Family trust compliance blitz signals wealth strategy reset

Professionals advised to review their wealth strategy as the Australian Tax Office (ATO) family trust blitz continues. 

The flexibility that a family trust once provided has been overshadowed by ATO crackdowns on family trust elections and income distribution practices previously regarded as grey areas. 

The ATO’s primary goal may be to stamp out tax avoidance, however the increased focus on compliance has left many trustees and beneficiaries wondering if and how it affects them. 

How family trust compliance became a key area of ATO scrutiny

ATO activity targeting trusts has been in place for some time, most notably with the establishment of the ‘Trusts taskforce’ back in 2013.

Then in 2021, the ATO released a practical compliance guideline (PCG) [PCG 2021/4] which set out how it approaches arrangements involving professional firms allocating profits or income to a trust. 

This was complemented by the release of the PCG 2025/5 in November last year which specifically focusses on professionals or small businesses that split income, instead of allocating appropriate amounts to those who earned it. 

Meanwhile, the ATO has also made a point of publicising renewed interest in ensuring family trust elections are compliant. While the tax framework has been in place for decades, the family trust ‘blitz’ is essentially shining a light on any areas where trust governance or distributions could attract any type of ATO scrutiny.

For individuals, families and groups who have long used trust structures as an integral part of their wealth strategy, it’s fair to say that now is an important time to revisit that strategy and make sure it’s still working for you. 

Family trust elections under the microscope

A family trust election is a decision made by a trustee to formally declare their trust a ‘family trust’. Once this election is made, the family trust must abide by family trust rules. In particular, who may be a beneficiary under the ATO’s definition of a family group. 

When more complex or long-standing trust structures exist as part of a family’s wealth strategy, it’s possible for trustees to inadvertently overlook some of these rules and make inappropriate distributions. 

The ATO has made it clear that any and all non-compliance involving family trust elections will be reviewed. Therefore, families and groups with established family trusts that could be at risk of non-compliance (or if the family trust structure no longer suits their needs) will need to take a closer look at their arrangements and consider adapting them accordingly. 

Personal services income splitting rules tightened

Perhaps more significant for individual and family wealth strategies is the ATO’s crackdown on income splitting. 

This applies broadly to a wide range of professionals and small businesses – from tradespeople to accountants, engineers, doctors, and more. Put simply, personal services income (PSI) is income derived from an individual’s effort, skills, or expertise. PSI that is diverted to a company or trust may be considered tax evasion which can attract significant penalties. 

For more complicated arrangements, such as when a child or spouse also works in the business, the ATO has traditionally leaned on a specific section of tax law (Part IVA) to cancel a tax benefit if they believe it was a result of tax avoidance. 

How and when the ATO applies Part IVA has been a bit of a grey area, so the new guidance on income splitting seeks to clarify this. It provides examples of risk profiles, with professionals urged to ensure their arrangements fall within the low-risk category before 30 June 2027 or risk retrospective compliance action. 

From a financial planning or wealth management perspective, this aspect of the ATO’s family trust blitz could disrupt mid to long term wealth planning, making new plans an imperative. For example, if a professional is directing PSI to a company or beneficiaries with lower tax thresholds for retirement savings, this would be considered high-risk behaviour, so the individual will need to reconsider how they save for retirement moving forward. 

Is it time to review your wealth management strategy?

Trust structures are a valuable tool for wealth distribution and asset protection. This has long been the case and will continue to be the case despite the ATO’s focus on family trusts. 

What has become crystal clear through the ATO’s recent actions is that not all trust laws are fully understood, and certain arrangements dance a little too close to the line of non-compliance. 

In taking steps to validate your trust’s compliance, it may become clear that your arrangements are too high risk and worthy of a review. 

It is also worth keeping in mind that all change creates opportunity. Perhaps:

• You haven’t reviewed your financial plan in years.
• Early career strategies no longer suit your goals.
• Running your business has kept you from exploring strategies that align with your current vision.
• Changes in tax, regulations or priorities mean your wealth strategy is no longer effective.

Whatever the case, the noise around family trusts provides the perfect opportunity to take a step back. Why not design a new wealth management strategy that speaks to your current vision, leverages the latest tax breaks, and remains fully compliant?

How RSM can help

RSM Australia has been trusted by small businesses through to high net wealth individuals and families for well over a century. We have guided our clients through regulatory changes and evolving market conditions unfolding across every decade – helping to position them for short-, mid- and long-term success. 

If the ATO’s family trust blitz is set to affect your financial planning in any way, please get in touch. We can:

• Conduct a thorough review of existing arrangements.
• Discuss options and opportunities.
• Work with you to develop a new wealth management plan.

From restructuring or redirecting distributions to reviewing your entire financial setup, we’re here to guide you. 

For a confidential discussion, please contact the financial services team at local RSM office.