We are very quickly heading towards the end of another financial year. In accounting world that means turning our minds towards impending tax bills for the year and looking to minimise the pain and suffering of proving funds to the tax man. 

In May and June each year we touch base with clients to discuss current year profits and ways in which tax can be minimised. One of those techniques can be income splitting across family group members. 

If your business is currently operating through a family discretionary trust, the Australian Tax Office (ATO) has recently issued draft tax rulings and guidance in relation to the spreading of income across family member beneficiaries. Depending on how your trust generates its income and how it distributes that income will determine if your trust has the potential to catch the eye of the ATO. 

Trust distributions are often made to adult children for asset protection and estate planning purposes. Sometimes, the adult children in a family may have lower tax rates than their parents, so the overall tax rate percentage for the family group is lower because of the spread of these trust distributions. 

It appears the ATO now believes that parents who make trust distributions to their adult children, and then arrange for their children to give the distribution back to them, may only undertake this exercise to reduce tax. The ATO has indicated that if an audit were to be undertaken, the ATO could invalidate prior year trust distributions and tax the trustee of the trust at 47 per cent on the amount of the distributions. 

As part of undertaking tax planning, it will be important to discuss this ATO guidance with your professional tax advisor as it is currently a hot topic. 

This advice is general and doesn’t consider your personal circumstances, so discuss it with your tax professional.


Karen Peall is the Executive Manager of Lyons Judge Bundaberg and has more than 20 years’ experience in accounts and taxation.