On 17 November 2016 the ATO released Taxpayer Alert TA 2016/12, which deals with trust income reduction arrangements that are under review. 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 reflected in the taxable net income of the trust. In doing this, the taxpayers seek to gain substantial tax benefits.
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.
The ATO says the arrangements in question typically display all or most of the following features:
- Steps are taken to create an artificial difference between the trust income and taxable net income of a closely held trust with the primary motivation appearing to be the avoidance of tax. The steps may include:
- amending or varying the trust deed definition of income or the trustee's powers to determine trust income;
- the trustee taking steps for the principal purpose of reducing trust income; and/or
- the trustee relying on a power in the trust deed to determine that trust income is less than it would otherwise have been.
- The beneficiary who is made presently entitled to the trust income:
- pays little or no tax on the share of taxable net income included in its assessable income; or
- is a private company, with the arrangement designed to impose tax on the net income of the trust at the rate of 30%, while limiting any increase in the accumulated profits of the company so as to minimise future assessable income that arises from paying dividends out of company profits.
- The trust retaining the economic benefit reflects the artificial difference between the trust income and taxable net income of the trust. That benefit may subsequently be extracted in a form that is claimed to be tax-free (or subject to a reduced rate of tax) in the hands of the recipient (usually an individual related to the controlling mind).
The Taxpayer Alert gives four examples of the arrangements. The ATO is currently reviewing these arrangements. It has commenced compliance activities affecting a number of entities and is identifying tax advisors who are promoting these schemes, with plans to "follow up appropriately". The ATO is developing its technical position on the arrangements and says it will canvass it in more detail in due course.
The ATO encourages those who may have entered, or may be planning to enter, into an arrangement of the types described to:
- phone the ATO on 1800 177 006;
- email the ATO at TrustRisk@ato.gov.au;
- ask the ATO for a private ruling;
- seek independent professional advice; and/or
- make a voluntary disclosure to reduce potential penalties.
The ATO identified the problematic arrangements through the Trusts Taskforce's ongoing monitoring and reviews, and says it continues to look for such arrangements using sophisticated analytics.
Ten of the cases the ATO is examining show lost revenue of more than $40 million and go far beyond legitimate tax planning, raising a number of red flags, Deputy Commissioner Michael Cranston said. "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 said.
Source: ATO, Taxpayer Alert TA 2016/2, 17 November 2016, https://www.ato.gov.au/law/view/view.htm?docid=%22TPA%2FTA201612%2FNAT%2FATO%2F00001%22; ATO media release, "ATO issues warning on contrived trust arrangements", 17 November 2016, https://www.ato.gov.au/Media-centre/Media-releases/ATO-issues-warning-on-contrived-trust-arrangements/.