Beware – the ATO is looking closely at family trusts

Recently the ATO has been cracking down on family trusts and how it is going about the crackdown has this expert raising the alarm. COMMENT

“Crackdown!” or “Backdown!” – the Australian Taxation Office often only makes the news when it pursues taxpayers or lets them off.

Recently the ATO has been cracking down on family trusts. Family trusts are used by taxpayers to run businesses or hold investments for a variety of reasons.

One of those reasons (but only one!) is the ability to allocate income of the trust to various members of the family for tax purposes.

The ATO generally has no problem with this where the income allocated to the family member is paid over to them.

Recently, however, the ATO has been questioning situations where the income allocations are not promptly paid to the family members to whom they were allocated.

This has been a quiet revolution – while the ATO flagged some concerns with family trusts not paying income allocations in 2016, the cases that are now being pursued are very “plain vanilla”.

They are nothing like the abusive arrangements that the ATO expressed concerns about.

Our recent experience is that the ATO is challenging the allocation of income by trusts to low-income adults (usually the adult children of the trust’s controllers) where the income is not transferred to them fairly quickly after the end of the financial year.

In order to investigate, the ATO is using its powers to conduct compulsory interviews with the trust’s controllers and the people who were allocated the income.

This is an intensely confronting process, particularly where the compulsory interviews involve your children. The anti-avoidance provision that the ATO is relying on is complex, and in my opinion the ATO is pushing its boundaries.

In administering the law, the ATO is asking questions about how family members choose to arrange their finances as between themselves.

There is a real question in my mind about the appropriateness of this. Ordinary family dealings are supposed to be outside the scope of ATO action in this area.

Perhaps more importantly, the ATO is now questioning standards of behaviour that it has previously walked past.

In my view, at a minimum, taxpayers need to be made aware of this change of view.

Perhaps until that happens, the ATO should be backing down, rather than cracking down.