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Family trusts will no longer be able to escape tax obligations by engaging in circular trust distributions, as the ATO seeks to tighten up possible loopholes.
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ATO clamps down on circular trust distributions
14 May 2018
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As announced in the budget papers, a specific anti-avoidance rule that currently applies to other closely held trusts that engage in circular trust distributions will be extended to family trusts.
According to the government, where family trusts act as beneficiaries of each other in a ‘round robin’ arrangement, a distribution can be ultimately returned to the original trustee — in a way that avoids any tax being paid on that amount.
The new anti-avoidance rules will enable the ATO to pursue family trusts by imposing tax on such distributions at a rate equal to the top personal tax rate plus the Medicare levy.
The proposed measure will apply from 1 July 2019 and is estimated to have a gain to revenue of $20 million over the forward estimates period.
Speaking to Accountants Daily, HLB Mann Judd tax partner Peter Bembrick said while there was a lack of information around the measure, it seemed “artificial" and could possibly be a legislative change to protect the ATO in future disputes.
“If the arrangements they are targeting are aimed at those trying to avoid those distributions reaching the individuals' returns and keeping them at the trust level without the trustee paying tax, I just question why that would ever work — it doesn't seem to make sense why that would have ever worked but there are possibly some technical arguments where they are unclear and they are trying to put that beyond doubt,” said Mr Bembrick.
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“If you step back and look at it logically, it can't work; it doesn't make sense that the ATO would allow that to happen.
“There could be some argument about the treatment and the ATO would have to take up a position which the taxpayer disputes and therefore it doesn't necessarily get a definitive result in every case whereas if they make a legislative change, the law is no longer ambiguous and they can put it beyond doubt.”
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