Common trust distribution issues explained

ATO Attack on Trust Distributions........................ If you have a Family Discretionary Trust you need to be aware that the ATO is now targeting this area. Where your trust is used to distribute income to family members on lower tax brackets the ATO is seeking to essentially tax trust distributions to family members that do NOT physically receive that money, at the maximum tax rate of 47% The ATO have just a released tax ruling that will stop commonly used trust distributions to family members. It’s one of the most significant developments for the taxation of trusts in over two decades. As a result of these ATO rulings your options to spread your trust income across your family members may be vastly limited and if so it could mean that your overall tax payable could increase. This is a game changer! It states that the ATO believes that parents who make trust distributions to their adult children and then arrange for their children to give the distribution back to them are only doing this to reduce tax. The ATO plans to invalidate the trust distribution and tax the trustee of the trust at 47% on the amount of the distribution, and they may charge penalties on this as well. The ATO have stated that they can go back as far as the 2015 tax year.

The ATO have updated their website guidance in relation to 'Family trusts concessions'. With the current focus of the ATO on family trust elections (FTEs) and family trust distributions tax (FTDT), I would encourage trustees and tax practitioners to read the web guidance and, where necessary, take steps to review trust records to identify (and mitigate where possible) any FTDT risk exposure. The ATO guidance sets out basic information relation to FTEs, IEEs, the family control test, the family of the specified test individual, the family group and FTDT. Unfortunately, the ATO web guidance (on this specific page) does not provide guidance on what is a 'distribution' for the purposes of FTDT. Many trustees and some tax practitioners will not be aware that a 'distribution' for the purposes of FTDT is not confined to a distribution of trust income made by way of resolution of the trustee each year. The meaning of 'distribution' for the purposes of FTDT is extremely broad and the broader meaning under the statute can extend to such things as the use of trust property at less than market value, interest free loans, debt forgiveness/waivers and capital distributions. FTDT is payable at the top marginal tax rate + Medicare levy (currently 47%) and whilst FTDT is levied on the trustee, directors of a trustee company will be jointly liable for any FTDT payable. There is no statutory limitation period on FTDT assessments, so it is extremely important that trustees and tax practitioners consider the risks on a regular basis. The ATO web guidance in respect to 'Avoiding FTDT' states "We would suggest that these matters should be considered at least annually, and elections not be 'set and forget' by trustees and their agents." If you are a trustee, and need assistance with a review FTEs made within your group and your FTDT risk, please reach out to me. #tax #trusts #familytrusts #FTDT #ATO

This article highlights some of the compliance traps with family trust distributions that accountants and tax advisors need to be aware of for both wealthy family groups and small business clients.  The ATO recently warned privately owned and wealthy groups that it was seeing an increase in issues with family trust distribution tax due to poor succession planning and inadequate record-keeping practices. According to Kristy-Lee Burns, partner at Owen Hodge Lawyers, the ATO's attention on family trust distribution tax for now seemed focused on high-net-worth taxpayers and the transfer of generational wealth. "We're seeing the ATO target long standing businesses with structures that have been in place for quite some time and handed down generation to generation," she said. Ms Burns said many of the tax issues she was seeing were arising where distributions had been made to third parties who arguably were not a descendant of the test individual. "Sometimes that's where distributions are made to a corporate entity that might not have necessarily been provided for under the deed. So a lot of the time in our space, we're having to advise people to go and get expert taxation advice on the likelihood that the ATO is going to pursue them," she said. One of the most common issues with family trusts is that people don't understand that the family group is essentially frozen upon the death of the test individual - "What happens is that you're not able to create new members or beneficiaries to give further distributions to and there's a bit of a misunderstanding on that. An example would be spouses of children, they're not automatically eligible to receive distributions in that scenario.", she said. Ms Burns also stressed the need to read the trust deed and ensuring it's compliant, and that’s its important when setting up a family trust to carefully select what person is going to be elected as the test individual. "Make sure you look at whether that individual is the right person. If you appoint the wrong person such as someone that doesn't intend on having children that can create some real problems with flexibility," she said. https://lnkd.in/g6pGEk-z

𝗙𝗧𝗗𝗧: 𝗧𝗵𝗲 𝘀𝗹𝗲𝗲𝗽𝗶𝗻𝗴 𝗴𝗶𝗮𝗻𝘁 𝗮𝘄𝗮𝗸𝗲𝘀 In my monthly AccountantsDaily column, I look at the rising risk of family trust distribution tax (FTDT) liabilities as this unforgiving law is unleashed on family trust arrangements. The provisions have applied since 9 May 1995, but the law is outdated and difficult to navigate. The complex nature of these provisions and insufficient ATO guidance continue to create confusion, resulting in tax practitioners hitting roadblocks and clients facing significant unforeseen tax liabilities. ❝The past year has seen an increase in the number of FTDT issues raised by the ATO, primarily due to the complexity of the law, genuine misunderstandings by taxpayers and practitioners, and greater scrutiny by the ATO ... bona fide arrangements that do not involve any mischief are being caught in the wake of this revival of these integrity provisions. ❝The sleeping giant has finally awoken, and it’s not pretty.❞ The article covers: ➡️ What is a family trust? ➡️ What is an interposed entity election? ➡️ The meaning of ‘distribution’ ... it’s broader than you may think! ➡️ Did you know FTDT has an unlimited amendment, so the ATO can issue assessments and impose GIC going back an awfully long time ➡️ Why law reform is needed ➡️ What we’re seeing as the ATO sharpens its focus on FTDT. Feel free to share your thoughts and comments below 👇 #tax #accountants #thetaxinstitute #tti #robyntax #taxpolicy #trusts #FTDT The Tax Institute Julie Abdalla https://lnkd.in/gJr5ZrwM