Earlier this year, Deputy Commissioner for Private Wealth, Louisa Clarke did not shy away from stating “Trusts will also continue to be a key focus area for us. In 2025, we’ll be continuing to raise awareness about family trust distributions tax and how it applies to distributions made outside the family group.”[i]

In the lead up to 30 June, it’s time to factor in the ATO’s intensifying focus on private groups, particularly in the area of trusts, private companies, and inter-entity dealings. Year-end planning isn’t just about ticking-off routine admin tasks, it’s an opportunity to take a step-back and reassess long held assumptions and confirm that your structure is working as intended. For example, simple missteps, especially around trust distributions, can trigger:

• Ineffective distributions
• Family trust distributions tax
• Losses of tax attributes (such as flow-through of franking credits).

Below we touch on a few items that private groups and their tax advisors should pay special attention this year-end planning season.

Trustee Resolutions

Where your private group includes a discretionary trust, the ATO has been clear in their expectations that trustee resolutions are expected to be carried out before year-end and in accordance with the deed. As such, it is critical to read the deed, understand the steps required to make an effective trust distribution and action them.

For example, if the deed says that the trustee must resolve to distribute income before 30 June, make sure the resolution is before 30 June not on 30 June. If a beneficiary must be endorsed by the appointor, make sure it is evident that the beneficiary has been endorsed by the appointor. Each trust deed (even those from the same drafters) have their own peculiarities or have gone through iterations. As such, one-size resolutions definitely do not fit all trusts.

While advisors consistently hear the refrain “read the deed”, failure to do so can potentially result to ineffective distributions and the risk of various consequences for group, many of which are not able to be rectified in future.

Family Trust Elections (FTEs)

FTEs can simplify the application of trust and company loss rules and access to franking credits, but they come with strings attached. Once made, the trustee effectively commits to only distributing to a defined family group. Making distributions outside this family group, and the trustee triggers a liability to pay family trust distributions tax (FTDT) at 47%.

Key things to consider:

• Have any entities made an FTE or an Interposed Entity Election (IEE) previously?
• Do you need an FTE (or an IEE) or should you look to make one having regard to the needs of the family group?
• Do the intended beneficiaries of the family trust fall within the legislative definition of ‘family group’?

Division 7A: The ongoing focus area

Borrowing from your company (or distributing company funds through a trust) may give rise to Division 7A implications that require addressing. With special leave in Commissioner of Taxation v Bendel yet to be considered by the High Court, some uncertainty exists in relation to UPEs and their interaction with Division 7A. While the Full Federal Court decided in favour of the taxpayer, the ATO has maintained their historic position per their Interim Decision Impact Statement[ii].

As has been the case for many years, the ATO is increasingly focused on these arrangements.

Issues for private groups to consider include:

• Do your need to enter into a loan agreement, in light of the Full Federal Court decision in Commissioner of Taxation v Bendel?
• Whether minimum yearly repayments have been appropriately calculated and satisfied?
• Do existing loan agreements comply with the requirements under Division 7A?
• Is the private group’s dividend and distribution policy appropriate to facilitate repayments of loans in a manner which will not compound the issue further?
• For larger, more complex private groups, do the thin capitalisation provisions or the introduction of the debt deduction creation rules impact the way the group approaches intra-group financing arrangements.

Paying Your Tax Debts

While the ATO has talked about stepping up debt collection, it appears their debt book has increased to its largest ever size. With recoverable debt estimated to make up half of that total there is no doubt that taxpayers with outstanding debts can expect another increase in collection intensity.

Further, from 1 July 2025, General Interest Charges (GIC) and Shortfall Interest Charges (SIC) will no longer be tax deductible under the specific provisions allowing for costs of managing tax affair.

Historically deductible under specific provisions of the Tax Act, the deductibility of any GIC or SIC depend on when they are incurred, not the period they relate to. For example, any GIC or SIC accruing post 1 July 2025 should not be deductible under the specific provisions, even if the underlying tax liability was from an earlier year. While taxpayers may be able to consider whether these provisions are deductible under other provisions, where possible, it may be naturally easier to pay off these debts if you can.

Further to the extent there are historical items requiring tidy ups, it may be beneficial to consider expediting any amendments. Care should be taken with any proposed plan to obtain borrowings from other sources to repay tax debts as a way to potentially ‘maintain’ deductibility.

Overall, this change in the potential economic cost of ATO interest charges should be factored into broader decisions on how private group’s approach cash, tax debts and payments.

[i] “Spotlight on… Deputy Commissioner Louise Clarke”, 14 January 2025. https://www.ato.gov.au/businesses-and-organisations/business-bulletins-newsroom/spotlight-on-deputy-commissioner-louise-clarke 

[ii] https://www.ato.gov.au/law/view/document?docid=LIT/ICD/VID903of2023/00001