The ATO’s Tax Avoidance Taskforce – Trusts (“the Taskforce”) takes compliance action against taxpayers involved in tax avoidance or evasion using trusts. This is a multi-agency taskforce that includes the AFP, AUSTRAC, ASIC, CDPP, and ACIC, amongst others.
The Taskforce targets higher risk trust arrangements in privately owned and wealthy groups, focusing on the risks presented by lodgment of trust tax returns, complex distributions, trust and taxable income mismatches, unidentified beneficiaries, cross border and international risks, and tax avoidance and evasion.
What attracts the attention of the Taskforce?
The ATO provides insights into the scenarios that attract their attention.
Circular trust distributions
The ATO states that a circular trust distribution exists “where a trust (the first trust) makes a distribution to a second trust. Then all or part of that distribution goes back to the first trust as a distribution from either the second or another trust.”
The Taskforce seeks to ensure that the trustees have complied with their obligations to trustee beneficiary non-disclosure tax.
Differences between distributable and net income
The Taskforce focuses on tax-preferred beneficiaries, including private companies, where their distributable income is significantly less than the net income.
This behaviour will not always be considered tax avoidance, and situations that attract the attention of the Taskforce include where steps have been taken to create or increase the difference between distributable and net income, or to include the tax-preferred entity as a beneficiary.
Distributions to complying superannuation funds
The Taskforce focuses on distributions from trusts to complying superannuation funds, including self-managed super funds (SMSFs). Situations where attention will be raised include where a complying superannuation fund receives income distributions from a trust, where the distributions result from:
- The exercise of a discretion of the trustee.
- A fixed entitlement that was not acquired on arm’s length terms.
Distributions to tax-preferred beneficiaries
The Taskforce focuses on distributions to tax-preferred beneficiaries that may have been used by trustees to attempt to reduce the amount of tax paid on the trust’s net income. Tax-preferred beneficiaries include tax-exempt entities and entities that pay lower rates of tax, amongst others.
Situations that attract attention include where a tax-preferred beneficiary becomes entitled to an amount that is favourably taxed because of their characteristics, or steps that were taken to change the character of the trust income to influence favourable taxation.
Family trust distributions tax
Situations that will attract attention include where a trust that has a family trust election in place (family trust) is distributing outside their family group.
Income recharacterisation arrangements
The focus is on trusts where revenue activities are mischaracterised or transactions are undertaken for the dominant purpose of changing the character of trust income in order to achieve lower rates of tax, or to obtain access to benefits or concessions not ordinarily available to trusts.
One example is using special purpose trusts to re-characterise ordinary income as discountable capital gains.
Loss trust moved into group
Trusts with significant revenue or capital losses that have recently been moved into a group attract the attention of the Taskforce. In these situations, entities within the new group may attempt to take advantage by distributing capital gains to the capital loss trust.
The Taskforce focuses on non-lodgment of trust and beneficiary tax returns. If a trust has derived income, it will have to lodge a return, irrespective of the amount of income, unless exempted by the Commissioner.
Non-residents’ capital gains
The Taskforce focuses on trust capital gains of trusts that are attributed to a foreign resident beneficiary’s interest in the trust that have not been assessed to the trustee. In these situations, there is a higher risk that tax was avoided.
Potential reimbursement agreements
The Taskforce focuses on arrangements that may constitute reimbursement agreements, involving making distributions to lower taxed beneficiaries while the economic benefits are directed to another entity. The other entity is often a controller of a privately owned group, close relatives of the controller or an entity within such a group. These arrangements may be entered into to avoid tax obligations.
The Taskforce focuses on arrangements involving private companies acquiring units in a unit trust. Concern arises if the cost of the units is more than what would have been paid had the parties been dealing at arm’s length.
Value extraction and corpus distributions
Capital distributions, or entitlement to corpus, may involve extracting value from a trust in a non-assessable form. Situations that attract attention include where corpus entitlement is satisfied by an unrealised capital gain, and where the trustee has borrowed money to satisfy the corpus entitlement and is claiming deductions for the loan interest.
The ATO has a specialised multi-agency taskforce in place to combat tax avoidance and evasion using trusts. While trusts may use complex arrangements and structures to avoid their tax obligations, the ATO has made it clear that it is aware of and specifically targeting such scenarios, with a focus on higher risk trust arrangements in privately owned and wealthy groups.