The Australian Taxation Office (ATO) and Federal Government have become concerned about the level of compliance in cash-based industries and there have been further developments in this area. In particular, the ATO and Federal Government have extended the taxable payments reporting regime to include payments being made by courier and cleaning businesses to contractors (that have an ABN) they engage to provide cleaning and courier services. The extension of the taxable payments reporting regime has occurred to further reduce the circumstances where cash payments can fall outside the tax system.
Recent developments highlight tax minefield with trust distributions
Trusts are the most common investment and business vehicle for business taxpayers and investors. The ATO has indicated that a significant amount of trust income being distributed to beneficiaries (whether corporate or individuals) remains unpaid at the end of the income year (referred to as unpaid present entitlements, or ‘UPEs’). The ATO has identified a number of circumstances in which trust distributions have remained unpaid for significant periods of time (in some extreme cases, these amounts have remained unpaid for decades).
Therefore, the ATO has commenced a strong compliance push towards UPEs (particularly those involving discretionary and family-owned and controlled trusts). For instance, the recent Federal Court decision in Nelson’s case indicates that the trust ‘reimbursement agreement’ provision, which has traditionally been little more than a theoretical risk, is fast becoming a key weapon in the ATO’s continuing assault on trust distributions, including UPEs.
Tax reforms create compliance nightmare for trust distributions made to tax-exempt entities
Many family discretionary trusts make trust distributions to tax-exempt entities including, for example, eligible religious institutions, sporting clubs, schools and charities. Such distributions may be viewed as tax effective as the income distributed to the entity is not subject to tax due to its tax-exempt status, which means no tax liability arises in relation to the distribution. To curb the behaviour of using this trust’s potential ability to shelter taxable income via an exempt entity, the Australian Government introduced targeted anti-avoidance provisions, which ensure that distributions to tax-exempt entities are subject to the ‘pay or notify rule’ and the ‘benchmark percentage rule’.
What attracts ATO’s attention?
The ATO regularly review and update what attracts its attention, and it has published the following behaviours and characteristics which may attract its attention as part of their commitment to transparency in working with privately owned and wealthy groups.
- tax or economic performance is not comparable to similar businesses
- low transparency of your tax affairs
- large, one-off or unusual transactions, including the transfer or shifting of wealth
- aggressive tax planning
- tax outcomes inconsistent with the intent of the tax law
- choosing not to comply or regularly taking controversial interpretations of the law, without engaging with the ATO
- lifestyle not supported by after-tax income
- accessing business assets for tax-free private use
- poor governance and risk-management systems.
If you have any questions in relation to the above, please do not hesitate to contact our tax lawyers and accountants at The Quinn Group on (02) 9223 9166 or submit an online enquiry form today.