Be alert to ATO action!

What's the Issue?

Commonly, businesses are owned via Family Trusts. One of the benefits of a Family Trust is that income from the business is earned by the Family Trust and then can be distributed among beneficiaries of the Family Trust, which are usually the family members of the person running the business.

Some of the activities that the ATO is examining closely are 'gift back' arrangements. Usually, if income from a Family Trust is not distributed to the beneficiaries, it is usually taxed in the Trust at the top marginal tax rate.

So, 'gift back' arrangements have been very commonly used by many (if not most) Family Trusts to nominally distribute the income of the Trust 'on paper' to avoid the top marginal tax rate but without actually paying the income to the beneficiaries. The books of the Trust then record the funds as being gifted back to the Trust.

The ATO has been challenging instances of 'gift back' where there is no genuine intention of paying the funds to the beneficiary. This can be demonstrated by evidence (e.g. documents or emails) or by patterns of distributions over several years.

Other areas being closely examined, and sometimes challenged, by the ATO include:

• interest free loans to beneficiaries especially where the loans are never repaid and it appears there was never any intention of them being repaid,
• "reimbursement agreements" where the Trustee makes a distribution of income to a corporate beneficiary that is entirely owned by the Trustee.

Any Tips?

Reduce the risk of the ATO challenging trust distributions by putting in place arrangements which demonstrate the entitlements have actually been paid to the beneficiaries or are actually for their benefit. Also, where loans are being made to beneficiaries, it is important to prepare documentation which evidences an intention of repayment, for example by including interest calculations and repayment schedules.

For further guidance, please feel free to give Mitchell Zadow, Managing Principal and an Accredited Specialist in Commercial Law, a call on (03) 8561 3318.

The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

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