Trusts – are they still worth it?

August 2, 2023

The recent ATO crackdown on trusts will no doubt have some business owners asking themselves the question: Is this structure still the best option for my business?

To recap, trust distributions have been under the ATO microscope in recent years. The latest ATO crackdown was in February 2022 when it updated its guidance around trust distributions especially those made to adult children, corporate beneficiaries and entities that are carrying losses.

Depending on the structure of these arrangements, the ATO may potentially take an unfavourable view on what were previously understood to be legitimate distribution arrangements. The ATO is primarily targeting arrangements under section 100A of the Tax Act; specifically, where trust distributions are made to a low-rate tax beneficiary, but the funds are is transferred or paid to another beneficiary usually with a higher tax rate. The ATO’s Taxpayer Alert (TA 2022/1) illustrates how section 100A can apply to the quite common scenario where a parent benefits from a trust distribution to their adult children.

Despite this new ATO interpretation and the wider crackdown on trusts in recent years, the choice of a trust as a business structure still has a range of benefits including:

• Asset protection – limited liability if a corporate trustee is appointed. Usually, when a person owes money and cannot meet the repayment requirements, the creditor can access the person’s personal assets to recoup the debt payable. However, if a trust is in place, there is no access to  beneficiary assets.
• 50% CGT discount – A family trust receives a 50% discount on capital gains tax for profits made from selling any assets the trust has held for more than 12 months when distributed to an individual beneficiary. This contrasts with a company structure where the 50% CGT discount cannot be accessed.
• Tax planning – Income that sits in the family trust that is not distributed by year-end is taxed at the highest income tax rate. However, any trust income distributed to the beneficiaries is taxed at the income tax rate of the beneficiary who receives the distribution. The Trustee(s) must confirm the distribution by the end of the financial year. Best practice is to ensure the distributed funds are paid to the beneficiary.

If you have questions around your trust structure, or your business structure more generally, please get in touch.

This information has been prepared without taking into account your objectives, financial situation, or needs.  Because of this, you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs. Content in partnership with the Institute of Financial Professionals Australia (IFPA).