Article by Simon Northey
as featured in the Farm Weekly issue 17 March 2022
Trustees should be aware the Tax Office have recently released several documents concerning trustees that allocate trust profit to adult children. The documents are mainly designed to question arrangements that are tax motivated, rather than explaining ordinary family dealings.
Amongst the documents, the “Taxpayer Alert” appears to focus on family trusts which are controlled by parents, where the trustee makes tax driven profit allocations to a child with no regard to the adult child’s future entitlements.
One common arrangement in their focus includes costs relating to the upbringing of minor children shown against the child’s beneficiary account, instead of the parent’s beneficiary account. Some examples of these costs would include school fees, uniform costs, share of family holidays.
A summarised example is;
- The trustee of the Blue Family Trust derives income of $400,000 in 2020-21 and Trevor (Dad) allocates to Simone (daughter recently turned 18) $160,000.
- Before the end of the 2020-21 income year, Simone agrees that any distribution will, after the payment of tax, be paid to Dad to reimburse him for part of the school fees and costs of other extracurricular activities since Simone was five years old, being $315,000.
- The Tax Office could view this arrangement as tax driven on the basis that they determine the cost recoupment items are the ultimate responsibility of the parents and should not be offset against Simone’s beneficiary entitlement.
- They could also view Dad as obtaining an economic benefit of Simone’s trust income allocation and could reassess that income allocation to Dad at his tax rate, or the trustee at the highest rate.
- The Tax Office could also apply penalties and interest if they deem the arrangement as tax avoidance.
I guess the take home message is, the Tax Office are expanding their interest in how trustees allocate profits and how taxpayers, especially high net worth taxpayers, are managing their tax affairs with regards to children once they have turned 18.
This could be likened to the Tax Office scrutiny applied to trustees allocating profit to corporate beneficiaries some 10 years ago, resulting in significant changes in managing corporate beneficiaries. In fact, the Tax Office have always had a keen interest in trusts and the profit allocations because of the potential tax minimisation opportunities, and this interest is not going away.
Whilst it could be considered early days for the scrutiny applied to arrangements involving trusts and adult children, it feels it is treading down a similar path to that of corporate beneficiaries and serves a warning to ensure all processes are well documented and in order with proper trust profit management.
This is an area that you must seek the advice of an experienced tax adviser!
To discuss this article further, we encourage you to contact Simon Northey on (08) 9621 3200, or your Byfields accountant.
Disclaimer: This content provides general information only, current at the time of production. Any advice in it has been prepared without taking into account your personal circumstances. You should seek professional advice.