The use of trusts by taxpayers and businesses is widespread. They are used for all sorts of legitimate business reasons, but there has been a nagging concern in government circles that they are used as tax avoidance vehicles.
In the 2013-14 federal budget, the government announced that it would provide $67.9 million over four years to the ATO to undertake compliance activity in relation to trust structures.
A taskforce looking at these structures will target the exploitation of trusts to conceal income, mischaracterise transactions, artificially reduce trust income amounts and underpay tax. It will focus on taxpayers who have been “involved in egregious tax avoidance and evasion” involving trusts.
Compliance activity will target known tax scheme designers, promoters, individuals and businesses who participate in such arrangements.
The ATO has now released further information on the potential targets of this compliance action utilising its intelligence systems, including new tax return form labels. This of itself is something of a flag for businesses to understand the sorts of issues the ATO is looking at.
The ATO says some of the factors that will attract its attention include arrangements where:
- trusts or their beneficiaries who have received substantial income are not registered, or have not lodged tax returns or activity statements;
- there are offshore dealings involving secrecy jurisdictions;
- agreements with no commercial basis appear to be in place so as to direct income entitlements to a low-tax beneficiary while the benefits are enjoyed by others;
- there is artificial characterisation of amounts such that tax outcomes do not reflect the economic substance, with the result that some parties have received substantial benefits from a trust while the tax liabilities corresponding to that benefit have been attributed elsewhere (e.g. by making resolutions that artificially reduce trust income in attempts to direct minimal present entitlement but full tax liability to entities with no capacity or intention of paying);
- there has been mischaracterisation of revenue activities to achieve concessional capital gains tax (CGT) treatment e.g. by using special purpose trusts to attempt to re-characterise mining or property development as discountable capital gains;
- changes have been made to trust deeds or other constitutional documents to achieve a tax planning benefit, and are not credibly explainable for other reasons;
- transactions have excessively complex features or sham characteristics, such as round robin circulation of income among trusts; and
- new trust arrangements have materialised that involve taxpayers and/or promoters who have histories of or connection to previous non-compliance (e.g. people connected to liquidated entities that had unpaid tax debts).
According to the ATO, the taskforce is intended to target higher risk taxpayers and not ordinary trust arrangements nor tax planning associated with genuine business or family dealings. While that may provide some solace to SMEs, it is not guarantee the ATO will not come knocking on their door.
However, the ATO says those taxpayers that are unsure regarding their arrangements can seek a private binding ruling, or contact the ATO via the trusts taskforce at [email protected] (mark all information “in confidence”) to discuss the arrangement.
Alternatively, the ATO said voluntary disclosures can be provided if taxpayers need to adjust a tax position that had previously been taken.
Trusts have a genuine place in many business planning scenarios. The ATO’s increased compliance activity is not unexpected and from the information now available, SMEs can at least be aware of the sorts of things that might attract the ATO’s attention. Forewarned is forearmed!
Terry Hayes is the Editor-in-Chief of tax news reporting at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.