Now they are over 18, can my child have a bigger distribution from my family trust?

Most children under 18 years of age can only receive $416 from a family trust before the 47% tax rate is applied. There are some exceptions but that is a post for another day.

Historically, a child becoming 18 meant that they became another adult to receive a distribution from the trust to reduce the family’s overall tax burden. Trust distributions could be made “on paper” and the beneficiary may not have even been aware of the distribution, let alone physically receive it. In some instances, the trustee tracked amounts of education expenses paid by the trust over the years, board and household expenses charged for living in the family home and the cost of holidays, gifts, and other items were reimbursed from trust entitlements. In other instances, trust distributions were just gifted to the parent controller of the trust by the beneficiary.

In summary, the trust controller saved tax but the trust beneficiary received no benefit from the distribution they were said to have received.

These practices are now over since the release of tax ruling TR 2022/4 and Practical Compliance Guideline PCG 2022/2 in December 2022, signalling that the Australian Taxation Office (ATO) has renewed vigilance in enforcing section 100A of the Income Tax Assessment Act 1936.

Section 100A is an anti-avoidance provision which makes the trustee of a trust liable to tax at the punitive rate of 47% on income which has been distributed to a beneficiary in circumstances where the ATO considers section 100A applies.

Broadly, the ATO considers section 100A applies if the trust distribution to a beneficiary involves an arrangement where a benefit being is provided to another person, intended to reduce someone else’s tax liability and the arrangement is outside ordinary family or commercial dealing.  

TR 2022/4 sets out the ATO's interpretative position on the application of section 100A and PCG 2022/2 records that it sets out, “… a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach”.

The PCG contains examples of what it describes as white, green and red zone arrangements, with the red zone scenarios illustrating where the risk to participants is high for audit and section 100A being applied.  

For children who have become 18, paragraph 10 of the PCG says that section 100A will not apply if only the beneficiary benefits from their trust entitlement; or there is no agreement, arrangement or understanding to provide a benefit to someone other than the beneficiary. The PCG contains green zone scenarios where beneficiaries use their entitlement for their own benefit, including their payment of university fees.

The ATO guidance on ‘ordinary family or commercial dealing’ is extensive and needs to be understood by anyone considering making trust distributions to adult children other than by putting the money in their bank account with no strings attached