ATO releases trust distributions guidance
Discretionary (“Family”) Trusts are a very common structure that are used throughout Australia by both the big and small ends of town, with more than 700,000 in existence according to the ATO’s most recent statistics.
Given the prevalence of trusts, any change in tack by the Government and/or the ATO can have far reaching implications.
The recent release of Draft Tax Ruling TR 2022/D1 is an example of such a change in tack by the ATO that has garnered significant attention.
This draft ruling deals with “reimbursement agreements” covered by Section 100A of the Income Tax Assessment Act 1936.
Broadly, the term “reimbursement agreements” is used to describe a situation where one party receives a distribution from a trust for tax purposes, but where another party enjoys the benefit.
In other words, the tax distribution goes one way and the cash goes another.
Section 100A is designed to combat improper “reimbursement agreements” that are designed to avoid tax. When Section 100A applies, the trustee of the trust (& not the beneficiary) will be taxed on the trust distribution at a flat tax rate of 47%.
Section 100A has been in the legislation for over 40 years. However, there has only been a handful of examples of where Section 100A has been applied. Those examples are at the more extreme end of the spectrum.
Other than a basic fact sheet first published in 2014, the ATO have not formally expressed a view on the application of Section 100A until now.
The views expressed in the draft ruling have come as a surprise and are out of step with the way in which Section 100A has been historically applied and commonly understood to operate.
Many in the legal and accounting professions have expressed concerns that the ATO are overreaching with the views expressed in the draft ruling.
If the ATO’s views as currently expressed in the draft ruling prevail, it will necessitate a change to the approach to trust distributions for many families from 1 July 2022. There may also be a need to review the history of distributions made since 2014.
The most notable issues are around distributions to adult children (& wider family members) as well as distributions to corporate beneficiaries.
The draft ruling is currently under consultation prior to being finalised. Additionally, there is a significant case (Guardian AIT), that has been appealed by the ATO to the Full Federal Court and that will be heard later this year.
The outcome of that appeal will have a significant bearing on the ATO’s views expressed in the draft ruling.
We are watching the progress of the draft ruling through the consultation process very closely and hope to have greater certainty ahead of EOFY 2022. We will be keeping affected clients informed and will advise on any implications that will affect how trust income is distributed moving forwards.
In the meantime, please contact us if you have any questions.
Federal Budget 2022/23
The Federal Budget will be handed down by the Treasurer, Josh Frydenberg on the evening of Tuesday the 29th of March.
The budget papers will be published on the official website shortly after the budget is handed down.
With an election hot on the heals of the budget, it will be interesting to see what is in store.
As usual, we will provide detailed analysis of the budget in the days following. Watch this space.
Research & Development Tax Incentive
Last month we wrote about the R&D tax incentive, which is designed to encourage innovation in Australia’s private sector.
We take this opportunity to remind you that the due date for submitting applications in respect to the 2020/21 financial year is the 3rd of May 2022.
With that date drawing near, it is time for applicants to get their skates on.
If you need assistance to apply, or have questions about eligibility, please get in touch.
Sky Wealth welcomes Patrick Quigley
We are pleased to advise that Patrick Quigley has recently joined Sky Wealth to head up our financial advisory division.
Patrick has over 25 years’ experience in the financial services industry having previously held positions in notable firms such as J.P. Morgan, Mercer Wealth Solutions and Citigroup Stockbroking.
Patrick is a licensed Financial Adviser, holds a Bachelor of Business Studies with Honours, and a Higher Diploma in Business and Finance from Oxford Brookes University in England.
We are looking forward to working closely with Patrick to ensure that our clients have access to the highest quality financial advice.
If you would like further information on the financial advice options available from Sky Wealth, please get in touch.
Single Touch Payroll (STP) Phase 2
The STP system commenced on the 1st of July 2018 with most employers coming into the system from the 1st of July 2019.
The STP system is a mechanism for employers to report payroll data electronically to the ATO each time they process a pay-run.
Phase 2 of STP was announced in the 2019/20 Federal Budget and involves and expansion of the data that the ATO collects through the STP system.
This expanded data includes:
- Disaggregation of gross earnings into component parts (eg ordinary hours, overtime, etc);
- Employment and taxation conditions (eg TFN declaration information, employment basis, etc); and
- Child support garnishees and deductions.
STP Phase 2 officially started on the 1st of January 2022. However, there are extensions in place to adopt Phase 2 based on the payroll software provider used.
Below is a summary of the adoption dates applicable for some of the most common payroll software providers:
- Xero: 31 December 2022
- MYOB: 31 December 2022
- KeyPay: Live for STP Phase 2
- Quickbooks: Live for STP Phase 2
- Reckon: 31 December 2022
- Wage Easy: 31 December 2022
Payroll software products that are live for STP Phase 2 will have already communicated with users to assist them to start reporting compliantly for Phase 2.
For those who use a payroll product that has an extension, keep an eye out for updates from that supplier leading up to the extension due date.
If you require more information about STP Phase 2 please contact us. Please also get in touch if you are unsure on whether your payroll product is live for Phase 2 or if it has an extension in place.
Quote of the month
The world is a complex, fast moving place. Every day, we are faced with a deluge of data to process and decisions to make.
In order to cope, we are required to make assumptions that allow us to shortcut the time and energy required to make decisions and respond to situations.
It is generally the case that our assumptions serve us well in navigating our busy daily lives. However, sometimes they do fail us.
It is for this reason that we should keep in mind the words of the American Writer & Professor of Biochemistry, Isaac Asimov who cautioned that “your assumptions are your windows on the world. Scrub them off every once in a while, or the light won’t come in”.
To ensure that our assumptions continue to work for our benefit, it is important that we remain open-minded and test those assumptions when there is new information and/or changed circumstances.
Sky Accountants Ballarat
Phone: 1300 328 855
Office Address: 902 Howitt Street, Wendouree, Victoria 3355, Australia
Postal Address: PO Box 2234, Bakery Hill, Victoria 3354
Sky Accountants Gisborne & Macedon Ranges
Phone: 03 97444522
Office Address: 45 Hamilton Street, Gisborne, Victoria 3437, Australia
Postal Address: PO Box 270 Gisborne Victoria 3437