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ATO Issues Draft Guidance on the Use of Discretionary Trusts

Earlier in the year, the ATO issued long-awaited guidance material that could impact anyone using a Discretionary Trust.

On 23 February 2022, the ATO issued the following long-anticipated guidance material that may impact anyone currently using a Discretionary Trust.

Here’s the rundown of the technical changes:

  • TR 2022/D1 – Draft tax ruling which sets out the Commissioner’s preliminary view on when S.100A of the Income Tax Assessment Act 1936 will apply
  • Draft PCG 2022/D1 – Outlines the ATO’s new compliance approach to S.100A
  • Taxpayer Alert 2022/1 – Deals with the application of S.100A in the context of parents benefiting from the trust entitlements of their adult children.

Although not specifically concerned with S.100A, the ATO also issued a related draft tax determination, TD 2022/D1, which sets out the Commissioner’s revised view on when an unpaid present entitlement becomes the provision of ‘financial accommodation’ with effect from 1 July 2022.

Section 100A is, essentially, an anti-avoidance provision which, despite being in existence for some 40 years, has been the subject of only limited ATO compliance activity.

How Does This Impact Me? 

Broadly, S.100A can apply where a beneficiary is made presently entitled to a share of trust income but somebody else actually benefits from that income. Where it applies, it is the trustee rather than the beneficiary who will be liable to pay tax on the distribution at the top marginal tax rate.

However, S.100A does not apply to certain categories of arrangements, including:

  • where the beneficiary is under a legal disability
  • where the agreement was not entered into for a tax reduction purpose
  • where the agreement was entered into in the course of an ‘ordinary family or commercial dealing’.

Significantly, in its draft tax ruling, the Commissioner has taken a narrow view of when the ‘ordinary family or commercial dealing’ exception can apply, thus increasing the potential for S.100A to apply to what have traditionally been considered ordinary family dealings.

Fortunately, despite S.100A having an ‘unlimited’ review period, the ATO confirms that it will not apply its new draft compliance approach to trust distributions made prior to 1 July 2014 unless:

  • The ATO is otherwise considering the income tax affairs of the trust for those income years
  • The trustee entered into an arrangement that continues before, and after, that date; or
  • The trust and beneficiary tax returns that were required to be lodged for those income years were not lodged before 1 July 2017.

What Do You Need to Do Next?

While the draft guidance constitutes the most significant development in the taxation of trust income in over 10 years, it’s important to remember that the guidance (other than the Taxpayer Alert) is currently in draft form and that the ATO is actively considering feedback from the community as part of its consultation process (submissions are due by 8 April 2022).

This means that right now, you don’t need to do anything as your BlueRock accounting advisor is proactively considering the implications of the draft guidance and will be in contact to discuss any impact this may have on your 2022 tax planning process.

Feel free to reach out to one of our Melbourne-based BlueRock accounting advisors if you’d like more information about how you might be impacted by the proposed ATO changes.

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