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ATO targets discretionary trust partnerships

On 22 November 2013 the ATO released Taxpayer Alert TA 2013/3 “Purported alienation of income through discretionary trust partners”. The ATO is targeting, in particular, accountancy, legal, and other professional practices that operate as partnerships of discretionary trusts. This ATO alert flags an attack by the ATO on basic business structures under the guise of tax avoidance.


The ATO are looking for income splitting schemes where income of individuals attributable to their professional services is alienated to a trust. Of course, there are a number of hurdles to jump before the law can effectively attribute income distributed by a partnered discretionary trust to just one individual.
Firstly, individuals in a professional practice do not generate personal services income, but rather the practice generates the income. Secondly, even where there are individuals generating personal services income, the partnership will be a personal services business where a number of individuals are generating personal services income from a number of unrelated clients. This effectively prevents the partnership’s income being attributed to individuals.
If all else fails, the ATO have raised the possibility of applying Part IVA. Presumably, the Part IVA argument would be that if not for the partnership being made up of discretionary trusts, then more income would be attributable to what would otherwise be individual partners who would individually be liable to pay more tax, and, as such, the structure is a tax avoidance scheme.
The example provided in the alert compares the tax paid by three individual partners who each derived $500,000 in income from the partnership to a scenario where three partnered discretionary trusts distribute to two beneficiaries amounts of $50,000, to four beneficiaries amounts of $80,000, to another $450,000, one trust receives $350,000 but has at least an equal amount in losses, and an unidentified amount is distributed to a non-lodging corporate beneficiary. The resulting tax collected in both scenarios is then compared showing that overall more tax can be collected where three individual partners pay tax on $500,000 compared to where seven beneficiaries pay tax on lesser amounts, one beneficiary doesn’t lodge, one trust has losses, and the net profit or loss of the other two trusts remains a mystery.
With reference to the ATO’s example, it is not, as suggested by the ATO, a given that less tax is collected in the latter scenario. And then to confidently say that the arrangement is a tax avoidance scheme would require showing that the arrangement makes no sense other than to split income through trusts that would otherwise clearly be attributable to an individual or individuals, thereby reducing individual tax, while the tax consequences to the trusts and other beneficiaries pale in significance.
In theory, the ATO could take the same approach to corporate structures under Part IVA.
The other issue for the ATO is the capital gains tax consequences of an individual partner assigning his or her interest to a trust. The ATO is concerned that little, if any, CGT will be collected if individual partners are eligible to claim CGT concessions on the assignment of their partnership interest.
The ATO advises that it will look at partnered discretionary trusts in the 2013/14 and later years.

Posted in: Tax & ATO News Australia at 26 November 13


Tax & ATO News Australia

Author: David Hughes

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