Surprise, Surprise the ATO wants More Taxes from Your Family Trust

Surprise, Surprise the ATO wants More Taxes from Your Family Trust

Well, they do. And they don’t.

Here’s the issue.

Accountants for years have been taking the micky out of the ATO and not surprisingly the ATO are getting a bit p**ed off.

And for some reason we accountants are very upset that the ATO is upset with, well, us. The accountants are so upset with this that they are making a big deal about it when in reality they are the ones who caused the issue.

But it actually gets worse. Because the ATO say that what has been happening is a ‘sham’, which in ATO speak means illegal.

Crikey.

For an accountant that is tough to take because it’s a bit hard to explain to clients they have f****ed up and advised something that is illegal so are reverting to blaming the ATO.

Trusts are fantastic entities to use if you want flexibility when it comes to income. They are also great for asset protection. And that is one of the reasons they are used extensively in Australia. And that is also why they are great for medical professionals who want to divert income to low tax paying individuals or entities and to those that may wish to protect assets.

They can be quite useful for estate planning too.

But there is a problem because this is what has been happening.

Accountants have told their medical clients to use family trusts (which derive either medical income, medical practice income or other investment income)

And accountants have been telling their clients that they can divert income to say their children (to save taxes) but that income can still be used by the medical professional to go on a cruise. Or buy a BMW. Or some jewels from Tiffany.

And this is the bit that is p**ing off the ATO.

You see according to them if a trust is going to say it is going to give income to someone then they expect the money to go to that person. And to be honest, I don’t have a problem with that.

It is the reason we have always told our clients that if they want family members to be entitled to income they pay them the money. And that is why I do not have any issues with what the ATO are doing. And nor do my clients.

The accountants are hitting back saying most medical professionals support their family members in other ways such as paying rent for children at university or tuition fees. And that makes sense. But the ATO are then saying they expect to see some kind of evidence that that is the case. If clients are paying for tuition, they don’t expect to see HECS debts building up.

So Who is the ATO targeting?

The ATO is saying if a trust distribution is given to one member of the family but the actual economic benefit (money) goes to another family member they have a problem with that because in their view they only reason you would do that is to save taxes. And, in my view, they would be right.

Does this affect you?

If you have a family trust in your group structure, your arrangements could be affected if you have been told to distribute income to someone else but you still take the money out for yourself.

There’s more. According to the ATO there is no limited period they can drag up such arrangements. This means if you continue they can drag it up in 10 years time and ask for additional taxes, and penalties. It also means they can go back 10 years from now too. And that is why the accountants are so upset.

This will inevitably lead to a lot of crying. And a lot of drinking. In fact, it will be an ocean full of crying. And lead to an ocean full of drinking.

So, it might not be a bad idea to get a review done because the ATO has been quite specific what they expect to see.

Here are the ATO rules:

  • The ATO will be devoting compliance resources to review arrangements dating back to 1 July 2014 that are ‘red zone’ categories

Examples that are in the ‘red zone’,

  • A person is entitled to income at lower rates of tax and then they make a gift of the entitlement back to someone who pays higher rates of taxes.
  • A family trust earns regular income each year, and the income is distributed to an adult child who is a full-time student with no other income but the income is never paid.

The parent then prepares a note each year for the adult child to waive their right to the trust entitlement so that the trustee can retain the funds in the trust, while also clearing off the unpaid present entitlement.

  • Parents draw cash from the family trust throughout the year and at the end of the year, trust distributions are made to adult children or grandparents.

Children and Grandparents then write a letter of gift (or similar) to ‘gift’ or ‘waive’ their trust entitlement to the parents who have already benefited from the cash but are not taxed on it.

What action should I take?

Yep, you guessed it. Get a review especially if you have been advised to do any of the above.

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