The Rules for Trust Distributions are Changing

For Business | For Individuals | Tax
April 4, 2022

The Australian Taxation Office (ATO) has released a package of draft advice and guidance that sets out tax treatment of:

  • Trust entitlements arising out of reimbursement agreements
  • Unpaid present entitlements of trust beneficiaries

What does this mean?

This important development will affect the taxation of distributions being made by discretionary trusts (including family trusts). The ATO has raised potential concerns with cases where trust distributions have not been paid to a beneficiary, or where they have been paid out and returned to someone else.

This can sometimes happen if trust distributions are kept within the trust and not paid to a beneficiary for a variety of reasons. The ATO has flagged that it will likely audit trusts where distributions have been kept within the trust (or paid to another entity), and these will be investigated as potential tax avoidance issues.

The consequences of these rules will be to reverse valid trust distributions and tax these amounts to the trustee of the trust at 47%. Trust distributions for the current income year may be affected.

Not only this, but the ATO has indicated that these guidelines may be applied retrospectively. The ATO has stated it will go back as far as the 2015 financial year to review trust distributions and even earlier if they are reviewing your tax affairs for another reason.

These guidelines impact common trust arrangements arising out of individual circumstances which may now be considered a higher risk from an audit perspective.

Nexis will be undertaking a risk assessment for our clients’ trust accounts and will be in touch directly with you if you are a trustee of a trust to discuss further.

If you are concerned about what this means for you in the meantime, please contact us.

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