ATO Cracks down on Family Trust distributions – New ruling on Section 100A

ATO Cracks down on Family Trust distributions – New ruling on Section 100A

What is Section 100A?

Section 100A is an anti-avoidance provision targeting Trusts, which is essentially designed to target arrangements whereby one person is distributed the taxable income, but a different person is the one that received it.

Section 100A applies when:

  • a beneficiary is made presently entitled to trust income; (ie. End of year distribution minutes)
  • there was an arrangement that another person (usually another beneficiary or the trustee) gets a benefit attributable to that trust income – this is called a ‘reimbursement agreement’;
  • a purpose of the arrangement was someone paying less tax; and
  • the arrangement was not an ‘ordinary family or commercial dealing’

What are the changes?

The ATO have released new draft guidelines which they state clarifies their existing opinion on when they will apply s100a. However, these appear to have greatly expanded the scenarios which may fall foul of 100a and which were previously understood to be an ordinary family dealing.

The ATO’s position is outlined in the draft Tax Ruling  and is accompanied by a draft Practical Compliance Guideline and a Taxpayer Alert

These updated ATO views can be summarized as follows;

  • the application of section 100A is expanded to arrangements as outlined in the guidance that in the ATO’s view are not ordinary family or commercial dealings;
  • the PCG outlines using a traffic light system to categories arrangements, into zones of risk;
    • low risk (to which compliance resources will not be dedicated),
    • medium risk (with respect to which the ATO may ask questions), and
    • high risk (to which the ATO will dedicate compliance resources);
  • the arrangements outlined by the ATO are a far broader range of transactions than anticipated particularly concerning as categorized a High Risk Zone to include distributions to adult children where the funds are seen to be applied for the benefit of their parents.

It is the distributions to adult children which is covered by the Taxpayer Alert that has caused major concern amongst families and looks to be a retrospective change in policy by the ATO.

Some examples of the traffic light system are set out below;

Example 1:

Taxable Income distributed to retired mother, with funds paid to her adult children

Example 2:

Taxable Income distributed to uni student child, with an equal cash amount then paid to her

Note: The above example is unlikely to be green if the funds are paid to the parents, who use those to pay the uni fees on their daughter’s behalf

Example 3:

Taxable Income distributed to uni student child, with the trust paying part of the majority to the child, and the remaining to a Grandmother to cover board.

Does it affect me?

If you have a Family Trust, then these guidelines will impact you.

The key rule of thumb to keep in mind now is that any taxable distributions of trust income, should always be followed by (or be preceded by) an equal cash payment to that person.

What do I need to do?

Butler Pty Ltd will be sending out the 2022 Trustee minutes for signing before 30 June within the next few weeks. When completing and reviewing, ensure that these minutes reflect that cash payments to beneficiaries that have or will occur from the Trust.

If you would like clarification on how to distribute your Trust, please contact our office for a tax planning meeting, where we can review and apply these to your specific circumstances.

If you have any questions or require further information, please contact our office.