Trust Taxation

For many years, it has been common practice for business owners and investors who use family (discretionary) trusts to distribute trust income between family members and related entity beneficiaries.

Trust distributions are often made to adult children for asset protection and estate planning purposes.

Sometimes, the adult children in a family may have lower tax rates than their parents, so the overall tax rate for the family group is lower as a result of the spread of these trust distributions.

However, on 23 February 2022 the ATO issued Taxpayer Alert TA 2022/1, ”Parents benefitting from the trust entitlements of their children over 18 years of age”.

It states that the ATO believes that parents who make trust distributions to their adult children and then arrange for their children to give the distribution back to them are only doing this to reduce tax.

The ATO plans to invalidate the trust distribution and tax the trustee of the trust at the highest marginal tax rate (47%) on the amount of the distribution. Penalties and interest charges may also apply.

The ATO have stated that they can go back as far as the 2015 tax year to review trust distributions.

We have summarised these significant changes in the following fact sheet.