The AAT has held that, in a tax avoidance scheme case, the income of a family trust, purportedly distributed between husband and wife taxpayers, was in fact income to which the husband alone was presently entitled. It also upheld penalties that had been imposed on the husband.
The taxpayers are farmers and the Tribunal said they participated in a tax avoidance scheme in the 2002, 2003 and 2004 income years (in common with other farmers including the taxpayers in AAT Case [2012] AATA 823, Re Lack and FCT), which the Commissioner described as a profit-washing scheme. The taxpayers conceded the scheme was a sham.
The taxpayers had set up a family trust – the Kingston Family Trust. In June 2002, another trust, a unit trust, was created (the Bethel Trust) of which the taxpayers and 2 companies were the unit holders. In the 2002, 2003 and 2004 income years, the trustee of the Kingston Family Trust purported to distribute $80,000, $280,000 and $175,000 respectively of the income of the Kingston Family Trust to the Bethel Trust. The balance of the income of the Kingston Family Trust in those years was distributed between the taxpayers and one of their children. The Commissioner issued amended assessments in 2009 increasing the taxable income of each of the taxpayers by $40,000 in the 2002 income year, $140,000 in the 2003 income year and $87,500 in the 2004 income year. The Commissioner also imposed shortfall penalty against the taxpayers on the basis of 50% of the tax shortfall.
The issues concerned how the distribution to the Bethel Trust should be dealt with, whether the Commissioner had power to amend the original assessments, and whether the penalties should be remitted. The Tribunal said that, pursuant to a clause of trust deed of the Kingston Family Trust, the husband was presently entitled to the sums purportedly distributed to the Bethel Trust. Thus, in the Tribunal’s view, all of the income of the Kingston Family Trust purportedly distributed to the Bethel Trust in each of the 2002, 2003 and 2004 income years, was income to which the husband was then presently entitled, meaning that the wife was not entitled to any of that income. The Tribunal also held the Commissioner had the power to amend the original assessments, and that the shortfall penalty imposed on the husband should stand, albeit that the penalty on the wife would now not be applicable.
(AAT Case [2012] AATA 898, Re Kingston & Anor and FCT, AAT, Hack SC DP, AAT Refs: 2011/0615-17, 2011/0612-14, 19 December 2012.)
[LTN 247, 20/12]