Trusts

The ATO has reviewed their approach to the use of family trusts and has recently issued new draft guidelines. Specifically, the guidelines address concerns about the use of trust structures to distribute money to low-income members of the family for the main purpose of tax avoidance.

In previous years it has been possible and within the regulations to undertake tax planning by distributing income from a family trust to the lowest taxed beneficiaries, who are usually adult children.

The cash was able to remain in the trust with all transactions to children noted in the tax returns. However, this technically also allowed some parents or guardians to use the cash from a family trust themselves rather than actively transferring it to the nominees (the children). This is the issue the ATO wishes to address.

With new guidelines, the ATO has tightened the regulations surrounding trust arrangements in order to reduce opportunities for tax evasion. The ATO’s new compliance guidelines are very specific. The Commissioner has indicated the ATO will be monitoring activities and will apply penalties to parties who they believe have abused the tax laws. The ATO can also apply their decisions retrospectively if they choose to conduct an audit of trust activities.

While distributing proceeds from income to children in family trust is not a problem – the beneficiaries must genuinely benefit from the funds. Funds cannot act as a ‘loan’ from parents that is later ‘paid back’ to the parents.

Accountants have been well briefed on these matters and can advise clients about compliance. Should you have any questions about the use of a family trust, or the new guidelines, please contact dmca advisory on 08 8272 5620.