What the Section 100A Trust Distributions mean for your clients

What the Section 100A Trust Distribution mean for your clients

In one of the most significant updates to family trust legislation in decades, the ATO has released a raft of long-anticipated guidance material that directly targets how trusts distribute income.

The draft guidance which focuses on distributions where income from a family trust is distributed to adult children, and the children then use the funds toward family expenses or gifts back to their parents, have understandably caused a wave of concern among accountants, that now need to address these dramatic changes with clients.

The guidance at a glance

The ATO will be reviewing trust arrangements where parents enjoy the economic benefit of income distributed to adult children. It says it is concerned that taxpayers are entering into these arrangements to avoid tax on the net income of the trust by utilising the lower marginal tax rates applicable to the adult children beneficiaries.

The guidance proposes tighter rules for distributions along with a definition of what is considered an “ordinary family or commercial dealing”. Essentially, distributions allocated to adult children still living at home, for costs such as education or lifestyle expenses, will face tougher scrutiny, especially when controlled by parents, yet were being used to access lower tax rates.

With four ‘risk zones’ classified as white, green, blue, and red, the ATO has said, depending on where arrangements fall, will determine its response. High on the list of red zone examples is where an adult child’s entitlement to trust income is paid to a parent to reimburse them for expenses incurred before the adult child turned 18. For example, school fees, university fees, or living costs. Or where the entitlement is applied against a debit balance of the beneficiary representing expenses incurred by the trustee before they turned 18.

The ATO indicated that circular arrangements where a trust owns shares in a company, the company is a beneficiary of that trust and where income is circulated between the entities on a repeating basis, could also fall within the scope of the rulings.

If the ATO invalidates a distribution by relying on s100A, the trustee will be taxed at 47% on the distribution.

Why is this such a concern?

The ATO’s changes squarely impact the middle-class entrepreneur business owner and astonishingly these scary rulings are to be applied retrospectively. It is penalising clients on prior-year decisions, that they made with advice from their accountants, based on new laws introduced now. It is little wonder that many across the accounting industry are calling this an unfair ATTACK!

This guidance will require the industry to revisit the tax planning arrangements of Australian family trusts with thousands of trustees.

Potentially more concerning for accountants is that the proposed rules also include “promoter” penalties for those advising that trusts should distribute in a tax-efficient manner.

What can you do for your clients?

While the guidance is still in draft form, and subject to further consultation by accounting and legal industry bodies, the approach has been closely considered by the ATO over many years, leaving accountants with little choice but to be well-prepared.

Once firms have helped their teams understand the key issues and developed an appropriate policy for all trust distributions, it will be imperative to make your voice heard and let your local member of parliament know just how concerning these changes are and what it means for their constituents.

Last, but certainly not least, it will be critical to guide clients through the changes and prepare them for the potential impacts.

Next steps?

Ready for more about s100A? Watch this on-demand webinar.