Trusts are back in the ATO spotlight

With more than 947,000 trusts operating across Australia, it’s no surprise the ATO continues to keep a close eye on how these structures are managed. Trusts remain central to many wealth and succession plans, but their complexity means they also attract compliance scrutiny.

Closer attention to how trust structures are now being used is part of the ATO’s focus on ensuring taxpayers pay the required tax and do not inappropriately use structures to reduce their tax liabilities.

What’s attracting attention

The ATO’s latest data analysis has pinpointed a few emerging behaviours it’s concerned about:

• Overclaiming tax deductions: Some trusts are reducing their net income by claiming deductions that don’t stack up – often without the documentation to support GST refunds.
• Loss trafficking: This refers to the creation and use of artificial losses to offset income, giving the appearance of reduced profitability.
• Misuse of tax-exempt vehicles: Ancillary funds and other exempt structures are sometimes used to access concessions or private benefits where there’s no real entitlement.

If these practices sound familiar, it might be time to get back on track.

Family trust elections missteps

Family trust elections (FTEs) and interposed entity elections (IEEs) are meant to define clear tax relationships. But when recordkeeping falls short or elections aren’t properly understood, issues arise – particularly with Family Trust Distribution Tax (FTDT).ii

Trustees are also being encouraged to check the FTEs and any IEEs the group has in place and to clearly identify members of the family group.

Trustees should ensure they understand the tax implications of making these elections and how they affect distributions and tax responsibilities for both the trust and its beneficiaries. In fact, the ATO is seeing instances where individual beneficiaries are incorrectly returning amounts on which FTDT has been paid.

Trusts in succession planning

Using a trust to transfer wealth is common in succession planning – but it needs to be done correctly.

Trouble often arises when capital gains tax events are overlooked, the tax consequences of transactions are misunderstood and Division 7A issues are ignored when loans, payments or debt forgiveness are involved.iii

These oversights can lead to unexpected tax bills at a time when stability and clarity matter the most.

Amendments to a trust deed (such as changes to the trustee, adding or removing beneficiaries, or amending the vesting date) can also create tax risks for trustees.

The same applies if the trust has a family trust election in place but makes distributions outside the family group.

Trusts with an IEE in place to include the interposed entity in its family group may also find the ATO asking questions.

Don’t forget the franking account

Another area of focus right now is discrepancies in trust franking account balances and situations where a trustee fails to apply the franking credit integrity rules when making or receiving franked distributions.

Trustees need to ensure they are complying with the 45-day holding rule if they wish to avoid scrutiny. This rule requires shares to be held ‘at risk’ for a continuous period of at least 45 days (90 days for preference shares) during the qualification period.

It is also important to check you have family trust elections in place if you wish to access franking credits for the trust’s share holdings.

If your trust touches any of these areas – from family elections to succession plans – now is a good time to review your setup. Good governance and clear records don’t just help you comply with ATO rules; they protect your beneficiaries, your finances, and your legacy.

The ATO has a checklist that is designed to help avoid basic trust errors if you don’t fully understand your obligations or take reasonable care to get things right.

The checklist states you should:

• Understand how income is defined for the trust estate.
• Identify the trust’s beneficiaries.
• Understand resolutions and present entitlement.
• Identify any family trust elections (FTE) or interposed entity elections (IEE).
• Maintain clear and accurate records.

Want help reviewing your trust structure or clearing up a few grey areas? Get in touch with our office today.

i Trust statistics | Australian Taxation Office

ii Areas of focus 2024–25 | Australian Taxation Office

iii Areas of focus 2024–25 | Australian Taxation Office