ATO Takes Action Against Family Trusts

James Creevy and Mitchell Harding, current as of: 17 July 2025.

In recent months, the Australian Taxation Office (ATO) has warned privately owned and high-net-worth groups alike about growing compliance concerns with discretionary and family trust structures. In particular, issues being identified are in relation to outdated deeds, invalid trust distributions, and unclear succession mechanisms. The ATO has made it clear it is zeroing in on poorly maintained structures and vague trust deeds which may undermine the validity of historical or future distributions to beneficiaries. In particular, the ATO is monitoring trusts that are subject to intergenerational wealth transfers which are becoming increasingly prominent as earlier generations of trusts are approaching their vesting date.

The reason why these types of structures are being scrutinised is due to several reasons including ATO’s enhanced data matching technology capabilities, along with amended tax returns, that for one reason or another raise a flag to the ATO and result in them taking a closer look at the structure. What often comes to light are older deeds that were drafted with stricter and inflexible provisions, amendments and changes that were poorly drafted, and critically, historical distributions that were made to recipients outside the pool of eligible beneficiaries.

These days, advisers with trust clients are now on the front line. Trusts that were once “set and forget” now come with real compliance risk. And as the ATO sharpens its focus, it’s not just the ultra-wealthy who need to be vigilant and ensure the trustee of a trust is complying with the trust deed, it’s everyone involved with administering a trust, advisers and trustees alike.

Why Family Trusts Are Under the Microscope

At the core of most compliance issues with discretionary and family trust structures is a misunderstanding of who the eligible beneficiaries of a trust are. Advisers are all too aware of the importance of “reading the deed” when it comes to each client’s trust structures, however, time is finite and understandably, mistakes can be made when an assumption is made that the pool of eligible beneficiaries in one trust deed, is the same as in another trust deed. Even where two trust deeds are drafted by the same deed provider, the pool of beneficiaries may be customised, or one may be an earlier version of said trust deed and therefore could have different pool of eligible beneficiaries than the later version. Clearly, making an assumption on who the eligible beneficiaries are without properly identifying them in each particular trust deed is a dangerous exercise because if a distribution is made to an individual or entity that does not actually form part of the pool of eligible beneficiaries, then the distribution would be invalid, resulting in adverse tax consequences.

Another common scenario is where a Family Trust Election (FTE) has been made which tightens the pool of beneficiaries who can receive trust distributions by limiting it to the individual specified in the election (Test Individual) and their family group. A distribution can technically be made to a person who does not fit within the meaning of Test Individual or their “family group”, however, this would attract 47% Family Trust Distribution Tax (FTDT). These types of scenarios highlight how it is essential that advisers understand each of their clients’ trust deeds, which are almost always different from one client to the next, to ensure yearly trust distributions are valid and are going to individuals or entities that are eligible beneficiaries.

The Adviser’s Dilemma

When the ATO starts asking questions, most problems have been there for a while. It might start with something simple, an amended return, an unusual distribution, or a routine data match, but once they start, bigger issues surface. What they find is rarely about outright evasion; it’s about outdated deeds, distributions to ineligible parties, and poor recordkeeping.

This puts advisers in a difficult position. They are suddenly playing catch-up, reviewing old documents and trying to explain decisions made years ago, sometimes by different advisers. The pressure to make voluntary disclosures, involve legal support, or negotiate outcomes rises quickly.

By the time the audit begins, the window for easy fixes has closed. That’s why early detection and proactive trust management is essential.

How Trust Evolve® Helps Advisers Mitigate These Compliance Risks

With the ATO applying resources to monitor these trust structures, advisers need more than technical knowledge – they need tools built for prevention.

Trust Evolve® was created for exactly this purpose. Backed by our in-house legal team, it gives advisers a structured, expert-reviewed way to assess and manage discretionary and family trust compliance before issues arise.

It’s not a replacement for advice, it’s a smarter, more scalable way to deliver it with confidence and legal backing. In particular, the Trust Evolve Report, coupled with tailored distribution resolutions, provides an adviser with a comprehensive overview of the Trust structure to assist with identifying eligible beneficiaries and ensuring valid distributions. To combat unclear succession mechanisms, the Trust Evolve Amendment that comes with the product also updates the provisions of the Trust Deed to facilitate the smooth transition when it comes to the offices of Appointor and Trustee. 

When you’re ready to further protect your clients and take control of trust compliance, simply: explore how Trust Evolve® can integrate into your firm’s review workflows and start catching risks before they escalate.

To find out more, head to the Trust Evolve® page or get in touch with one of our team members.

Acis does not provide advice in relation to commercial law, taxation, duty, company law or any other matter. We do not purport to provide advice nor should you construe anything in any correspondence with us, or material provided by us, as advice of any kind.