On Thur 17.11.2016, the ATO released Taxpayer Alert TA 2016/12, which deals with trust income reduction arrangements the ATO is reviewing.
This Alert cautions against arrangements that minimise tax by creating artificial differences between the taxable net income and distributable income of closely held trusts.
The ATO says the arrangements appear designed to exploit the proportionate approach to trust taxation. The arrangements are deliberately structured to exclude from the trust income much of the economic benefit that is reflected in the taxable net income of the trust. In doing this, the taxpayers seek to gain substantial tax benefits.
The ATO says the underlying premise of the arrangements described in the Taxpayer Alert is that the taxable net income of the trust is assessed to the presently entitled beneficiary, while the economic benefits reflected in that net income are retained by the trustee, or passed to a different beneficiary in a purportedly tax-free form. Under these arrangements, the rate of tax paid by the presently entitled beneficiary is lower (often significantly lower) than the rate of tax that would otherwise have been paid by the trustee and/or the beneficiary who receives the benefit.
Unfortunately we have seen some trustees enter into arrangements that create contrived differences of this type.
The ATO identified these arrangements through ongoing monitoring and reviews by the Trusts Taskforce, and continues to look for these arrangements using sophisticated analytics.
Ten of the cases we are examining show lost revenue of more than $40 million and go far beyond legitimate tax planning, raising a number of red flags. We are looking closely to see if arrangements comply with trust law, constitute a sham, or are captured by anti-avoidance provisions or integrity rules,” Mr Cranston said.
The Trusts Taskforce was established in 2013 to undertake targeted compliance action against people involved in tax avoidance or evasion using trusts. Since this time, the ATO has raised $772 million in liabilities and collected $164.5 million. In addition to cash collected, assets of $55 million have been restrained under proceeds of crime legislation.
Any taxpayer who has, or is thinking of, entering into a similar arrangement should seek independent advice, review their arrangement, or discuss their situation with the ATO on 1800 177 006 or at TrustRisk@ato.gov.au.
More information about these arrangements can be found in Taxpayer Alert TA 2016/12.
[ATO website – Media Release] [LTN 223, 17/11/16]
[FJM note: I’m not sure why this TA is released a decade after these arrangements first appeared. I had a matter, where an arrangement, such as this, was implemented to affect the 2007 year. The relevant (contrived) assessments issued a year later, the sacrificial corporate beneficiary was put into liquidation about a year after that, the audit started about a year later, the adjustments issued about a year after that and I was briefed in about 2011. My client settled with the ATO on the basis that Part IVA applied and he went on, in 2012, to sue the advisers who put him into the scheme. The ATO has been aware of this type of arrangement, therefore, since at least 2008 or 2009. The ‘proportionate’ approach to the construction of s97(1)(a) of the ITAA 1936 was finally confirmed, by the High Court, in 2010 in Bamford v FCT [2010] HCA 10. The Bamford case, itself, illustrated the kind of manipulation that could occur. As a result, the ATO has had a special ‘trusts’ team examining ever thing to do with trusts since 2010 or earlier (since the first instance decision in Bamford was in 2008: [2008] AATA 322. So, I’m not sure why they talk about this ‘task force’ only commencing in 2013 (it existed before this, if only under a different name). Still, it is, I guess, better to have this Tax Alert late, than never.]
[Bamford – High Court Summary: [2010] HCASum 9]