The Australian Tax Office (ATO) released draft documents concerning the tax treatment of trusts. These guidelines provide recommendations as to how section 100A under the Income Tax Assessment Act of 1936 should be applied in regards to trust stripping arrangements. A key focus of the documents is where distributions are made to lower-taxed family members, whereby said family members do not actually receive the economic benefit, which goes to someone else. The documents also include a risk matrix on compliance for trust arrangements.
This release also follows closely behind a recent December 2021 taxpayer-won case of Guardian AIT Pty Ltd as Trustee for Australian Investment Trust Vs. Commissioner of Taxation FCA 1619, in which the court determined that arrangements for distribution of trust income to corporate beneficiaries, which were, in turn, converted into a dividend that was paid back into the trust did not create a reimbursement agreement as per 100A.
According to the IPA general manager of technical policy, Tony Greco, there is much dissatisfaction in the accounting fraternity over the draft ruling by the ATO that its members reportedly feel has blindsided them. In the IPA’s submission, it states that there was no earlier indication of a narrower interpretation adopted in the draft documents despite the limited ATO guidance on section 100A.
The IPA has noted that the ATO knew for years what widely used practices were applied by professionals in legitimate tax planning for families. It criticised the ATO for not intervening earlier to clarify as advisers had operated under the assumption that the practices they adopted were tolerated, if not entirely acceptable, as they were rarely subjected to ATO compliance activity.
CPA Australia has also criticized the draft guidelines stating that they are adding uncertainty within the small business community. In CPA Australia’s submissions, concerns were raised over distortion of the original intent of section 100A, retrospective application of guidelines in an attempt to boost penalties, and lack of clarity on practical compliance issues.
It was noted that the ATO’s clarifications on the interpretation and application of section 100A were much broader than what advisers originally understood. CPA Australia is recommending that the authority amend section 100A to set a time limit and dominant purpose requirement that will be better balanced with other tax avoidance provisions.
CPA Australia has also said that its members are concerned about issues of retrospectivity that would mean having to adjust returns as far back as 2014-2015. The accounting body also faulted the ATO for its sudden ‘out of the blue’ position on section 100A that did not give sufficient warning despite the existence of taxpayer alerts and compliance program messaging that could have facilitated this communication.
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