The ATO has changed its approach and compliance response, with family trust distributions on the hit list.
Earlier this year the ATO released guidelines using ‘risk’ categories for trust distribution arrangements, indicating that the ATO is taking a more aggressive approach to investigating trust income distribution. It is expected that many family groups will pay higher taxes.
The ATO’s crackdown comes under the guise of Section 100A. Section 100A was legislated in 1979 to address deliberate trust stripping practices and has not commonly been used by the ATO to assess trust distributions.
If trusts are not meeting the requirements outlined in Section 100A, the Trustee may be taxed at penalty rates.
Who will be affected?
Anyone with a trust could be impacted by this new ATO response.
The ATO’s position and interpretation of the 1979 Section 100A legislation is not clear, however the guidelines suggest it could use Section 100A to investigate beyond deliberate tax stripping practices, specifically addressing distributions by trusts where a tax benefit is perceived under a reimbursement arrangement.
|ATO Risk categories and compliance response
The ATO’s guidelines and proposed compliance response based on Section 100A, use four risk categories: White Zone, Green Zone, Blue Zone and Red Zone.
At this stage, both the White Zone and Green Zone are considered low risk and the ATO will not look at compliance into these arrangements.
The Blue Zone is considered medium risk, and the ATO may initiate contact with Trustees in this instance. The Red Zone is deemed high risk by the ATO, with review and analysis of these arrangements, and potential for an audit, is considered a priority by the ATO.
It’s important to know if your arrangements fall into the Blue or Red Zone, so that you may take action or be prepared for an ATO audit. Please contact us ASAP so we can discuss your options and approach.
What you need to do
This increased scrutiny could have an enormous impact for beneficiaries, so it’s vital to seek professional advice relating to managing trust distributions. The rules, risk categories and proposed scenarios are complex. Every trust, associated beneficiaries and distribution approach is different, and some trusts will be affected and others won’t, depending on where you sit within the four risk categories.
We are here to help and can explain what you need to do for your individual circumstances.
For our clients who engage our tax planning service, managing your trust distributions and taxation requirements will already be included as part of our planning processes. Our service also includes capitalising on tax efficiencies and reviewing your Trust Deed to ascertain whether there are more effective ways to distribute income. A key goal of our tax planning service is to prepare a well-considered trust distribution strategy that addresses matters including tax deductibility of bad debts or losses, while considering the benefits or impacts for the trust beneficiaries.
It’s important to understand the ATO’s approach to trusts and we strongly encourage you to discuss your trust circumstances with us. At a minimum, we can assist you to prepare your Trustee resolution which must be in place prior to June 30.
The ATO approach and compliance response involves interpretation of complex legislation. This is a important and pressing matter that should not be ignored, we invite you to contact us on 03 9708 8801 or email firstname.lastname@example.org to discuss your situation and options.
At Robinson Voss Partners, we have over 40 years combined experience and expertise in specialised tax issues, accounting and business advice. We are single-minded in our goal to help clients achieve business success and personal prosperity.
General Advice Disclaimer: The information contained within this document is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. Robinson Voss Partners (RV Partners) strongly suggests that no person should act specifically on the basis of the information in this document, but should obtain appropriate professional advice based on their own personal circumstances.