How property settlements could be impacted by proposed tax rules for trusts.
What are the proposed tax rules?
The ATO has recently published a draft ruling (TR 2022/D1) which appears to be a macabre attempt to put another nail in the coffin for family trusts which could have a significant impact on the potential tax liabilities in the matrimonial property pool, especially with respect to the retrospective nature of the rules.
To put it simply, the ATO proposes to make the trustee of a family trust pay income tax on a distribution made to a beneficiary where there is an agreement comprising the following:
• Benefit of the distribution is provided to another person/entity
• Intention to reduce the tax liability of a person/entity
• Arrangement falls outside of ordinary family or commercial dealings
In practical terms, the trustee is liable for income tax at a rate of 45%, rather than the beneficiary at their lower marginal rate, which could potentially decrease the value of the property pool.
A determining factor will be whether the arrangement falls outside of the phrase “ordinary family or commercial dealings” and needs to be considered on a case-by-case basis.
What are some examples that may be subject to ATO review?
Some common examples that are on the ATO radar include the following:
• Distribution is made to an adult child beneficiary so that their taxable income does not exceed a marginal rate threshold, however, the benefit is not provided to that beneficiary, but rather to other members of the family such as the parents who have a higher marginal rate of tax.
• Distribution is made to a corporate beneficiary (bucket company) in Year 1 which is assessed at the corporate rate. The bucket company pays a fully franked dividend to the trust in Year 2 and in turn, the trust makes a franked distribution to the company in the same year and the arrangement is repeated is subsequent years resulting in the trust income not being assessed more than the company rate.
• Trust distributions are made to a beneficiary over several years, however, the beneficiary does not call for, or forgives their entitlement allowing the trust to benefit from the retention of the distribution
How could the property pool be impacted?
• An additional tax liability may arise being the difference between the trustee rate of 45% and the beneficiary’s marginal rate
• Potentially, trust distributions starting from 1 July 2014 may be targeted
• Beneficiary remains presently entitled to their trust distribution despite the trustee being assessed on the distribution
Where to from here?
Any matrimonial property settlement involving a family trust should carefully consider the potential taxation implications that may arise from the ATO’s view with respect to historical distributions to beneficiaries. If appropriate, consent orders could be drafted to make an allowance for any contingent taxation liabilities.
Should you have any questions please feel free to contact John at DBS Accountants + Business Advisors for a confidential, no obligation discussion on 07 3666 0684.