05/05/22

AUSTRALIA: ATO gives update on new approach to family trust distributions.

As published on step.org/industry-news, Thursday 5 May, 2022.

The Australian Taxation Office (ATO) has announced a partial retreat from its recently issued guidance on trust reimbursement agreements and unpaid present entitlements.

The guidance, concerning the use of the s.100A anti-avoidance measure, appeared in February 2022. The ATO can invoke s.100A when trust income is distributed to relatively favourably taxed beneficiaries, but the benefits of that income are enjoyed by others who might have had to pay more income tax; for example, parents who benefit from the trust entitlements of their adult children. If the rule is determined to apply, the trustee (not the beneficiary) is liable to tax on the income at the top marginal rate.

There is a safeguard for taxpayers in that the section does not apply to arrangements entered into in the course of 'ordinary family or commercial dealings' or where no party to the arrangement has a tax avoidance purpose. However, the ATO's February 2022 guidance document, which was issued in response to the Guardian case (2021 FCA 1619), appeared to dilute that protection for which there is 'limited judicial guidance', it said. It stated that an arrangement was not classed as 'an ordinary family or commercial dealing' merely because it is commonplace or involves no artificiality and could be regarded as such only when it could be readily explained by family or commercial objects. If what has happened was only explicable by tax reasons the exception for 'ordinary family or commercial dealings' would not apply, said the ATO, warning that it has an unlimited period in which it can amend assessments under the section.

This guidance dismayed some tax advisors. Law firm McCullough Robertson said the ATO had 'completely repurposed' the provision and was seeking to attack trust distributions that are ordinary family dealings in apparent defiance of the Federal Court of Australia's decision in the Guardian case. Law firm Coleman Greig warned that the ATO could be coming to audit trustees who had made such arrangements and advised them to review larger distributions of income in the last few income years and seek legal advice on their position.

The ATO now accepts that this guidance unsettled tax advisors by calling into question some practices that have been relatively longstanding. It says it will not apply s.100A anti-avoidance measures against ordinary family trusts that distribute a benefit to an adult child with a low marginal tax rate. The ATO Deputy Commissioner, Louise Clarke, clarified that the section can apply only where a distribution is made under an agreement where there will be a payment or other benefit provided to some other entity that will typically have a higher tax rate than the beneficiary, where a purpose of that agreement is that someone will pay less income tax.

'The ATO's position is that if the beneficiary of the trust gets the benefit, 100A has no role to play', she said. 'The ATO is not concerned about ordinary family trusts where the relevant family members benefit from the distributions.'

Similarly, the ATO will not use the measure when profits from the family business are distributed to members of the family who work in the management of the business and a family member then chooses to reinvest the profits in the business.

Moreover, said Clarke, the ATO will not pursue taxpayers who relied in good faith on the previous s.100 guidance issued in 2014. 'I want to reassure the community [that] we won't have a retrospective element', she said. 'We stand by our 2014 guidance for this interim period.'

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