ATO activity: further crack-down on the use of trusts in the 2013/14 financial year announced

With very little fanfare the 2013/14 federal budget allocated an additional $67.9 million to the ATO over the next four years to target the misuse of trusts. 

These funds are intended to enable to ATO to further increase its audit capacity in this area, something of a windfall for an ATO under increasing pressure to maximise tax receipts given the size of the federal deficit in recent years, After considerable ATO activity in this area in the past few years, and while the ATO acknowledges that trusts are still often legitimately used for managing business and family affairs, the ATO also claims that its “recent compliance operations have uncovered evidence of increased manipulation of trusts as vehicles that can be at the centre of tax avoidance or evasion arrangements”.

It is with this collective mindset, and with the renewed vigor brought by an increased budget, that the ATO will approach its task. It is therefore to be expected the ATO would aggressively investigate any hint of impropriety. 

The ATO has published some indication (no doubt incomplete) of the sorts of factors that will attract its attention.  These include situations 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 giving tax results out of line with the commercial reality – for example, 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 CGT treatment.

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 are excessively complex or include sham characteristics, such as round robin circulation of income among trusts.

New trust arrangements have materialised that involve taxpayers and/or promoters who have histories of or connection to previous non-compliance – for example, people connected to liquidated entities that had unpaid tax debts.

Although the ATO (properly) advises taxpayers to ensure they seek independent advice if they are uncertain about their tax arrangements, it also encourages taxpayers to approach the ATO directly if they are concerned about the legality of their arrangements. They suggest either seeking a private binding ruling or approaching the Trusts Taskforce directly. 

However, it should be borne in mind that, given the significant return expected on the federal government’s spend in this area, it is reasonable to expect that:

the ATO will be under considerable pressure to ensure that their audit activities identify very significant amounts of additional taxable income; and

the audits will result in significant penalties being levied on non-compliant taxpayers. 

Further, the ATO has foreshadowed that in the most serious cases it will also be pursuing criminal sanctions in conjunction with law enforcement authorities in Australia and overseas.

In this current ‘climate’ we advise that the prudent course of action is to seek specialist advice before considering approaching the ATO, to ensure matters are addressed effectively and appropriately. Walker Wayland NSW has considerable experience in this area. If you would like to discuss any aspects of this further please contact us.