Australian Taxation Office (ATO) $67.9 Million War Chest to Target Trusts
Year End Action Required Immediately
12 June 2013
Author: Jamie Towers
During the 2013/14 Federal Budget, the Government announced the ATO would be provided with $67.9 Million of funding to increase audits of trusts to target anti-avoidance or evasion. The ATO Trusts Taskforce will investigate matters including where:
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 has been mischaracterisation of revenue activities to achieve concessional CGT treatment - for example, by using special purpose trusts to attempt to re-characterise mining or property development as discountable capital gains
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 have excessively complex features or sham characteristics, such as round robin circulation of income among trusts
Fortunately, the ATO have advised that the Trusts Taskforce is intended to target higher risk taxpayers and is not targeting ordinary trust arrangements and tax planning associated with genuine business or family dealings. However, the increased likelihood of investigation means that it is crucial for trustees to ensure that their compliance is effective and timely.
ATO Fact Sheet highlights need for Action by 30 June
The ATO has issued a web page fact sheet highlighting what Hanrick Curran has been telling our clients for the last few years – "Trustee resolutions must be made no later than 30 June" http://www.ato.gov.au/content/00318706.htm
Make a resolution by 30 June 2013 to distribute income to avoid the trustee paying 46.5% tax on all trust income
One thing that is for certain is that trustees need to resolve on or before 30 June how they will distribute the income of the trust for the year. If they fail to do so, in some cases, the trustee will be assessed on the income of the trust at the top marginal tax rate.
The ATO has confirmed that while some trust deeds do not require the resolution to be in writing, it would be prudent to record it in writing (at least in note form) on the date of the resolution to evidence the decision. Formal trustee minutes can be recorded at a later date. As the ATO has advised it will be taking compliance action in relation to certain trust distributions, we strongly recommend all trustees make and record the resolution in writing before 30 June.
If the trustee wishes to 'stream' capital gains or franked dividends to particular beneficiaries, this must first be allowed by the trust deed, recorded in writing (by certain dates) and disclosed correctly.
How to make an effective Trust Resolution:
- Understand what the trust deed says:
- How is income defined?
- How is capital defined?
- Does the trust deed allow 'streaming' of distributions?
- Who are the potential beneficiaries?
- What is the estimated income of the trust?
- Who do you wish to distribute income to (consider other beneficiaries level of income for tax effective distributions
- Do you want to 'stream' franked dividends or capital gains to certain beneficiaries?
- Ask Hanrick Curran for assistance to correctly make a tax effective resolution
Failure to make an effective resolution may be as detrimental as making no resolution at all.
In addition to action required by 30 June, require all trustees to make more disclosures with steep penalties for non compliance. Some of these disclosures are required to be made at an earlier date than the tax return, possibly as early as 28 July.
- A Trustee Beneficiary (TB) Statement is required in some circumstances if the trust is distributing to other trusts. The Trustee will be liable for tax at 46.5% if this is done incorrectly or not at all.
- A TFN Report is required within 28 days of the end of the quarter in which a new beneficiary provides the trustee with their Tax file Number (TFN). Penalties apply for not reporting TFN disclosure correctly.
Withholding tax is required if no TFN has previously been provided (subject to exceptions).
The trust tax return now also requires disclosure of each beneficiary's share of income of the trust estate and separately their share of franked dividends, capital gains and other income.
Speak to your Hanrick Curran representative for assistance to ensure that you comply with all the new disclosure requirements so that you avoid any penalties and non-disclosure tax.
Have you got Audit Insurance for your Trust?
The ATO Trusts Taskforce and the new level of information disclosure will lead to a higher risk of an audit. Have you considered tax audit insurance? Ausure South East Queensland can provide cost effective tax audit insurance to cover you for any professional costs associated with a revenue office review, potentially saving you thousands. Contact Nathan Case at Ausure on 07 3218 3966 or Nathan.firstname.lastname@example.org or speak to your Hanrick Curran representative for a referral.
The information provided above is only general in nature and should not be relied upon without seeking professional advice in respect of your own circumstances. However, the 30 June deadline is approaching so we recommend you contact your Hanrick Curran representative immediately to ensure you comply with the new trust tax rules and disclosure requirements.
To view this article in pdf format, please click here.
© Hanrick Curran 2013