Trust Distributions to Adult Kids

Although a common strategy, it appears the ATO have recently decided that distributing trust income to adult children (but not giving them the cash) is no more than tax avoidance. This is such a shame as it was one of the few, fun tax planning strategies we had left in the tool box. Not to mention how it made us appreciate our lazy uni-student children whilst they lay on the couch consuming our internet data and food!

The ATO ruling is currently in draft form as Taxation Ruling TR 2022/D1 and Practical Compliance Guideline PCG 2022/D1. It is open for public discussion. I can imagine that (as this is a strategy of the more wealthy in society) there will inevitably be some push back. It will be interesting to see how the final ruling evolves.

The most relevant takeaways from the current draft are;

  • Trustees should ensure that beneficiaries who are entitled to the trust income actually receive and retain the benefit of the distributions.
  • Distributions to adult children may be problematic where cash doesn’t follow, or where entitlements are purported to satisfy education and living costs incurred on their behalf.
  • The ATO will target distributions to lower tax rate beneficiaries (such as retired parents) who make regular gifts to higher tax rate beneficiaries (such as adult children).
  • The trust reimbursement rules will not apply to arrangements which are “ordinary family and commercial dealings”. However, the ATO take a very narrow view of this exception.

This will obviously affect upcoming June 2022 distributions. We will be in touch before then when things have settled down.

In the meantime, and of no relevance to the above, I thought you might like to see what we got up to yesterday having picked Kelly in the USA on our way to the UK!

Stay safe in the rain!

Lindsay 0413 952 180

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