Trust Distributions – the game has changed.

The ATO has released information targeting trust distributions under section 100A. These changes may significantly impact on trust distributions and how they may be taxed. The information released by the ATO is called a “Guidance” package. In simplest of terms, this package is designed to include ‘Section 100A’ to tax distributions targeting trusts and beneficiaries, to counter tax avoidance arrangements. This is a very important change that may affect many businesses and investors – however, the team at Highview are always one step ahead and ready to tackle this change with our clients in a proactive manner. 

Please don’t panic. Below is more detail, but please be aware that the changes are complex.

We don’t expect our clients to be on top of this, that’s our role, but for those who’d like to read more about the changes, here’s the nuts and bolts…

The potential impact

The consequence of the ATO applying section 100A is that the trust distributions would (instead) be taxed to the trustee at the top marginal tax rate (currently 47%). The views set out in the ATO Guidance Package challenge the effectiveness, for tax purposes, of many practices that have become common in year-end tax planning involving trust distributions. In many cases, the ATO are seeking to apply their views retrospectively and for future income years, but please be note that this is being largely debated by industry bodies – so watch this space.

The basis of trust taxation

Under the general regime for the taxation of trusts, the liability for tax is allocated by reference to the concept of present entitlement to the distributable income of the trust (i.e., based on trust distributions). To the extent that one or more beneficiaries are made presently entitled to a share of the distributable income, those beneficiaries will be liable to tax on an equivalent proportion of the net (tax) income of the trust. To the extent that there is some distributable income to which no beneficiary is presently entitled, the equivalent proportion of the net (tax) income will be assessed to the trustee.

Section 100A

Section 100A is an integrity provision that operates where a beneficiary’s present entitlement arises out of, or in connection with, an arrangement (referred to as a “reimbursement agreement”) that:

a) involves a benefit being provided to another person other than the beneficiary,
b) is intended to have the result of reducing someone’s tax liability, and
c) was entered into outside the course of ordinary family or commercial dealing.

Where it applies, section 100A deems the beneficiary not to be presently entitled with the result that the trustee is taxed (at a flat rate equal to the top marginal tax rate (currently 47%) on that beneficiary’s share of the trust’s net (tax) income.

Key interpretive issue with the ATO Guidance

As noted above, a key determinant of whether section 100A applies is whether the exception for arrangements entered in the course of ordinary family or commercial dealings applies. The ATO have taken a narrow view of scope of that exception in their Guidance. Accordingly, the ATO believes that certain distributions to family members or to corporate beneficiaries can be caught within the operation of section 100A.  As a result, the ATO see section 100A applying to many arrangements that taxpayers may have thought were outside its scope.

When do the changes apply from?

While the ATO’s ability to issue amended assessments is normally subject to a 4-year limit, that limit does not apply to amended assessments based on section 100A. The ATO has an unlimited amendment power in respect of section 100A, that is otherwise only generally available where there has been fraud or evasion. The Guidance is stated to apply to present entitlements arising both before and after the date of finalisation of the drafts. However, again, this is being strongly disputed by industry bodies.

What are the next steps?

It is important that clients consider their position and how the new ATO Guidance will apply to their circumstances. If you are concerned, please speak with your Highview specialist to review your current situation and determine what action is required.

Source: Australian Taxation Office