The ATO is reviewing trust arrangements where parents enjoy the economic benefit of trust income appointed to their children who are over 18 years of age (Children).
The common feature of the arrangements is that trust income is appointed between members of the family group but in substance, it is the parents who exercise control over and enjoy the economic benefit of the income.
According to TA 2022/1 the arrangements may display all or most of the following features:
- the trustees of a discretionary trust (Trust), or the directors of a corporate trustee, are either one or two individuals who are the parents in a particular family (Parents)
- income derived by the Trust is used during the year of derivation to meet the expenses of the Parents. These may be recorded as beneficiary loans made from the trustee to the Parents throughout the year
- resolutions of the trustee for the year show one or more of the Children presently entitled to a share of the income of the Trust
- the entitlements are for substantial amounts but do not generally result in the Children’s taxable income exceeding the threshold for the top marginal tax rate ($180,000).
- amounts are not paid to the Children. Rather, at the actual or purported direction of the Children, the entitlements are satisfied by the amounts being either
- paid to their Parents, or
- applied against any beneficiary loans owed by the Parents
- the parties contend that the entitlements are paid or applied in this manner because
- the Children are required to repay their Parents for expenses incurred in relation to their upbringing or while they were minors (for example, school fees, school uniform costs or their share of the family holidays)
- the Children are required to pay or repay their Parents amounts to meet their share of family costs for the current year in excess of amounts it would reasonably be expected an adult child would meet for their personal living expenses while they remain living at home or otherwise supported to some extent by their Parents (those amounts being, for example, a reasonable rate for their board, lodgings or rent if living away from home, or car expenses), or
- there is an agreement that the Parents will manage the pooled family members’ entitlements from the Trust for the benefit of the family members
- there is no expectation or understanding that the Children’s income they derive from sources other than the Trust distributions will be used to either repay their Parents for expenses incurred when they were a minor or pay more than their reasonable share of the household expenditures, or be placed in a pool to be managed by the Parents for the benefit of the family members.
The ATO is concerned that taxpayers are entering into these arrangements to avoid tax on the net income of the trust by utilising the lower marginal tax rate applying to the Children in particular circumstances. The ATO may invoke applicable specific or general anti-avoidance rules to these arrangements.
Although the alert specifically considers arrangements involving the children of controlling individuals, the ATO is also concerned about similar arrangements involving other family members of controlling individuals that would have lower marginal tax rates than those of the controlling individuals.
The ATO is currently reviewing these arrangements and engaging with taxpayers who have entered into, or are considering entering into these and similar arrangements. Taxpayers and advisers who enter into these types of arrangements will be subject to increased scrutiny from the ATO.
Source: Taxpayer Alert TA 2022/1 Parents benefiting from the trust entitlements of their children over 18 years of age, 23 February 2022, accessed 23 February 2022.