COVID-19 and trust liquidity issues

The ATO has highlighted the fact that due to COVID-19, a trustee may experience liquidity issues that may affect a trust’s ability to satisfy a beneficiary’s entitlement. This may happen where financial institutions impose restrictions that affect the way a trustee can deal with its assets.

The ATO states that where a present entitlement arose before any effect of COVID-19, in circumstances that were not a reimbursement agreement, trustees may need to make subsequent arrangements to meet the requirements of the financial institution. If that occurs, these arrangements will not invalidate that entitlement nor trigger other taxation impediments.

“For present entitlements conferred at the end of the last tax year, the law will apply based on the facts presented,” it says. “We won’t undertake compliance action to consider the validity of an entitlement … in circumstances where a trustee is affected by liquidity issues due to COVID-19 and unable to satisfy the entitlement.”

The ATO also reminds trustees of the importance of complying with the terms of their trust deeds. It says that for cases under review, it will continue to apply the law. Further, the ATO says that its compliance approach is intended to provide relief and certainty to trustees and associated private groups who experience genuine liquidity difficulties as a result of COVID-19, and assures affected parties that it will monitor behaviour to ensure this approach works as intended.

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