Trust distribution considerations

With the ATO increasing their focus on discretionary trust distributions via the application of section 100A (present entitlements from trusts arising from reimbursement agreements), as well as Part IVA (general anti-avoidance provision), it is important to keep this front of mind when discussing these issues with clients and when assessing a client’s ATO audit risk.

One of the issues of contention in a recent Part IVA case ‘Minerva Financial Group Pty Ltd v FCT’ was that trust distributions were made in such a way that they escaped the 30% resident corporate tax rate, and instead directed distributions to non-residents, therefore only being subject to a 10% withholding tax rate.

In this case, broadly, the trustee had a discretion to distribute to both the resident and non-resident beneficiaries. The taxpayer did not provide evidence of any commercial or other reason why it failed to distribute, or distribute more of, the distributable income to the special unitholders. This was a deciding factor in determining that the taxpayer had a dominant purpose of obtaining a tax benefit.

Key takeaways from this case which can be applied more broadly:

• Importance of having sound justification to support the determination of trust distributions, that are not just tax reasons!
• Just because there is a discretion to distribute to a range of beneficiaries, consideration still needs to be given to why a trustee is deciding to distribute to one beneficiary over another – and the reason best not be for a tax benefit!

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