A surge of inquiries and concerns about looming changes to the way family trust earnings may be taxed has prompted the Australian Taxation Office to seek more feedback from accountants and financial advisors.
Changes to the tax office's guidance may see tougher scrutiny of how some farm family trusts distribute earnings to young adult members as part of strategies which potentially minimise their parents' tax bill.
In particular, the ATO has concerns about situations where children aged over 18, whose incomes may be low, or below the tax threshold, are "officially" recipients of trust payments, yet in reality most of that money actually goes back to their parents.
The assumption is the parents, or another party, or another trust, may be collecting distributions which should have benefitted the younger trust members.
Arrangements likely to be under scrutiny include situations where adult children may transfer their trust earnings, after tax, back to their parents in the form of payments for past school fees paid by mum and dad.
A variety of other unofficial arrangements or understandings which see trust members transferring the after-tax benefit to others will also be examined as part of the ATO's clarification of Section 100a of the Income Tax Assessment Act.
The 100a clause was introduced 40 years ago to derail the practice known as "trust stripping", which typically involved trust profits being diverted to a tax-exempt or loss-making entity, then being passed back to unofficial beneficiaries.
The latest draft guidelines not only spooked some trust operators, but also their accountants, even though the ATO said its review began partly in response to tax planners seeking more clarity.
Some advisors now feared they may be in trouble for the advice provided as part of a legitimate taxation strategy to their farming family clients.
In particular, they were concerned the new guidance may lead to retrospective punishment, or even loss of their license.
No retrospective cost
However, when pressed by Nationals Senator Susan McDonald during recent Senate estimates hearings, the ATO's acting commissioner, Jeremy Hirschhorn, said taxpayers who relied on previous guidance issued in 2014 would not be pursued for retrospective payments.
Mr Hirschhorn also confirmed accountants or advisors who provided ordinary advice on trust payments and were not "marketing aggressive 100a-style schemes" would not be subject to promoter penalties.
If the children get the money we have no concerns- Jeremy Hirschhorn, ATO acting commissioner
"We stand by our 2014 guidelines for the interim period, until we bring out this new guidance," he said.
There was no intention to capture "prudent ordinary tax planning transactions".
"Our position is that if a beneficiary of the trust gets the benefit then Section 100a has no role to play... if the children get the money we have no concerns," Mr Hirschhorn said.
He accepted many people worrying about the guidance update may not fully understand the ATO's approach, but hoped to alleviate "many unfounded fears" when consultation with tax industry professionals ended and new advice was finalised.
Because of the heightened concern and volume of submissions generated by the review, public feedback will now be accepted until the end April.
An ATO spokesman said the new guidance had actually identified specific arrangements previously noted in its taxpayer alerts "which we consider to be higher risk".
"We hope taxpayers and advisers will take account of the guidance and we will see behavioural changes in future years," he said.
However, most activities of family trusts did not attract Section 100a attention.
He also noted "ordinary family or commercial dealings" qualified for exclusion from Section 100a rules.
Such dealings may include arrangements whereby a farming family trust's controllers reinvested distributions in that trust's business operations.
Arrangements to achieve succession planning or asset protection objectives, may also qualify for this exclusion, depending on the facts.
The ATO acknowledged some taxpayers and advisors now realised trust distribution strategies used in some prior years did not match how it saw the law applying, and its compliance approaches would ensure that "in practice there will be limited disruption for prior years".
There were no plans to ramp up an audit program dedicated to those years.
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