What is an STCA?
Some people are not even aware of the benefits of a Family Trust. Others have an over-inflated opinion of the advantages that trust provides. So, what’s what? Here are a few things that make some re-consider the complexity of a family trust’s workings – and to consult an accountant before doing anything.
Where is the ATO in all this?
First of all, the ATO is implementing strict measures on family trust taxes. Their new ruling targets popular tax strategies involving distributions to companies and relatives. Families must quickly review how they manage their family trusts.
How will the ATO implement their new measures?
The ATO is targeting section 100A of the tax law. If 100A applies, the trust distribution will be taxed to the trustee at the highest rate, rather than the beneficiary, who would have likely paid much less tax.
Section 100A generally applies in the following situations:
*A beneficiary is entitled to a share of the income of a trust.
*There is an agreement, whether formal or informal, written or unwritten, where someone other than the beneficiary benefits from the amount.
*A reason behind this agreement is to reduce the amount of income tax paid.
However, section 100A does not apply if the agreement is part of an ‘ordinary family or commercial dealing.’ The ATO is now focusing on this ‘ordinary family or commercial dealing’ exception. The ATO believes that the exception does not automatically apply just because all parties involved are family members or because the practices are common.
The ATO’s crackdown will affect many trust distributions, but some cases are more concerning than others. For instance, if a trust distributes all its income to a husband and wife, and they use it for household expenses, it’s usually not an issue.
However, problems arise if the trust distributes income to adult children, but the money actually goes to the parents. This is a common income-splitting strategy. For example, adult children in university with no other income benefit from lower tax rates. Distributing $180,000 to them could save around $30,000 in taxes. Families may like the tax savings but are hesitant to give such a large amount directly to their teenagers. Various strategies have been developed to address this, and these are now under ATO scrutiny.
Additionally, the ATO is focusing on unpaid trust distributions to companies and circular arrangements. These involve a trust distributing to a company, which then pays a dividend back to the trust, and the trust redistributes to the company.
So, we can’t distribute to anyone else?
Not always. But such arrangements will face much closer scrutiny in the future. If the distributions are genuine and can be clearly explained on a family or commercial basis, they may still qualify for the ‘ordinary family or commercial dealing’ exclusion.
For instance, if an adult child living at home receives a $10,000 distribution from their parents’ family trust and uses it to cover board and car expenses, this might pass under section 100A. However, a $180,000 distribution to an adult child that ends up with the parents is less likely to be considered an ‘ordinary family or commercial dealing’ unless there are significant reasons, such as the child using the money to repay a loan from the parents for a home purchase.
The ATO emphasizes that a situation isn’t an ‘ordinary family or commercial dealing’ just because it’s common practice in the family or community. Taxpayers can’t argue that their arrangement is ‘ordinary’ just because others do it.
Proper documentation and detailed reasoning will be crucial to justify that the exclusion applies.
If you have a family trust, it’s crucial to assess whether any of the new ATO perspectives might affect you. If your trust distributes income to various family members or companies, you should carefully review your situation.
While some of the ATO’s views are still in draft form or are set to apply from 1 July 2022, other parts are intended to apply retrospectively. Therefore, addressing these issues before 30 June 2022 is essential.
Family trusts will remain an effective tool for managing family wealth, but tax planning will become more complex and tailored. Most families will need to reevaluate their tax strategies as 30 June 2022 approaches. But don’t despair. Don’t panic. We specialise on trusts and helping people just like you.
To understand how these changes affect you and to find the best ways to manage your situation, please click here for expert accounting support from us.