Impending changes to trust taxation

Posted on 21/3/2022

Tax Advisory

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The goal posts have shifted… again. The ATO has sent the taxation industry into a spin upon releasing their long-awaited guidance on their interpretation of key legislative provisions governing the taxation of trust income.
Impending changes to trust taxation

Many family groups utilise trusts, specifically discretionary trusts, to conduct income producing activities, whether that be in the form of passive investment or carrying on a business. Trusts also offer asset protection and succession advantages and are therefore widely adopted.

What has changed for trusts?

The ATO has released four documents, three of which are in draft form. Primarily, they concern the splitting of income by trusts amongst family members and controlled entities where that income is enjoyed by another individual or entity.

For those who appreciate the technical detail, those documents are as follows:

  • Draft Taxation Ruling TR 2022/D1. This draft document outlines the ATO’s general understanding or interpretation of section 100A of the Income Tax Assessment Act 1997.
  • Draft Practical Compliance Guideline PCG 2022/D1. This draft document discusses the circumstances where the ATO will utilise its compliance resources and seek to apply section 100A of the Income Tax Assessment Act 1997. The document contains a risk matrix so that taxpayers can ascertain their risk profile with respect to an ATO audit.
  • Taxpayer Alert TA 2022/1. This document is not in draft form. The Taxpayer Alert outlines tax minimisation strategies that the ATO considers to be at the ‘extreme’ end of the spectrum. These strategies will be the focus of ATO audit activity with respect to section 100A of the Income Tax Assessment Act 1997.
  • Draft Taxation Determination TD 2022/D1. This draft document outlines the ATO’s opinion as to when a corporate beneficiary’s unpaid present entitlement to trust income constitutes financial accommodation (and thus a loan) for the purposes of Division 7A of the Income Tax Assessment Act 1997. From a conceptual perspective, the first three documents and this document are linked insofar as they are concerned with present entitlements to income of a trust where the actual income (funds/cash) is not received/enjoyed by the entitled beneficiary.

What does this mean?

Through these documents, the ATO is outlining:

  • Behaviour it is concerned with.
  • Areas where it will focus its audit / compliance resources.
  • How taxpayers can mitigate their risk of audit.
  • How taxpayers should approach the ATO if they have engaged in the relevant behaviour.

Importantly, the Taxpayer Alert is a final document, as the ATO does not intend to consult with the taxation industry on behaviour it considers to be at the extreme end of the tax minimisation spectrum.

What should you do?

At this stage, there is no action required by you.

Your Perks Adviser will continue to monitor developments in this area in the lead-up to 30 June and contact you if any action is required.

However, if you have any queries in the meantime, please do not hesitate to contact either your Perks Adviser or a member of our Tax Advisory Team below.

Speak to one of our specialist Tax Advisory Directors.

Brian Nimmo

Brian Nimmo

Brian specialises in providing high level taxation advice. Tax consulting across corporate tax, capital gains tax and international tax, to ATO product and class rulings for managed investment schemes.

Neil Oakes

Neil Oakes

Providing tax consulting advice to small, medium and large enterprises, with specific focus in the aged-care and property industries.

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