Family Trust Distributions - Be careful what you wish for!

The cat-and-pigeon show created by the ATO’s more aggressive stance on the application of Section 100A to unpaid trust distributions to adult children took a new twist last month with the release of the Full Federal Court’s appeal decision in the Guardian Case.

The Court confirmed that a real “agreement” to deal with the funds must exist before the beneficiary becomes entitled to the distribution, and the ATO lost on that point. A unilateral decision by the trustee or even a pattern of behaviour is not an “agreement” for Section 100A purposes. The beneficiary needs to be a willing party to the arrangement.

However, the ATO had an ominous win in one year using the “catch-all” anti-avoidance law – the much-feared Part IVA.

It is worth noting that the ATO’s win did not relate to the trust distribution, but rather the next step, where a trust distribution to a “bucket company” was subsequently paid out as a franked dividend to a non-resident individual.

So, the ATO’s apparent belief that taxpayers must arrange their affairs in the most tax-ineffective way seems to be alive and well and gaining some judicial support.

It will be interesting to see whether the Guardian Case makes it to the High Court of Australia, and if so, how that august bench applies the law to the facts.