ATO Focus on Unpaid Trust Distributions

Home>All>ATO Focus on Unpaid Trust Distributions

Over the past few years the ATO has been reviewing trust distributions made, but remaining unpaid, to beneficiaries with different tax profiles to the primary beneficiaries of the Trust.  The ATO’s concern has been whether these distributions form part of what is termed, a “Reimbursement Agreement”.

Where the distributions are considered to be part of a “Reimbursement Agreement”, the ATO is able to assess the Trustee of the Trust on that distribution.  The Trustee will then be liable to tax at 45% of that distribution under s100A.

A key exclusion to the definition of a “Reimbursement Agreement” is an agreement that is made in the course of an ordinary commercial or family dealing.

In its 2016 guide[1], the ATO provides examples where arrangements do and do not constitute ordinary commercial or family dealings. Common features in the examples that do not satisfy “ordinary family or commercial dealing” include distributions to:

  • A Beneficiary who was made presently entitled and pays a lower amount of tax than the person actually enjoying the economic benefit of that income;
  • A Beneficiary is a tax-exempt entity;
  • A Beneficiary is a non-resident of Australia and net income includes foreign source income or income subject to withholding tax in Australia;
  • A Beneficiary has tax losses or excess deductions;
  • A restructure where a new class of beneficiaries are introduced with the above features[2].

Furthermore, at recent Tax Institute Conferences, senior ATO officers have presented a number of case studies regarding the possible application of s100A to what would be considered ordinary family tax planning, such as the distribution to adult children, where the amount remains unpaid, are loaned to other family members by the trust or is gifted back by the adult beneficiary.

The ATO are in the process of developing a Taxation Ruling dealing with the application of s100A that will focus specifically on the Commissioner’s preliminary views on the exclusions from a ‘reimbursement agreement’ for:

    • agreements not entered into with a purpose of eliminating or reducing someone’s income tax, and
    • agreements entered into in the course of ordinary family or commercial dealings.

The draft Ruling is expected in late 2019 and will be very keenly anticipated, especially now the Labor proposal of applying a 30% flat tax to Trusts will no longer proceed, ensuring the issue of tax planning through trusts remains a focus for the ATO and Treasury.

In relation to the distribution (and generally non-payment) of amounts from a Trust to family members, it is our view that without something more, these distributions are precisely what the ordinary family dealing exclusion was introduced to protect.

In the now withdrawn PS LA 1998/5 – trust reimbursement agreements, officers of the ATO are bound to specify with particularity the nature and scope of the reimbursement agreement alleged, which suggests that the arrangement should leave no uncertainty and perhaps, in layman terms interpreted as a ‘strikingly obvious’ trust stripping scheme.

The Courts have certainly not given the ATO license to apply s100A in some abstractly wide sense even with the broad drafting.  However, given the ATO’s position in their online Guide and their public presentations, we expect the Tax Ruling to take a broader view as to the application of s100A, so our recommendation is to review your trust distributions to ensure that where benefits are provided to beneficiaries, both directly and indirectly, they are correctly recorded against their entitlements.

If you do need some assistance, please contact Gary Lim or Sean Pearce.

 

[1] https://www.ato.gov.au/General/Trusts/In-detail/Distributions/Trust-taxation—reimbursement-agreement/

[2] Explanatory Memorandum – Income Tax Assessment Amendment Bill (No 5) 1978

Tags: