Final ATO Guidance on Discretionary Trust Distributions

A tax accountant uses a laptop to display graphical representations related to business and finance.

We discussed the ATO’s draft views on discretionary trust distributions in our March 2022 Insight Newsletter.  At that time, the draft guidance was released in an attempt to clarify how the ATO interpret the anti-avoidance provisions that were designed to combat “reimbursement agreements.”  A reimbursement agreement involves a beneficiary becoming presently entitled to income from a discretionary trust for tax purposes under an agreement where another party would enjoy the benefit of the distribution. 

The draft guidance was subject to much discussion and criticism in the tax industry.  After considering the feedback received, the ATO last week issued final guidance in the form of Tax Ruling TR 2022/4 and Practical Compliance Guideline PCG 2022/2.

While the final ruling has not changed significantly from the draft, it has been updated for recent court decisions, and some additional commentary and examples have been included. 

The final PCG also includes more practical examples to illustrate the risk zones that were introduced in the draft guidance.  The green zone (low risk) has been expanded and the blue zone (medium risk) removed.  A compendium to the PCG sets out the feedback received on the draft guidance, along with the ATO response.

Some of the important clarifications to arrangements that will fall within the green zone include:

  • Where a beneficiary receives their entitlement within 2 years of becoming presently entitlement (see Example 5 in the PCG)
  • Distributions to a corporate beneficiary with tax losses (see Example 13)
  • Distributions from one trust to another trust within the same Family Group (see Example 6)

The final PCG also narrows down the application of “red zone scenario 5 – arrangements where the presently entitled beneficiary has losses” to only apply where the beneficiary is outside the “family group”.  Example 18 in the PCG illustrates this.

We will address the impact of the final guidance with impacted clients in the lead up to 30 June 2023.

More detailed explanation of the guidance can be found on the ATO website here.  There is also a short video explanation here.

If you have any questions about your discretionary trust don’t hesitate to contact your client manager.

Kreston Stanley Williamson

Author – Darren O’Malley

*Correct as of 16 December 2022*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.

Read Other Articles

Pin It on Pinterest