ATO crackdown on family trusts about to get serious

Family Trusts Australian Taxation Office ATO beneficiaries family trusts tax
There are concerns the ATO will investigate previous tax filings and charge applicable interest and penalties.

If there is one quiet but important battle to keep your eye on this year, it is the stoush between the Australian Taxation Office and the beneficiaries of family trusts.

It has been underway for some time but now that the battlelines have been drawn, the rubber will really start to hit the road this week as trusts begin to file their annual returns at the end of the tax year.

That filing will come in the wake of some very clear warnings from the ATO that they are on the lookout for a range of “dodgy” behaviour within trusts and will also come looking for accounting firms that have given advice that might have helped people avoid paying tax.

Family trusts have long been used as a tool for the wealthy to efficiently stream income to beneficiaries that are in lower or zero tax brackets and also as a way to keep important assets like a farm intact for future generations.

Trusts themselves usually don’t pay any tax – that is paid under normal income tax rules by the person getting the distribution – and by splitting income to lower rate taxpayers the overall amount of tax paid can be greatly reduced.

What the ATO is cracking down on are a range of artificial schemes in which money washes to and from companies and also money that is paid to children, who promptly repay their parents for the cost of their upbringing.

Will the ATO go trawl back through past years?

There has been a lot of agitation among those who have trusts about the crackdown, with the really big fear being that the ATO will start trawling back through time to find this sort of behaviour and then go through the usual application of back interest and penalties.

The ATO has denied it is on a fishing expedition but there is little doubt that it wants to crack down hard on a range of practices that have built up over the years and revolve around payments to low or no tax beneficiaries working their way back to high tax individuals.

One of the examples they use is a family trust giving a university student with no other sources of income an entitlement to $180,000 – which would put them just below the top tax rate of 45%.

The student would then pay the $180,000, minus any tax paid, back to their parents to “pay back’’ the cost of bringing them up through childhood.

In other words, the beneficiary of the trust didn’t actually get the benefit, their parents did – using a tax rate potentially lower than their own.

Similarly, the ATO are looking for arrangements in which a trust pays money into a company it owns which is then washed back to the trust as dividends – potentially pushing any tax payable by individual recipients well into the future.

Loans between companies and trusts are also under the microscope.

The ATO is also asking for the tax file numbers of any beneficiaries that will receive a distribution from a trust for the first time in the 2022 year, with the notices needing to be lodged with the ATO by 31 July, 2022.

The ATO also wants all trust distribution resolutions lodged by the same date, with the income of the trust subject to the highest marginal rate of tax if this is not done.

Blind eye will not be turned from here on

It is a complex area covering thousands of trusts but what is clear is that over time a range of fairly questionable practices have arisen within family trusts that greatly expand the idea of income splitting in ways that substantially reduce income tax paid by beneficiaries.

Just how hard the ATO go in chasing past sloppy practices – and how far back they will go – remain to be seen but the clear warning is that they won’t be turning a blind eye to anything trusts are up to from here on.

In political terms, with the Albanese Government looking for more revenue wherever it can find it, there will be very little sympathy for those using trusts as a way of reducing tax bills.

In accountancy offices all around Australia this week there will be a flurry of last minute filings as trusts and their beneficiaries try to make sure they comply with what looks like becoming a much tougher regulatory regime for trusts.

What happens from here on – in particular how hard the ATO will go in cracking down on trusts and their advisers that haven’t complied with the new, tougher draft rules – will be a really interesting battle.

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