The tax office attack on family trust distributions

The section of the Tax Act it is looking at is S100A, which covers situations where a beneficiary is entitled to a share of trust income but someone else in the family benefits from that income.

A draft ruling looks at the use of reimbursement agreements. This is where an adult beneficiary child is distributed income from their parents' trust but payment is made to the parents to reimburse them for expenses they incurred prior to the child turning 18. This would include expenses such as school fees and living costs. The ATO states that these expenses are the sort of expenses that the parents should be paying as normal parental expenses and having the child reimburse them later is not "ordinary family dealings".

It also released a Taxpayers Alert looking at distributions to other adult family members where the money is not paid to the beneficiary but kept by the trustees of the trust and used by themselves or if paid to them but later gifted back. It is OK to retain the funds in the trust if used for working capital of a business carried out by the trustee, to acquire or maintain an investment asset of the trustee or to lend to a family member with interest paid on the loan. The alert sets out examples of what it considers low, medium and high risk. The higher the risk, the more likely it would have a closer look.

It appears not concerned with distributions to spouses on a lower tax rate if the couple have mixed finances and the money is paid into a joint account and used to fund family expenses.

If the distributions are found to be invalid the trustee is taxed at the top rate of 47 per cent on the distribution.

Please note the ruling is still draft and many taxpayer organisations will submit comment on its application. It would still pay to discuss planned distributions for the current year with your tax adviser.