The ATO has last week released a suite of four publications giving long-awaited draft guidance addressing their concerns over the tax consequences of common trust distribution arrangements where beneficiaries pay lower tax rates on the trust income distributed, but may not actually benefit from the funds that were recorded as having been distributed to them.
A Taxpayer Alert (TA 2022/1) has been issued in final form while the other three publications have been issued in draft form for purposes of consultation (submissions to be made up to 8 April 2022) before being issued in final form.
We will continue to keep you informed once the final versions of the publications are released.
It should be noted in particular that the guidance publications take a much more restricted approach when it comes to distributions by trusts to family members (such as adult children), as well as tightening up the ATO’s views on the appropriate treatment of trust distributions made to related companies.
Key to understanding the implications of these announcements is the concept of a ‘reimbursement agreement’ and the anti-avoidance rule in Section 100A of the tax legislation. The ATO has confirmed that it takes a very broad view of the range of situations in which this anti-avoidance rule should be applied.
The ATO has also discussed the exclusion for ‘ordinary family or commercial dealings’, giving examples of situations that it believes should reasonably fall within this exclusion and other situations where the ATO believes that it should not, and would therefore be subject to review and possible action by the ATO.
The scope of ‘ordinary family dealing’ should, in the view of the ATO, be relatively narrow so it will in many cases be necessary to review current and prior years’ trust distribution arrangements in the light of the new draft guidelines.
To complicate matters, the meanings of the terms “reimbursement agreement” and “ordinary family or commercial dealing” have been the subject of a recent Federal Court Case (single judge) decision that has been appealed by the ATO to the Full Federal Court. The outcome of this appeal could alter the basis of the ATO’s TA 2022/1 and other publications.
For further information you can find the ATO’s comments here, and the ATO’s suite of documents at the following links:
- Draft Taxation Ruling TR 2022/D1 Income tax: section 100A reimbursement agreements
- Taxpayer Alert TA 2022/1 Trusts: parents benefitting from the trust entitlements of their children over 18 years of age.
- Draft Practical Compliance Guideline PCG 2022/D1 Section 100A reimbursement agreements – ATO compliance approach
- Draft Taxation Determination TD 2022/D1 Income tax: Division 7A: when will an unpaid present entitlement or amount held on sub-trust become the provision of ‘financial accommodation’?
Please speak to your HLB Mann Judd adviser if you would like to discuss what these announcements may mean for you and your trust arrangements. We would be pleased to assist.