The ATO’s New Views on Discretionary Trust Distributions

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Managing Tax Implications with Discretionary Trusts in Financial Planning

When it comes to financial planning, it’s essential to carefully consider using discretionary trusts as an investment vehicle for families. While they offer helpful features such as asset protection and tax-efficient transfer of assets between generations, anti-avoidance provisions in tax legislation since 1979 have raised concerns about their flexibility level. It’s essential to incorporate thorough financial planning strategies to ensure that using discretionary trusts aligns with your long-term goals and minimises potential tax implications.

Reimbursement Agreements in Discretionary Trusts

The anti-avoidance provisions in section 100A of the Income Tax Assessment Act 1997 (s100A) were designed to combat “reimbursement agreements”.  A reimbursement agreement involves a beneficiary presently entitled to income from a discretionary trust under an agreement that another party would benefit from the distribution.  The provisions were introduced to help stamp out “bottom of the harbour” schemes where distributions were made to corporate beneficiaries that escaped tax by being stripped of their assets before the tax became payable.

ATO’s Draft Guidance and Risk Zones

The ATO has recently attempted to clarify how they interpret s100A and have released Draft Taxation Ruling TR 2022/D1 to set out the Commissioner’s view on when a beneficiary’s entitlement to trust income arises from a reimbursement agreement that would trigger s100A.  In summary, this would occur where a discretionary trust makes someone presently entitled to trust income in circumstances where:

  • Someone other than the presently entitled beneficiary benefits from the income; and,
  • At least one party agrees to get a tax benefit.

S100A does not apply, however, where:

  • The agreement was in the course of an ordinary family or commercial dealing; or,
  • The presently entitled beneficiary is under a legal disability (e.g., a minor).

TR 2022/D1 sets out the ATO’s view of what constitutes an “ordinary family dealing”, and Appendix 2 of that ruling includes some valuable examples.

Taxpayer Alert TA 2022/1 was also released to address whether they consider specific arrangements where parents benefit from the trust entitlements of their adult children to be “ordinary family dealings”. 

Draft Practical Compliance Guideline PCG 2022/D1 explains the ATO’s planned approach to applying s100A.  The guideline allocates various scenarios into low (white or green zone), medium (blue zone) and high (red zone) risk.   The ATO will dedicate compliance resources to consider the application of s100A to red zone arrangements, and they suggest that taxpayers consider modifying blue zone arrangements to reduce their risk profile.

TR 2022/D1 is currently only in draft form.  The ATO is seeking comments by 8 April 2022.  The final ruling may differ significantly from the draft but may not be issued before the end of the current financial year.  Accordingly, if you use a discretionary trust as an investment or business vehicle, you must pay close attention to the draft ruling this tax planning season.

We will contact you again in the coming months to clarify the ATO interpretation once the final rulings have been issued. If you have any queries in relation to your trust, don’t hesitate to contact us.

Draft Taxation Ruling TR 2022/D1 sets out the ATO’s views on Taxpayer Alert TA 2022/1.

Kreston Stanley Williamson

Author – Darren O’Malley

*Correct as of 31 March 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.

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