Private Groups and Trusts under ATO scrutiny

The ATO in Australia continues to target privately owned and wealthy groups, with specific focus on groups with risky trust structures that exhibit characteristics of tax avoidance or evasion.

The ‘Tax Avoidance Taskforce – Trust’ (Taskforce) has been established to take compliance action against taxpayers who use trust vehicles in ways other than ordinary trust arrangements or tax planning associated with genuine business or family dealings. The Taskforce continues the work of the ‘Trusts Taskforce’.

The objectives of the Taskforce are to:

• “undertake focused compliance activity on private groups involved in tax avoidance and evasion arrangements using trust structures;
• target tax scheme designers, promoters, individuals and businesses who participate in such arrangements;
• lead cross-agency action to pursue the most egregious cases of tax abuse using trusts; and
• undertake projects to gather intelligence on and deal with specific risks.

There is no doubt that the experience and issues identified by the preceding taskforce has moulded the Taskforce’s objectives and areas of identified risks.

• Whilst the areas reviewed by the Taskforce could be much wider than projected, the ATO has released the following non-exhaustive list of arrangements that attract the Taskforce’s attention:
• trusts and beneficiaries who are not registered, or fail to lodge tax returns or activity statements, despite receiving substantial income;
  offshore dealings with secrecy or in low tax jurisdictions;
• income entitlements being distributed to low-tax beneficiaries without apparent commercial justification, while benefits are enjoyed by others;
• artificial adjustments made to trust income so that tax outcomes do not reflect the economic reality - TA 2013/1 identifies these arrangements as involving a deliberate mismatch between trust and taxable income. For example, the trustee of a family discretionary trust resolves to exclude a capital gain from its trust income and distributes all of the trust income to a specific beneficiary (usually a newly incorporated related company). The capital gain is distributed to another beneficiary (i.e. a family member) as a tax free capital distribution. The company is unable to repay the tax debt and is wound up;
• revenue activities which are purposefully mischaracterised as capital items in order to access the concessional capital gains tax (CGT) discount - for example, the trustee mistreats sale proceeds received by a property developer on capital account instead of revenue account and claims the CGT discount (refer TA 2014/1);
• deliberate changes are made to trust deeds to achieve tax planning benefits -
  TA 2016/12 identifies these arrangements as being aimed at exploiting the proportionate approach to trust taxation. For example, the trustee determines trust income to be less than taxable income, creating an artificial difference which is distributed to an individual as a tax free capital distribution;
• transactions which have excessively complex features or sham characteristics such as round robin circulation of income; and
• new trust arrangements by taxpayers linked to previous non-compliance.

Whilst the Taskforce is stated to be targeting tax avoidance and tax evasion, elements of the broadly described arrangements above would be evident in a range of circumstances. Therefore, it will be interesting to see the breadth of the Taskforce’s activities.

The objectives of the Taskforce continue the ATO’s focus on private groups. Private groups using trust vehicles should be wary of significant penalties, civil or criminal offences which may arise in cases of non-compliance and should consider self-amending or making a voluntary disclosure if necessary.