What Needs to Be Done with Your Family Trust This Year?

We have been discussing the new ATO trust provisions with clients over the last year, both personally and in our newsletter articles. As a leading team of accountants in Sydney, we understand the evolving landscape of trust regulations. The last couple of articles on the ATO activity with trusts are shown herehere and here.

As a refresher, the ATO has had the ability to look closely at trusts through Section 100A of the Tax Act. This section has been around since 1978. In 2014 a Tax Ruling was released as to how the ATO was going to deal with trust distributions with, in particular, attention centered on when distributions are made to beneficiaries and the benefit does not accrue to that beneficiary. It also looked at where “reimbursement agreements” are put in place to effect the beneficiary who receives the distribution agreeing to having the beneficiary’s cash benefit go to another beneficiary (usually the parents receiving the cash benefit of their children’s distribution).

While this Tax Ruling was in place, the ATO did not take any significant action in relation to the Ruling up till now.

In December 2022 the ATO released TR 2022/4 which

  • provides the ATO’s view about reimbursement agreements for section 100A, including the exceptions for agreements which:
  • don’t have a tax reduction purpose
  • are entered in the course of ordinary family or commercial dealing

This Ruling was originally released in February 2022 as Draft Taxation Ruling TR 2022/D1 and the final ruling takes into account feedback received from the community and tax professionals on the draft ruling. The Ruling applies to trust arrangements both before and after its issue and should be read in conjunction with Practice Compliance Guidance PCG 2022/2. This PCG 2022/2 provides a number of examples of situations which are satisfactory to the ATO and others where you are likely to attract ATO attention to the Trust.

With the ATO now having come to their final position on what they will be looking at, the 2023 financial year’s tax planning and preparation of accounts and tax returns for trusts will be very important. Every trust will need to be reviewed, both for past year’s circumstances, and for what is to be done in the 2023 financial year. It will be the most important year for trusts ever and there will be a need to ensure all client’s affairs will be able to stand up to any ATO scrutiny.

There is no doubt, now the ATO has resolved its position, that there will be significant audit and review activity of trusts going forward. Proper thought and documentation needs to be in place to be ensure your trust will fit into the safety zones set out in the rulings.

With that in mind, we wanted to reach out to all clients with trusts to set out what is to happen this year. In particular, during the run up to 30 June, we will be in touch with all trust clients to

  • do the usual trust distribution minutes to evidence who is to receive distribution?
  • ensure that the beneficiaries will benefit from the trust distributions they are to be given.
  • ensure there is a bank account in each trust and that payments made to beneficiaries come from this account.
  • review the assets of the trust to see where funds have been used, if the beneficiary has not received all of their allocated distribution.
  • conduct a review of what has happened in the past to ensure it falls into the ATO’s “green zone”, being what is satisfactory to them.
  • ensure that adequate documentation of the distribution decision are maintained.

There is a lot to do with trusts this year which will be in addition to what has had to be done in past years. It is unavoidable and is necessary now the ATO has added to the issues that need to be contemplated by all trusts.

With this in mind, we thought we would give you early warning of the additional work that will be needed in tax planning and when the 2023 financial statements and income tax returns are prepared. This is work that we have not had to do in the past and is imperative to ensure your trust’s tax affairs stand up to any future ATO scrutiny.

We will discuss with you leading into Tax Planning and when doing the set fee quote for the 2023 compliance work, to ensure you are aware of what the additional costs are likely to be for your particular trust. We will be in touch in this regard.

In the meanwhile, if you have any queries in relation to your trust don’t hesitate to contact your client manager.

Author – Michael Goodrick

Kreston Stanley Williamson

*Correct as of 28 February 2023

*Disclaimer – this article has been produced by Kreston Stanley Williamson as a service to its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas contained in this article, it is imperative you seek specific advice relating to your particular circumstances. Liability limited by a scheme approved under professional standards legislation.

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