On 23 February 2022 the Australian Taxation Office (ATO) released a number of draft tax rulings that have shocked business owners across Australia and made their Accountants to look incompetent.
Anyone that uses a Family Trust is likely to be affected by these new rulings from the ATO.
Wimmera Mallee Accounting is urging anyone that will be affected to contact our local Federal Member and ask that these draft tax rulings be modified to remove the unfair provisions.
WHAT THE ATO HAS CHANGED
The key tax rulings from the ATO that are causing massive concern across Australia are these:
TA 2022/1 Taxpayer Alert: Parents benefiting from the trust entitlements of their children over 18 years of age
TR 2022/D1 Income Tax: Section 100A Reimbursement Agreements
PCG 2022/D1 Section 100A Reimbursement Agreements – ATO Compliance Approach
The draft tax rulings from the ATO slam shut the commonly used approach used for over 30 years where income from a Family Trust is distributed to adult children or grandparents, and the funds are either never actually paid out of the Family Trust or if they are, the children or grandparents gift the funds back to their parents (or children in the grandparents case).
The ATO has taken the approach that an adult child or grandparent must personally use the funds and must not gift them or use them in any way towards usual family expenses.
If they don’t, then the ATO has stated they will tax the Trustee of the Trust at 47% (the top margin tax rate) on the trust distribution given to the adult child or grandparent. Additionally, the ATO would charge penalty tax which could be 50% of the tax and interest on the extra tax.
The ATO calls this a “reimbursement agreement” and they are trying to link these usual family actions to section 100A of the Income Tax Assessment Act (1936).
WHAT IS UNFAIR
In summary, we at Wimmera Mallee Accounting are livid that the ATO has released these draft Tax Rulings and given around 30 days to provided submissions about them - especially when the story is that the ATO took about 6 years to work on and release them!
On top of everything else that accountants have done for their clients to keep businesses moving forward during the COVID pandemic, they now have to cope with potentially angry clients over their retrospective changes to Trust taxation back to 2015.
In relation to the 43 new Tax Rulings released by the ATO about s100A, Trust Distributions to adult children and "reimbursement agreements":
These new tax ruling changes should NOT be made retrospective. This is totally unfair to accountants and their clients. Accountants have advised clients according to common understanding of the laws for many years. In what reality is it fair for a client to be judged on prior year decisions they made with advice from their accountants by new laws introduced now? No wonder accountants are livid!
The ATO's use of s100A to expand their attack on Trusts distributions goes against the original intention of why s100A was originally introduced in 1978. The Explanatory Memoranda for this legislation focuses on a beneficiary such as a tax exempt body or organisation being allocated a trust distribution and only retaining part of it while giving the majority of the funds tax free to another beneficiary. The new rulings by the ATO attempt to massively stretch the application of s100A - far beyond its original intent. Again, this is very unfair to the middle class entrepreneurs and aspiring business owners who legitimately use Trusts in the operation and growth of their businesses. New laws with a massive flow on effect as these need to be introduced by way of legislation being debated and approved, and not by the ATO stretching its interpretation of tax laws.
The ATO's labelling accountants as promoters of schemes to reduce tax by the legitimate use of Trusts in family dealings is shocking, especially when coupled with the threat to have them reported to the Tax Practitioners Board. As the Honorable Chief Justice Barwick said in a leading Australian High Court tax case back in 1977 (Slutzkin v FCT), his Honour went on to say: "the choice of the form of transaction by which a taxpayer obtains the benefit of his assets is a matter for him: he is quite entitled to choose that form of transaction which will not subject him to a tax, or subject him only to less tax than some other form of transaction might do.” Tax planning is not tax avoidance, and accountants helping their clients to make legal choices that will minimise their tax liabilities is entirely proper.
The right of a Trustee of a Trust to exercise their discretion to allocate income from a trust to their chosen beneficiary appears now to be superseded by the ATO in their statement that they will "invalidate" trust distributions that they disagree with. The ATO's interpretation of how they want to administer Trusts would appear to overturn hundreds of years of common law about use of Trusts. The legal reaction to this will be very interesting to watch.
The mental health effect on accountants across Australia as a result of yet another bombshell dropped on them (after everything else they've dealt with over the past 2 years) is unthinkable. Seriously, is the Government, Treasury and the ATO giving any consideration at all for what the accounting and taxation industry has recently gone through (being the counsellors for their own clients) and trying to keep their own mental perspective positive?
This may well be a tipping point for accountants and their business clients who use family trusts across Australia.
The ATO and whoever is advising them simply must do better than this. Should you have concerns, we urge you to contact your local Federal Member, and voice these concerns.
Wimmera Mallee Accounting has written to Dr Anne Webster to raise their concerns and request this issue be discussed in Parliament and awareness is raised. The more voices the better!
Should you have queries or wish to discuss, please contact Sandie Richmond, Dale Poyner or Kelly Haslam at Wimmera Mallee Accounting on (03) 5492 2766.