The AAT has affirmed that husband and wife beneficiaries of a family trust were each assessable on 50% of the income from a family trust that had been distributed to an “interposed” trust beneficiary on the basis that the arrangement was a profit washing scheme.
- The husband and wife taxpayers were beneficiaries of the Mack Family Trust, through which the husband’s accounting practice was operated [in rural Queensland].
- On 27 June 2002, the Glenferry Trust was constituted [with Drgee Pty Ltd as trustee] and [it was] made a beneficiary of the Mack Family Trust.
- The husband and wife taxpayers, [Drgee Pty Ltd] and Danbowl Pty Ltd [as trustee of the Eleventh Hour Unit Trust or ‘EHUT’], were unit holders in the Glenferry Trust.
- Danbowl [atf the EHUT] was also [the sole] beneficiary of the Glenferry Trust [that could receive it’s income]. [The Macks did not control Danbowl or the EHUT.]
- In the 2002 income year, the Mack Family Trust disclosed a net income of $263,092, of which, small amounts were distributed to the taxpayers and their children etc, while $210,000 was distributed to the Glenferry Trust.
- In the same year, the Glenferry Trust distributed its entitlement to Danbowl [atf the EHUT].
- In the 2003 income year, a similar pattern occurred.
- [The idea was that the profits of the Glenferry Trust, and others who distributed to Danbowl atf the EHUT, could ‘wash’ their profits through losses in a loss trust, save for 15% of those profits, which apparently were kept as a promotor’s fee].
- [Having lodged returns on this basis, the taxpayers did an ‘about face’ claiming that the Glenferry Trust’s income was not distributed to Danbowl atf the EHUT, but was off-set by various deductions.]
In July 2007, the Commissioner issued assessments to the Glenferry Trust and the taxpayers for the 2002 and 2003 years to treat the distributions from the Mack Family Trust as income of the Glenferry Trust to which the husband and wife taxpayers were presently entitled on a 50/50 basis on the grounds that the arrangement was a “profit washing scheme”.
The taxpayers argued that they did not participate in the arrangement, [and] the Glenferry Trust was entitled to reduce its income to nil in both income years on the basis of the availability of deductions for accrued director’s and management fees, and that their personal assessments should likewise be reduced.
However, the AAT dismissed the taxpayers’ applications essentially on the grounds that the arrangement was a sham and that therefore they could not have participated in the arrangement. In arriving at this conclusion, the AAT found that it could not rely on the husband’s evidence because on “critical matters”, it was “so at odds with contemporaneous documents and with matters that are incontrovertible” and especially that the taxpayer denied participating in the arrangement, yet on 27 June 2002 he arranged for the creation of the Glenferry Trust [and the issue of the units in that trust, that carried the right to all the income of that trust, to Danbowl atf the EHUT].
In any event, the AAT found that if the taxpayers had participated in the arrangement, then there were no grounds to support their claim that deductions for accrued director and management fees were available to the Glenferry Trust to reduce its taxable income to nil.
Finally, the AAT found it was appropriate in the circumstances for the Commissioner to assess the Mack Family Trust income on a 50/50 basis to the husband and wife taxpayers, particularly as they failed to discharge the onus of proving the assessments were excessive.
It also found that the matter involved evasion of tax, and that therefore the Commissioner was entitled to amend the assessments out of time.
Similarly, it found that the Commissioner was entitled to impose 50% shortfall penalties for “recklessness” and that there were no grounds for remission of the penalty.
(AAT Case [2014] AATA 367, Re Mack and FCT, AAT, Ref Nos 2012/5582, 2012/5583, 11 June 2014, Hack DP.)
[LTN 113, 16/6/14]