A family trust holds assets for the benefit of others. They are typically used by families to hold business interests or other assets for the benefit of the parents, children and grandchildren (known as the Beneficiaries).
A company is typically established to be the owner of the trust’s assets and is referred to as the Trustees. Each year, the Trustees decide how much income and which beneficiaries will benefit from the trust. It could be all beneficiaries, some of the beneficiaries or none.
When trust income is distributed to any beneficiary, it’s known as a discretionary distribution and that’s what interests the ATO.
Family trusts can’t be used to avoid paying tax!
Rather than using discretionary distributions for estate planning purposes and to protect family assets, some parents use their family trust as a tax avoidance strategy. In these situations, the trust’s income is shared with adult Beneficiaries who are in a lower tax bracket than their Trustee parents. This means trust income is taxed at a lower rate. After the tax is assessed, the Beneficiaries repay the net income to the Trustees (their parents).
In February 2022, the ATO made retrospective changes to the way they tax family trusts and began reviewing discretionary payments made to adult Beneficiaries dating back to 2015. If they find any discretionary distributions that were used as part of a tax avoidance strategy, they may invalidate those distributions and reassess them at the full 47% tax rate.
What you need to do now
Whether deliberate or accidental, it’s better to declare any dubious discretionary distributions now – before the ATO begins reviewing your trust’s activities. If you have any concerns, talk to us and we’ll evaluate any past payments your trust has made to its Beneficiaries.
Importantly, from here on, you need to ensure any discretionary distributions made by your family trust won’t be seen as tax avoidance. In other words, any distributions made to adult children Beneficiaries must be:
- Paid to them
- Used for their own benefit and
- Never redirected back to parents or Trustees
In addition, you should start talking to us about estimating the taxable income for your entire family as well as your family trust. As part of this tax planning process, we’ll discuss your options for this financial year and beyond.
For straight forward, down-to-earth tax advice, contact the team at W M Wright & Co on 02 4721 7444 or email Wayne at wayne@wmwright.com.au
