The ATO has released four tax rulings that will stop commonly used trust distributions to family members. It’s one of the most significant developments for the taxation of trusts in over two decades.
If you currently distribute funds from a trust to family or intend to, it is crucial to understand how these changes will affect you in this 2022 tax year and your future tax obligation changes.
As a result of these ATO rulings:
- Your options to spread your trust income across your family members may be vastly limited; and
- Your family group’s overall tax payable will probably increase.
For many years, it has been common practice by all business owners and investors who use Family (Discretionary) Trusts to look to spread trust income across family member beneficiaries.
Trust distributions are often made to adult children for asset protection and estate planning purposes.
Sometimes, the adult children in a family may have lower tax rates than their parents, so the overall tax rate % for the family group is lower due to the spread of these trust distributions.
What does this mean for you?
You must take steps now to plan for the extra tax payments that you may need to make.
On 23 February 2022, the ATO issued Taxpayer Alert TA 2022/1″ Parents benefitting from the trust entitlements of their children over 18 years of age”.
This means that the ATO believes parents who make trust distributions to their adult children and then arrange for their children to give the distribution back to them are only doing this to reduce tax. The ATO plans to invalidate the trust distribution and tax the trustee of the trust at 47% on the distribution amount.
The ATO has stated that they can go back as far as the 2015 tax year to review trust distributions.
Tax Planning Review
If you could be affected by these changes, it is vital to have a strategy in place to minimise your tax obligations before the end of the financial year.
We can walk you through how these ATO tax law changes affect you and discuss new strategies that you might be able to use.
Book a chat with me to see how I can help.
This blog post is intended for informational and educational purposes only. The information provided in this blog post should not be taken as professional accounting advice or recommendations.
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