Tax Office crackdown on trusts

Beneficiaries of cashed-up trusts are in the Australian Tax Office’s sights, with tough scrutiny of expenses and income splitting under way ahead of a new draft ruling on reimbursement agreements.Accounting firms and lawyers say enforcement of anti-avoidance measures under section 100A of income tax law has seen trustees of family trusts required to detail distributions to beneficiaries, including adult children, to ensure they comply with rules about “ordinary family dealings”.

In some recent cases, senior external lawyers and barristers have been engaged by the ATO to conduct reviews of spending on household costs, family holidays, cars and a range of other living expenses.

Discretionary trusts allow for accumulated assets to be distributed to beneficiaries without incurring significant tax liabilities. Under the rules, there is an exception in section 100A which exempts agreements that are part of “ordinary family or commercial dealings”.

Section 100A can result in trustees being made liable for tax on the trust’s income, rather than a presently entitled beneficiary.

The Australian Financial Review has been told experienced tax advisers are grappling with the interpretation of the law, and the requirement for records to be kept on an indefinite basis.

Taxpayers are ordinarily required to keep records relevant to their own tax affairs for five years from the date they lodge their annual return. Section 100A has an unlimited amendment period, so the five-year rule doesn’t apply to distributions that are subject to it.

In a series of recent cases, questions about bank accounts and household spending have gone unanswered from ATO technical advisers during compliance activities.

‘A narrow category’

A spokeswoman confirmed a new draft taxation ruling on section 100A reimbursement agreements is currently being developed, including through public consultation which began in late 2019. No release date has been confirmed.

The spokeswoman said section 100A was a narrow category of arrangements.

“The ATO continues to investigate taxpayer arrangements to determine whether they comply with the law.

“The ATO does not comment on specific cases due to our privacy obligations.

“Whether a particular arrangement complies with the law will depend on the facts, including whether there is an agreement to make a payment or other provision of benefit to a person other than the named presently entitled beneficiary, and whether the agreement has the character of an ordinary commercial or family dealing.

“The ATO will request evidence of expenses where the terms of the arrangement that the trustee and others have entered into make those expenses relevant to the operation of the law.”

Rich Listers and wealthy families are already facing tough new scrutiny from the ATO as it improves anti-avoidance compliance and audits.

After a financial boost from the Morrison government, the ATO is adding some 200 additional staff to monitor tax avoidance across wealthy families, large companies and associated subsidiaries.

In December, the Financial Review reported widening reviews of the top 500 largest private wealth groups in Australia and new attention being given to the business affairs of “emerging” wealthy businesses, individuals and trusts.

By 2024, Australia’s entire high-net-worth population, including the biggest companies and the people who control them, will face additional and detailed examination.

The federal government is also going ahead with changes with effect from July 1, 2019, designed to stop heirs transferring assets into a trust after someone dies to take advantage of lower tax rates.

The ATO said extra enforcement efforts were designed to protect revenue and maintain the integrity of the tax system.

“Arrangements that seek to use a trust to facilitate income splitting would attract our attention,” the spokeswoman said.