What lurks beneath – A new ATO Trust Distribution ruling

Written by Andrew Mattner

As much as it pains me, I admit I am a closet lover of the 1975 cult movie Jaws.

Most of you would know the plot of the movie where a sleepy beachside holiday community went quietly about their business, doing the right thing until one day a killer shark showed up wreaking havoc and destroying the amenity of a peaceful town.

For over 40 years a vast majority of SME Australian businesses have operated via their family trust in the same way as those residents on Amity Island (for you fellow lovers of Jaws you will know that amity means friendship).

Well, just like 1975, something is lurking beneath the SME community in Australia in the shape of a new taxation ruling and determination.

While having some merit, it can only be seen as a brutal and unreasonable stroke by Treasury and the ATO to extract additional tax dollars from the business community to fund the free spending and Government deficits from recent years.

Those of you with a family trust will understand that prior to the 30^th June each year, the trustee of the trust must make a determination (according to its trust deed and governing laws) to a group of beneficiaries.

These will usually be family members over the age of 18 and associated entities (other trusts and companies) that are controlled by the family. Each of these beneficiaries then pays tax according to their applicable tax rate.

In some cases these funds were paid out to fund living expenses, taxation and other projects. In other cases these funds were retained in the trust for reinvestment back into the business or other assets to grow the asset base for an even greater future benefit for the family.

All the while, the majority (and I stress the majority) paid more than their fair share of taxation. For 40 years the ATO has considered this a valid and acceptable way to operate your affairs.

It seems change may be on the horizon. The ATO has announced via draft taxation rulings that in some cases, the allocation of funds to beneficiaries will no longer be recognised as valid distributions for taxation purposes.

The ATO is now considering taxing the trust at the highest marginal rate of 45%. In particular, the ATO plans to target taxpayers where distributions are made to adult children (over 18) where funds are not actually paid but instead are offset against the entitlements of their parents (under what is called a reimbursement arrangement).

Effectively this type of arrangement exists where there is no intent for the adult child to ever receive the benefit of the distribution with the entitlement ultimately being gifted to the parent.

It seems reasonable that the ultimate users of the funds should pay the tax. Where I do have an issue is every adult in Australia has the right to make their own decisions about how and where they spend or invest their money.

If an adult decides to reinvest their funds back into their parents’ enterprise or gift it for love and affection to someone else, that should be their right.

What if funds are subsequently gifted to their spouse (someone who didn’t receive the distribution) – will the ATO aim to capture that also?

So what does this all mean?

When it comes time to make trustee resolutions about allocation of income before 30 June, every business owner with a family trust knows life is about to become more complex.

Distributions and commercial arrangements will need to be considered more closely than ever before to ensure compliance should this ruling be adopted.

I fully expect that the new ruling will be challenged in court (and I would expect that the ATO would most likely lose) but in the interim the goal posts have shifted.

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