S100A: ATO Cracks Down on Discretionary Trust Distributions
If you have a discretionary trust, then you will almost certainly be impacted by the recently updated, and continually evolving rules relating to distributions from trusts.
The ATO released draft Practical Compliance Guidelines in February 2022, taking a significantly more aggressive position against taxpayers than was expected by the accounting industry.
On 21 June 2022, the ATO has sought to provide some more simple clarity to assist with distributions ahead of 30 June 2022.
Here are some of the key points, extracted from this new guidance:
When section 100A may apply
Section 100A of the Income Tax Assessment Act 1936 is an anti-avoidance rule. It applies to an agreement (called a ‘reimbursement agreement’) where one person receives a benefit from the trust but another person is made presently entitled to income and assessed.
Section 100A does not apply where the beneficiary simply receives or enjoys the benefit of their distribution.
Consequences of section 100A applying
Where section 100A applies, the beneficiary’s entitlement is taken to be disregarded. The trustee is then assessed on the beneficiary’s share of the trust’s taxable income at the top marginal rate.
Common arrangements in the Green zone
An arrangement is considered low risk (Green zone) where either:
- a beneficiary simply uses their entitlements to benefit themselves, their spouse and dependents, or
- in most cases, the beneficiary’s entitlement is retained by the trustee for use in commercial or income earning operations of the trust, provided that either:
- the beneficiary is employed in managing the business conducted by the trustee
- the beneficiary (or their spouse) controls the trustee
- the beneficiary is a private company that enters into a loan agreement with the trustee that complies with Division 7A.
Arrangements in the Red zone
High risk arrangements commonly have elements of contrivance, undue complexity, or other features that do not show a commercial or family-based reason, but instead a motivation to shelter income from higher rates of tax.
- A university student who has no other sources of income, is made presently entitled to $180,000 and agrees to pay the $180,000 less tax to reimburse their parents for the costs their parents incurred when the student was a minor
- A circular distribution where a company is made presently entitled to income each year and, all or part of that income includes a dividend sourced from that company.
More information can be found here.
If you have any questions on S100A or would like to discuss how you can better manage your financial arrangements, please contact our office on (08) 6212 7200 to speak to one of our qualified advisors.