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Tougher Times Ahead for Tax Avoidance Via Trusts

David Ohlmeyer • February 28, 2016

The ATO is becoming   ever more vigilant in searching out hiding places for undeclared income. Its most recent announcement will now see trusts come under a very bright spotlight indeed. In particular, the ATO will be looking to find evidence of non-compliance with two anti-avoidance rules and January 2016 has seen the roll out of a pilot program to do just that.

Trusts have long been seen as a way of avoiding paying income tax. Whilst it's true that income produced from trusts certainly attracts tax, the astute investor can minimise their tax obligations by distributing proceeds to those on low tax rates. Typically, this would involve individuals such as children or retirees.

It was after the landmark Bamford case in 2010 that tougher anti-avoidance rules were first introduced. In that particular scenario, it became clear that the amounts that beneficiaries were assessed on for tax purposes weren't necessarily the same as those under trust law. It was obvious, said the ATO, that such a mismatch gave rise to "opportunities for tax manipulation" and subsequently the ATO took steps to introduce tougher anti-avoidance rules.

The two rules which will now be looked at closely are:

  • The 'pay and notify rule' (Section 100AA). This states that the trustee has two months from the end of the financial period to notify a beneficiary of their entitlement when the trust makes a tax-exempt entity entitled to a distribution. If this condition remains unmet, the beneficiary is deemed to no longer be entitled to the income.
  •    The 'benchmark percentage rule' (Section 100AB). This rule applies if a tax exempt beneficiary is entitled to a share of the income from the trust estate that exceeds a benchmark percentage. If it does, then the beneficiary is not entitled to that part of the income.

Tax Commissioner Chris Jordan is confident that the pilot program will give much-needed information in order to provide him with "…an accurate picture of whether the integrity rules relating to distributions of income to tax-exempt entities are understood by taxpayers and their advisors and are operating effectively".

Specifically, the pilot study will be looking to:

  •  Measure the understanding of both taxpayers and their financial advisors of the requirements of Sections 100AA and 100AB
  •   Measure the effect that the provisions have had on behaviour
  •  Confirm the accuracy of reporting distribution to tax-exempt entities
  •   Deter exploitation and tax manipulation of trust tax provisions for tax-exempt entities
  •  Raise community awareness

The ATO has not made clear exactly which or how many trusts will form part of the review, but has advised that a limited number of letters will be issued in the months to come. One thing that is for certain, however, is that the opportunities for confidently sheltering large amounts of income via trusts look set to be greatly curtailed.

For professional and up to the minute advice on how best to meet your ensure you meet your business obligations in this area, contact the KDA Group on 02 4861 8383 and speak to one of our consultants.

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