ATO cracks down on trusts over new tax avoidance scheme

The Australian Taxation Office has launched a campaign against tax avoidance schemes run by trust funds and debt-laden companies.

The tax office is attempting to encourage people whose trusts use these schemes to come forward voluntarily to avoid hefty penalties and prosecution.

The targeted arrangements involve trusts handling cash from a capital gain. Typically, the arrangement has one beneficiary receiving the generated funds, tax free, while another beneficiary, a company, receives the tax liability.

The company, however, is unable the pay the bill because it never received the funds from the capital gains, according to ATO second assistant commissioner Mark Konza.

When the company is unable to pay the bill, it is wound up, making it much harder for the ATO to recover any of the tax debt.

“Most tax payers and their advisors are correctly taxing trust income but we are unfortunately seeing more instances where some are trying to avoid or substantially reduce tax,” Konza says in a statement.

“We are concerned that these arrangements may have been marketed to taxpayers on the basis that they are legitimate tax planning strategies.”

The tax office has labelled the schemes a “deliberate mismatch”, which generates more money for the beneficiaries of the trust than they are entitled to.

“As we can see, these arrangements try to send the funds tax-free to one beneficiary, and the tax liability to another beneficiary – without any funds,” Konza says.

The ATO is now warning people it has “systems in place that can detect these types of practices” and has issued a warning to all people involved in these schemes as it prepares to crackdown on this emerging form of tax avoidance.

The tax office has benefited from an extra $167 million in federal government funding this year to chase unpaid tax and target “egregious tax avoidance”.

A “trusts taskforce” was set up earlier this year to looking into trust arrangements which conceal income, mischaracterise transactions and artificially reduce income and tax payments. The government predicts the taskforce will result in an extra $379 million over four years.

CPA Australia head of business and investment policy Paul Drum told SmartCompany the tax arrangement described “smacks of the 1970s all over again”.

“It’s reminiscent of bottom-of-the-harbour tax avoidance of the ‘70s and the trust stripping arrangements which followed in the 1980s,” he says.

Drum says the government of the day bought in special legislation to stop these schemes, many people went to jail and it took around a decade to conclude the crackdown.

Drum says the current arrangements described by the ATO seem “blatant and artificially constructed” and require the “appropriate force of the law to ensure they are stopped”.

“These are schemes which fly in the face of the general anti-avoidance rules.”

Earlier this week, the ATO also flagged concerns about self-managed super fund trustees moving their assets around to avoid capital gains tax.


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