The Australian Taxation Office (ATO) has provided final guidance on the tax treatment of common trust distribution arrangements.

The guidance follows a period of public consultation and feedback from professional accounting bodies and financial advisers.

In order to address concerns held by many about the possible retrospective nature of its draft guidance, the ATO indicated the following:

  • They will stand by previous guidance for arrangements entered into between 1 July 2014 and 30 June 2022 where taxpayers have relied on it
  • In most cases, they will only apply the anti-avoidance rule in Section 100A within four years of a trustee lodging its tax return and will not review arrangements entered into prior to 1 July 2014 other than in exceptional circumstances.

Importantly, low-taxed beneficiaries such as adult children will not be adversely treated if it can be shown they receive or otherwise enjoy the benefit of their entitlement to trust income.

The ATO is primarily targeting arrangements where it was never intended that the beneficiary would receive their entitlement, but rather the distribution was made to save tax.

This is illustrated by a range of “green-zone” examples, and includes scenarios where the trustee retains the relevant funds to use in the working capital of a business carried on by the trust, or to acquire additional investment assets.

The level of risk is reduced where it can be seen that the beneficiary will receive the benefit of their entitlement, such as if the entitlement is paid to an individual beneficiary within two years, or a corporate beneficiary enters into an interest-bearing loan agreement with the trust on commercial terms.

The ATO has also provided similar guidance in relation to “red-zone” scenarios, including the distribution to a low-rate beneficiary, such as an adult child, that is supposedly in satisfaction of expenses incurred on their behalf before they turned 18.

It is clear that any such arrangements are not acceptable under the current guidance and are a clear illustration of “what not to do” going forward.

As part of the updated guidance, the ATO has also, removed the confusing “blue-zone” category. This means that arrangements will either fall within the green zone, which the ATO has indicated they will not generally review, or within the red zone, which the ATO has indicated they are likely to review and potentially take further action.

The greatest remaining area of uncertainty is the question of when an arrangement would be an “ordinary commercial and family dealing”, which would take a taxpayer’s trust arrangements outside the scope of Section 100A.

While taxpayers using family trusts must take great care when making decisions on the allocation of entitlements to trust income, the updated ATO guidance has provided much-needed clarity.