ATO announces focus on “extreme” tax minimisation strategies relating to disbursements from Family Trusts
Many of our clients utilise family trusts, specifically discretionary trusts, to operate their business or other income producing activities. Trusts also offer asset protection and succession advantages and are therefore widely adopted and have formed a part of how people have structured their affairs for decades.
The ATO has recently released four documents, three of which are in draft form, providing guidance on their interpretation where trust distribution arrangements involve one member of the family receiving a trust distribution entitlement, but the actual economic benefit goes to another family member – with the purpose of minimising or avoiding tax.
Of particular significance is the Taxpayer Alert document, which is not in draft form, which outlines the tax minimisation strategies that the ATO considers to be at the ‘extreme’ end of the spectrum. These strategies will be the focus of ATO audit activity and compliance resources.
The ATO approach is particularly concerning as it does not have regard to the fact that such arrangements/distributions have been commonplace in this space for decades. Distributions to family members, usually over the age of 18, have been occurring with the ATO’s knowledge without any concern being raised. Often the distribution to a child, for example, is ‘gifted’ to a parent at a later point in time, or certain costs incurred in the course of the child’s life are credited against the distribution.
Having allowed such distributions without challenge for many years, the ATO is now indicating it is going to scrutinise and potentially challenge such distributions as breaching the Income Tax laws.
Clients who operate family trusts and who make distributions to children of other family members should raise this issue with their accountant to ensure that, to the best extent possible, they do not transgress into areas of concern to the ATO.
The ATO in their (Draft) Practical Compliance Guideline (PCG 2022/D1) have indicated what they believe their compliance approach will be to the issue. They in fact ‘colour code’ arrangements to identify their perceived level of ‘risk’ associated with particular types of arrangements. It is a lengthy document, exceeding 100 pages, however is worth ensuring your accountant is aware of the issue and perhaps casting an eye across it yourself if you are concerned, interested or looking for a cure for insomnia.
If you would like assistance in understanding the issue or further information please don’t hesitate to contact us to discuss.
Further information is available at Taxpayer Alert TA 2022/1 and Draft Practical Compliance Guideline PCG 2022/D1
For more information and expert advice, ask to speak to a lawyer at Ezra Legal on (08) 8231 6100 or email admin@ezralegal.com.au
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Michael Fabbro
Principal
Ezra Legal
