ATO pushes ahead with trust crackdown

Tax experts have met with the ATO to express their concerns about a planned crackdown on trusts which is expected to have widespread ramifications for taxpayers and their advisers.

The ATO wants to target distributions from a trust that are allocated to a corporate beneficiary, but not actually paid (this is known as an “unpaid present entailment”).

This allows the owners of the funds to reduce or defer income tax. The funds can then accumulate in the trust and be reinvested.

The ATO is growing increasingly concerned about the level of accumulated funds inside discretionary trusts, of which there are around 460,000 in use. It is believed half of these trusts have corporate beneficiaries.

The ATO is particularly worried about the use of “unpaid present entitlements” and appears to be moving towards a position where entitlements should be treated as a loan and taxed accordingly.

The AFR reported this morning that tax experts on Friday met with the ATO and expressed their concerns. The ATO says it will provide further guidance to tax advisers as early as next month over the use of discretionary trusts with corporate beneficiaries and will spell out the circumstances in which it believes an unpaid present entitlement converts into a loan and provide written examples.

However, the ATO did not rule out applying any change retrospectively.