The ATO has released draft guidance on family trust distributions, where they perceive a tax benefit arises under a ‘reimbursement arrangement’.

Essentially, the documentation sets out ATO’s ‘preliminary but considered’ views where they perceive a tax benefit arises under a ‘reimbursement arrangement’. If the guidance becomes the new approach, it will greatly impact how a trust pays distribution and to whom.

The ATO focus includes distributions from trusts where the tax is paid by one individual (who is usually a low-income earner), but the economic benefit of the distribution is obtained by someone else (who is usually a higher income earner).

Example

There is a trust that benefits the Green family, consisting of two parents and two children (who are at university and are not earning money). The Green Family Trust decides to distribute a significant portion of the money to the two university-attending children. However, the catch is that the parents do not want the children to have control of the significant amounts of money, and decide they wish to keep the benefits of the lower tax thresholds of the low-income earners.

The position of draft guidance

A dealing involving family members does not automatically mean it is an ‘ordinary family dealing’. In this example, a dependent child gifting a trust distribution to their parents (when the parents could have received it anyway) would not be excluded from the operation of Section 100A, even though it arguably has become common place to do so from a historical tax planning perspective.

However, the rulings on income distributions from family trusts are currently in draft form, which the ATO has asked for feedback on before finalising the rulings. This may not happen before trust resolutions need to be completed this June.

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