the ATO will administer the ATO view as expressed in the draft products,” the ATO said.
WARREN STRYBOSCH
“We have included explanations of proposed transitional arrangements to support clients to adjust their tax affairs to comply with the draft guidance once it is finalised.”
The founder of the Find Group of companies draws on his diverse background, which ranges from teaching, to serving in the army, to taxation and accounting, to coach and help clients live their best financial lives. A multi-award winner, Warrens’s innovative approach in business means he was a champion of virtual financial advise long before the pandemic. Warren established the Find Foundation, which owns and operates acroos Victoria.
The products address the situation when certain trust distributions may attract the operation of section 100A or division 7A of part III of the Income Tax Assessment Act 1936 (ITAA 1936), according to the ATO.
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