A Matter Of Trust: Why Now Is The Ideal Time For A Trust Review

The Australian Taxation Office (ATO) has handed down a raft of new rules and regulations around family trusts over the past couple of years. 

The new guidelines have ramped up the complexity of the trust landscape and called into question the compliance of some long-standing family trusts.

Yet with many trusts established years ago, it’s clear trustees are in need of a genuine review service in order to continue administering trust distributions with confidence.

While some accounting firms rely on doing the same thing year after year when it comes to trusts, the new guidelines—coupled with a number of industry-shaping court cases over the past few years—mean a ‘set and forget’ mentality is now fraught with danger.  

That’s why PrimeAdvisory is offering clients the chance to have their trust reviewed by a team of qualified legal experts—ensuring compliance and preventing your family trust from attracting unwarranted ATO scrutiny.

What Are the ATO’s New Guidelines?

In December 2022, the ATO finalised its guidance on trust reimbursement agreements—with Section 100A of both the Taxation Ruling (TR 2022/4) and Practical Compliance Guidance (PCG 2022/2) set out as an anti-avoidance rule that “can apply where a beneficiary’s trust entitlement arose from a reimbursement agreement”.

According to the ATO’s guidelines, a reimbursement agreement “broadly involves an arrangement under which a beneficiary is made presently entitled to trust income and:

• someone other than that beneficiary receives a benefit in connection with the arrangement

• at least one of the parties enters into the agreement for a purpose of reducing tax”.

In other words, the ATO has made it clear it will not tolerate family trusts being used exclusively as a vehicle for tax avoidance. 

But what constitutes fair use of a family trust—at least according to the ATO’s latest guidelines? 

And how can you make sure that trusts that were often established years ago are now compliant?

You should start by having your trust reviewed.

Avoiding the Glare of the ATO Spotlight

Accountants have been spruiking the advantages of family trusts for years—highlighting the obvious tax benefits and asset protection afforded by the establishment of discretionary family trusts.

So popular are family trusts that in December 2022, the Australian Financial Review reported there were around 928,000 family trusts across Australia, managing assets worth a staggering $2.2 trillion.

Many of those trusts play a perfectly legitimate role in providing legal asset distribution to a range of beneficiaries.  

But with the ATO making it clear it is cracking down on those who use family trusts to obtain illicit financial gains—usually by making dubious distributions to beneficiaries such as adult children, but using the cash on themselves—now is the ideal time to conduct a detailed review to ensure your trust distributions remain above board.

What Does Section 100A Mean In Practise?

The additional scrutiny around Section 100A has led to concerns that the ATO intends to hand down hefty bills for back taxes dating back several years.

While the ATO was quick to point out that although the new guidelines are applicable from 2015 onwards, it typically only looks back around four years when performing audits. They also argued that while taxpayers shouldn’t expect sizable bills for back taxes padded out by years’ worth of interest, they are taking a closer look at how family trusts are being utilised.

From a practical standpoint, what that means is that not only have the number of options around distributing your income across a variety of family members been curtailed, the majority of family trusts are now likely to pay more tax.

Activities such as parents making trust distributions to adult children, only for those children to subsequently pay the money back, will be assessed as a form of tax avoidance. 

In circumstances where that occurs, the ATO will simply invalidate the distribution and tax the trustee at the top marginal rate of 47% of the amount paid.

It also means trustees must give what the ATO calls “real and genuine consideration” to a range of circumstances when apportioning income from the trust estate to beneficiaries, or otherwise face the risk of having the trustee removed by the courts and replaced by an independent body.

Making Sure your Trust is Compliant

While the initial announcement of Section 100A caused some concern within the accounting industry, there’s no reason to believe that those who employ the use of family trusts will automatically fall foul of the ATO’s latest guidelines or suffer the risk of an audit.

The ATO has explained that family trust arrangements will be categorised under four different zones—white, green, blue, and red—and explained that only trusts that fall into the blue and red zones are likely to face additional scrutiny.

Trusts established before July 1, 2014 fall into the white category and will not be scrutinised unless already under investigation, while trusts that fall into the green zone are considered low risk and unlikely to warrant extra attention.

It is only trusts whose activities are considered to be medium-to-high risk that land in either the blue or red zone—with those determined to be in the red zone set to receive detailed scrutiny from the ATO.

Along with being on the look-out for instances of children ‘paying back’ their adult parents after being named as beneficiaries, the ATO is also scrutinising entities that make losses designed to disguise income and minimise tax.

PrimeAdvisory is Offering Expert Trust Reviews

Section 100A is just one of a handful of new guidelines and eye-catching court cases that have commanded the attention of the accounting industry in recent years.

From PCG 2022/2 to TR 2022/4 and the headlines generated by the Owies, Minerva, Guardian AIT and Demian cases—all of which were largely the result of trust administrations relying on out-of-date practices—it is clear that trustees cannot afford to simply rest on their laurels and run the risk of overseeing a non-compliant trust. 

There is no denying that the rules around family trusts are complex, requiring a keen attention to detail and expert understanding of what is allowed under the guidelines and what will attract the ATO’s scrutiny.

That’s why PrimeAdvisory is delighted to have partnered with an industry-leading firm to provide an expert legal review of your trusts—ensuring everything remains compliant and providing much-needed peace of mind.

Take the guesswork out of family trust distributions and order an expert trust review today.

It could be the difference between securing your financial assets and continuing to provide for your beneficiaries as you see fit, and the unwanted attention of the Australian Taxation Office.

Drop me a line at [email protected] or call (02) 9415 1511 to order a trust review.