A family (discretionary) trust is a common feature of many business groups, whether it is used in the operating business, or as an investment vehicle for your family. A family trust allows for the distribution of the group’s income amongst family members and safeguards from legal liabilities (your otherwise 'at-risk' assets), for the benefit of the family group.
However, on the night of Wednesday 23rd February 2022, the ATO sought to redefine the purpose of the family trust with a series of tax rulings.
Therefore if you have a family trust in your group, you will be impacted!
What is the ATO aiming to do?
In summary, the ATO is trying to stamp out trust distribution arrangements where one member of the family receives a trust distribution entitlement, but the actual economic benefit goes to another family member, with the purpose of minimising or avoiding tax. The ATO views this type of arrangement as a ‘reimbursement arrangement’ (as captured under Section 100A) and therefore it seeks to deem the party that actually receives the benefit as the one that should taxed. The ATO even goes so far to call this type of arrangement a “sham” and “ineffective for trust law purposes".
In doing so, the ATO is proposing to introduce four risk zones depending on the nature of your trust arrangements which will dictate how they will attempt to enforce the law by way of tax compliance reviews of your family tax affairs.
How does this affect you?
As we said, if you have a family trust in your group, you will be impacted. This is because the estate and family tax planning strategies developed by the accounting industry over the past several decades are suddenly made ineffective overnight.
This means in the absence of any winding back or clarification on how the ATO will attempt to enforce their new views of the law, your tax liabilities for the 2021-22 and future years are likely to increase. This will especially impact those who rely on spreading the trust income among their adult children as a combined ‘family unit’ as the options are now greatly limited.
How is Prosperity responding to this?
Understanding that tax laws change all the time, for better or for worse, the Prosperity team sees this as an opportunity to work with you in optimising your family and business affairs. We have a range of family, estate, and business planning strategies in place to help you minimise the amount of cash outflow, some of which will be more relevant now than it may have been previously.
We propose to review your current 2022 estimated taxable income for your entire family group, including any companies and trust you have and discuss how to manage your 2022 trust distributions to avoid breaching any of the new ATO rulings.
After the 2022 Federal Budget on 29 March 2022 and the Federal Election before June 2022, taxpayers will need to review their year end tax planning.
What should you do right now?
The first thing we recommend anyone reading this article to do is to start planning your next 6-18 months of business and tax strategies with us RIGHT NOW!
With the proposed changes in place from 1 July 2022, and potentially reaching as far back as 1 July 2014, it is imperative that you are on the front-foot in managing this impact to your business and family affairs.
Love tax as much as we do?
For the tax aficionados reading this, we are referring specifically to TR2022/D1, TD2022/D1, PCG2022/D1 and TA2022/1. We are also keenly following submissions from industry bodies such as CAANZ and IPAA, as well as see the result of appeal to the “Guardian case”. Follow us to keep updated on what we have to say on these topics when more news comes to light.
The Prosperity team is ready to take your call tackling this new challenge.
To discuss any taxation concerns you have regarding this new tax change please contact Director of Taxation, Paula Tallon at ptallon@prosperity.com.au or Manager of Taxation, Charles Yuan at cyuan@prosperity.com.au, or your key account contact at Prosperity.