ATO scrutiny on family trust and section 100A arrangements
Last reviewed January 2023
The Australian Taxation Office (ATO) has finalised a tax ruling relating to trust arrangements that may be caught by anti-avoidance tax laws.
This ruling focused on decisions made by trustees of a trust which may ultimately attempt to reduce or eliminate an individual's income tax liability.
Broadly, the tax ruling states that a trust distribution which ultimately benefits another person will be exempt from anti-avoidance trust tax laws if it constitutes an 'ordinary family or commercial dealing'.
Ordinary family or commercial dealing
For an 'ordinary family or commercial dealing' to apply to your trust distributions, the transactions between your trust, your family members and their associated entities must be able to be explained as achieving family or commercial objectives.
One common example of an ordinary family dealing, which is exempt from anti-avoidance laws, is a family trust which distributes income equally between spouses who themselves have a shared financial responsibility of the family unit and ultimately enjoy the shared benefits of the distribution from the trust.
In the finalised ruling, the ATO has stated that the core test to determine whether your arrangement is an ordinary family or commercial dealing is to consider all relevant circumstances, including what is sought to be achieved and whether the arrangement will achieve those objectives.
Another relevant factor the ATO will consider in the core test is whether your arrangement is overly complex, artificial or contrived. Additional steps in the arrangement that cannot be explained to have other objectives, such as tax minimisation, will not be exempt from anti-avoidance laws due to being a family or commercial dealing.
ATO compliance
Accompanying the tax ruling is a practical compliance guideline which goes into depth about what is, and what is not, an ordinary family commercial dealing. In short, if you are operating your business in a family trust structure and you reinvest your earnings back into working capital of your business, the anti-avoidance tax penalties will not affect you.
Complementing these rulings is an ATO Taxpayer Alert, which discusses beneficiaries who are adult children of the controllers of a trust. Arrangements where an adult child receives a substantial distribution but does not receive an actual economic benefit will attract the ATO's attention for audit.
Making sure you get trust distributions right is an important step each year as part of your obligations as a trustee. A distribution that is caught by the s 100A anti-avoidance rules will void the distribution completely, meaning that your trustee may be liable for income tax at the top marginal tax rate. If you wish to speak with us directly about your current year situation, please reach out.
If you have any questions, please call our office. We would be happy to discuss your options for the upcoming income year and assist you further.
