The ATO’s “trusts taskforce” has uncovered a class of arrangements that it says appears to be designed to “exploit the proportionate approach to trust taxation”. Therefore a taxpayer alert has been issued by the ATO that warns closely held trust trustees against engineering a reduction in trust income to improperly gain access to favourable tax breaks, or in some cases pay no tax at all.
Deputy commissioner Michael Cranston says the taskforce has identified some trustees entering into arrangements that create contrived differences between net income and distributable income. “These trustees exploit the differences to have the net income assessed to individuals and businesses that pay little or no tax, and allow others to enjoy the economic benefits of the net income free-of-tax,” he says.
ATO analytics, as well as ongoing monitoring, identified the arrangements. Its taxpayer alert (read it here) traces the at-times intricate steps that are followed to contrive a tax benefit.
Cranston says that 10 of the cases the ATO is examining show lost revenue of more than $40 million, and “go far beyond legitimate tax planning”, which has raised several 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,” he says.
He emphasises however that the ATO’s taxpayer alert is not concerned with arrangements where differences arise between the trust income and the taxable net income of the trust, merely because:
- taxable net income can include amounts that are not traditionally regarded as trust income (for example, capital gains), or amounts that do not represent an accretion of value to the trust (for example, franking credits), or
- proper accounting (not principally directed towards the obtaining of tax benefits) leads to differences between when and how amounts are recognised for tax and accounting purposes.
As well as warning trustees, the ATO also warns that it is identifying tax advisers who may have promoted these sort of schemes, who it will “follow up appropriately”.