On the ATO’s radar: Trusts distributing to tax exempt beneficiaries

The Australian Taxation Office has advised of its intention to conduct a review to assess whether trusts are compliant with the anti-avoidance rules when distributing trust income to tax exempt beneficiaries. These rules aim at preventing trustees from using tax-exempt bodies to sradar-screenhelter income.

The ATO will be targeting situations  where the ‘pay or notify rule’ and the ‘benchmark percentage rule’ apply. The first rule relates to situations where a tax exempt entity is entitled to income of the trust estate but has not been paid nor notified of the entitlement within two months of the end of the financial year. In such instances, the ATO will disregard the beneficiary’s entitlement to the trust’s income. The second rule applies when the tax exempt entity’s share of the trust’s net income exceeds a benchmark percentage. In the ATO’s view, the tax exempt entity will not be entitled to that proportion of the income.

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