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Family Trust arrangements – significant changes in approach from the ATO

Updated: Mar 9

Late last month, the Australian Taxation Office (ATO) released a package of new guidance material that directly targets how trusts distribute income. The anticipated result of this, is that many family groups will pay higher taxes (now and potentially retrospectively) as a result of the ATO’s more aggressive approach.

It is unclear at this point how far back the ATO intends to apply the boundaries that are being re-drawn.

Family trust beneficiaries at risk:

  • Section 100A – an integrity rule, aimed at situations where income of a trust is appointed in favor of a beneficiary, but the economic benefit of the distribution is provided to another individual or entity.

  • Trust distributions caught by section 100A typically result in the trustee being taxed at penalty rates rather than the beneficiary being taxed at their own marginal tax rates.

  • Latest guidance suggests that the ATO will be looking to apply section 100A to some arrangements that are commonly used for tax planning purposes by family groups.

  • The result is a much smaller boundary on what is acceptable to the ATO which means that some family trusts are at risk of higher tax liabilities and penalties.

  • Section 100A has been in place since 1979, however it’s use has been limited to obvious and deliberate trust stripping.

Now the ATO appears to be preparing to use section 100A to attack a wider range of scenarios.

The ATO has set out 4 risk zones, where the risk zone for a particular arrangement will determine the ATO’s response:

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