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The ATO has recently released a number of Draft Rulings and Guidance on the application of Section 100A, representing a reversal of previously accepted practices concerning Trust distributions. Specifically targeted are arrangements where the beneficiary to whom the distribution is made, does not actually receive the funds but the funds are directed elsewhere in the family group. The announcements are not new law as such but merely the ATO announcing its interpretation of the law as it sees it. 

Although s100A was originally designed to prevent more historical aggressive tax schemes such as “bottom of the harbour” and dividend stripping schemes, the ATO have concluded that it can also apply to more common Family Trust distribution arrangements that have previously been accepted practice, for many years.

It is the ATO’s view, that a distribution from a family trust to an adult beneficiary (say a child at University) that is not paid in a timely fashion or where the funds are lent interest-free by the Trust to Dad and Mum or another entity in the group, may be attacked using section 100A. The impact of Section 100A is harsh. The distributions are taxed at 47% to the Trust instead of the beneficiary in addition to significant penalties and interest. Amazingly, there is no time limit for the ATO to raise a Section 100A assessment and the ATO have advised that they will go as far back as 2014 in assessing if there is an issue.

In addition to these relatively common arrangements the ATO have set out a number of other distribution arrangements that will scrutinise and have introduced a “traffic light” system for various scenarios which range from low to high risk depending on the circumstances of each case. Therefore, extreme care now needs to be taken when considering how trust distributions should be made each 30 June and whether any past strategies need to be revisited in light of this ATO attack.

If you have any concerns over past or present distribution arrangements, please feel free to contact our office to discuss with our advisors on how this may affect you.

Written by Ian McGinniss.

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