In recent years there has been a notable increase in family trusts due to the financial benefits they hold. The Australian Taxation Office’s (“ATO”) recent releases, indicate a crackdown on family trusts. This has brought more concern to an already confusing end of financial year. The following article will explain the current situation. Family trusts are commonly discretionary in nature. This type of trust allows for control of the trust property without beneficial ownership of it but provides a unique degree of flexibility in deciding who should benefit from income earned. Persons who might benefit from time to time during the term of the trust are called “beneficiaries”
A discretionary trust can result in taxation benefits. For example, distributions of income can be made to family members on lower marginal tax rates (known as income streaming) although special provisions apply to distributions of income to minors. This means that overall, the amount of tax paid can be greatly reduced.
Louise Clarke, Deputy Commissioner of the ATO stated that the ATO “understands that [income streaming] (is) a part of the tax landscape.” However, she identified that what currently concerns the ATO is where the beneficiary of the trust does not get the benefit, the benefit goes to another party.
An example provided by the ATO clarifies the actions in family trust that will not be tolerated. This example provides that a family trust gives a university student with no other sources of income the entitlement to $180,000. This figure places the student just below the top tax rate of 45%. The student then agrees to pay back that sum, less lax, to their parents to reimburse them for the cost of raising them. A lower rate of tax is then paid on the sum as it can be assumed that the parents’ income would place them in a higher tax bracket than their child with no other sources of income. In this example, the actions were constructed to benefit the parents, not the child, who is the true beneficiary.
Section 100A of the Income Tax Assessment Act 1936 (Cth) is a provision designed to prevent taxpayers from using trust structures to reduce their tax liability. Clarke said that “an attitude has been developed over time… that it’s ok to split income” and that people have started “to push the boundaries without really thinking about 100A or whether what they’re doing is appropriate”.
Currently, many people are concerned that the ATO will examine past behaviours of family trusts, raising the prospect of being charged for back taxes and penalties. In response, Clarke stated that the ATO will generally only look back four years when auditing taxpayers.
This issue reveals the importance of strong legal advice in your estate planning to ensure full compliance with the law. If you find yourself in difficulties with family trust issues at the present time and require legal advice, contact our experienced law team today.
DISCLAIMER: The information contained in this article is general and is not intended to be advice on any matter. It is for information only and is not legal advice. In the event of a legal problem, you should seek legal advice.
