This article is written by Charles Yuan, Manager of Taxation Services.
On 23 February 2022 the ATO released a package of materials targeting the taxation of family trust structures. You will no doubt have read the headlines on how this is a ‘game changer’ for family businesses.
Having waded through the technicalities of TR2022/D1, TD2022/D1, PCG2022/D1 and TA2022/1, I feel I should weigh in on the discussion as a career accountant and tax adviser.
Firstly, what is right about these new rulings?
The tax system should be robust and ensure it gives the community confidence that tax is imposed on the public in a transparent and fair manner. These rulings (amongst many other rulings and laws over the years) in my opinion are tackling the misuse of trust structures to avoid paying tax by some “unscrupulous taxpayers” and “clever” lawyers who game the system by operating within legal loopholes and perceived weaknesses in legislation. As a tax practitioner, I welcome any changes in taxation law that strengthens the integrity of our tax system, and I also welcome any rulings and determinations that provides the public with clarity and transparency on how the ATO seeks to govern these laws.
What are the disagreements to these new rulings?
However, despite what is right, there are many more areas I disagree with or have a general uneasiness over in this set of new rulings.
To start with, from a practitioner’s point of view, the dealings which the ATO is trying to stamp out has been standard practice and part of the ‘toolkit’ of a whole generation of accountants. The benefits of a family trust structure, i.e. the asset protection, estate planning and income splitting features of it, has been taught by accountants, lawyers and tax consultants as best practice for family businesses for decades. Since that time, many other changes were made to taxation law, including introduction of new laws like CGT, FBT & GST, also introduction of Division 7A, PSI income attribution rules and new rules on UPEs, all of which were intended to address problems of tax avoidance through inappropriate income splitting. Why is the ATO only now taking action and suddenly invalidating overnight decades of what had always been considered perfectly legal tax minimisation and family estate planning strategies?
I agree on stamping out tax avoidance practices, but this seems to be a heavy-handed sledgehammer approach by the ATO to what I perceive as little more than revenue-raising from the middle-class, taking advantage of their immense amount of power to force a change in the interpretation of tax law, without actually having to go through the parliamentary process an actual change in law requires. Or maybe this is simply a knee-jerk reaction from the Commissioner of Tax to his unexpected loss in the Guardian case?
The next area I am uncomfortable about is the ATO’s lack of understanding of the diversity in family arrangements of different cultures in Australia. In making these new rulings, the ATO has instead pigeon-holed everyone into the “Western” ideal of transaction-based family dealings, where adult children (whom by definition may be anywhere between 18 years of age to over 65) are expected to transact with their parents rather than accepting that some families due to their cultural backgrounds prefer to share finances or custody over family assets such as a family business (even if not on official legal terms).
The ATO attempts to provide some form of relief through the arbitrary use of ambiguous terms such as “ordinary family or commercial dealing”, however this is nothing more than an illusion as in the same document, ATO provides their view that a particular situation is not an “ordinary family or commercial dealing” merely because it is “common practice for either a family or for the community”. This means taxpayers cannot rely on their arrangement being ‘ordinary’ merely because "the arrangement has become prevalent".
Macquarie dictionary defines ‘ordinary’ as “such as is commonly met with; of the usual kind” or “customary; normal”.
This then begs the question, if a situation is common or normal practice, why is that not considered ‘ordinary’? The ATO conveniently does not attempt to define the term “ordinary family or commercial dealing” and there are no apparent safe-harbour rules other than reliance on this ambiguous term. Where then should you draw the line on what is considered accepted family dealings and what is not? More importantly, why is the ATO privileged to peer into private family arrangements and apply a narrow view on what constitutes “ordinary” in a society as culturally-diverse as Australia?
The last point that raises concern for tax practitioners like me are the apparent lack of taxpayer fairness with the ATO being able to “go after you” for at least the last seven years – with review periods going back as far as 1 July 2014, and technically unlimited period if you fall into the ‘blue zone’ or ‘red zone’.
There are many taxpayers whose affairs have been reviewed by the ATO over the past 40 years and this had never been an issue. PCG 2022/D1 confirms that the ATO will not commence compliance activity for income years ended before 1 July 2014 unless it is outside the green zone and the ATO are otherwise considering your income tax affairs. So the taxpayer whose affairs are being reviewed may get caught for tax going back decades but the lucky taxpayer who is not under review doesn’t. How is that equity for taxpayers?
As said by Prosperity’s Director of Taxation Paula Tallon, “One of the tenets of a good tax system is certainty. How can a taxpayer have certainty over their tax affairs where there is an unlimited period of review and a change in the way in which a provision is being applied?”
Bonus grievance
The ATO in the Taxpayer Alert is overtly attacking tax agents for simply providing clients with advice using decades-old widely-accepted best practices on trust structuring by calling advisers ‘promoters’, akin to promoters of scams and shams, and using the Registered Tax Agent licence status against them.
What can you do?
Understandably the ATO itself is a commissioned organisation of the federal government and generally does not partake in politics. However it is nonetheless part of the federal government and is therefore influenced by the goals of the politicians in parliament representing the Australian public.
Therefore, if you are concerned about this sledgehammer approach to stamping out tax avoidance, the strongest action you can take is to voice your concerns to your local federal member of parliament as well as to industry bodies such as CAANZ, CPA Australia and IPAA. Prosperity supports any submissions the industry bodies will be making to the ATO on these new changes in interpretation to trust taxation.
Let us know what do you think about this topic, contact Director of Taxation, Paula Tallon at ptallon@prosperity.com.au or Manager of Taxation, Charles Yuan at cyuan@prosperity.com.au.
If you need more information on ATO's changes to family trusts, click here.
