Busy times ahead for the Tax Practitioners Board

The income splitting party, where tax practitioners distribute trust income to the widest class of beneficiaries, all the while Mum and Dad (or Grandma and Grandpa) enjoy the benefit of that income, is dead. A new paradigm is clearly upon us and tax practitioners should be aware that it isn't just their clients in the sights of the ATO and the TPB.

TA 2022/1 Parents benefitting from the trust entitlements of their children over 18 years of age makes it clear that the taxation and use of income, as a whole family unit, is rarely going to satisfy the ATO. I am surprised that so much has been made of the issue when the opportunity for arbitrage in pure dollar terms is negligible, and short-lived, for the vast majority of private groups. How many adult children quite literally have no or minimal income in their personal name, such that the benefit of any income splitting could be material? Even then, there is a serious question about whether the pooling or sharing of wealth amongst a private group (including the payment of family expenses) is an "ordinary family dealing", meaning that s 100A cannot apply.

Apart from the obvious client issues which need to be managed, there are two additional points which need to be carefully considered by tax practitioners from the perspective of their practice:

1. the 100A publications are retrospective, albeit that the ATO says it won't audit clients in certain circumstances. This means that practices could be exposed to professional indemnity claims by their clients for prior years. It is therefore prudent for practices to revisit their income splitting strategies for prior years, especially where arrangements are directly covered by the alert. Tax practitioners should then determine how to raise such matters with clients. Ultimately, internal due diligence is essential before approaching the ATO to correct mistakes or make a disclosure (if at all); and
2. the ATO will target tax practitioners who distribute trust income to adult children, while allowing Mum and Dad to enjoy the benefit of that income. This really worries me because the ATO has only just published its view in this regard, giving tax practitioners no time to adjust behaviour. Nonetheless, it has clearly stated it will consider referring tax practitioners to the TPB. In my practice, I defend tax practitioners under investigation by the TPB and I have seen referrals for much (much) less. There is a real question here of fairness in my view, when such income splitting has been permitted for many years.

The alert states:

"...29. Penalties may apply to participants in, and promoters of, this type of arrangement. This includes serious penalties under Subdivision 290-B of Schedule 1 to the?Taxation Administration Act 1953?for promoters. Registered tax agents involved in the promotion of this type of arrangement may be referred to the Tax Practitioners Board to consider whether there has been a breach of the?Tax Agent Services Act 2009..."

Here's an example of one of the circumstances currently being targeted by the ATO.

"...Example 2

13.?The trustee of the Blue Family Trust is Azure Pty Ltd. Trevor is the sole shareholder and controller of Azure Pty Ltd. The Blue Family Trust derives assessable income in excess of $400,000 a year. Trevor's daughter, Simone, is a beneficiary of the trust. Simone has recently turned 18 years of age and works part-time. Simone expects to derive assessable income from her work of approximately $20,000 a year.

14.?Before the end of the 2020-21 income year, Simone meets with her father and agrees that any distribution resolved to be made by the Trustee will, after the payment of tax, be paid to Trevor to reimburse him for part of the fees for secondary schooling and costs of other extracurricular activities since Simone was five years old. Records maintained by the family show that these expenses amounted to $315,000.

15.?The Trustee resolves to distribute $160,000 to Simone and pays this amount into an account held in Trevor's name. Trevor pays income tax on Simone's behalf.

16.?This arrangement raises the concerns that are mentioned in this Alert. Simone is purportedly made entitled to a trust distribution and this amount is used to reimburse her parents for expenses that they would ordinarily meet. The arrangement, which results in Trevor obtaining the economic benefit of the trust income without that income being subject to tax at the top marginal tax rate he would otherwise have paid, appears to be more readily explained by the tax outcomes achieved, rather than any familial objectives..."

Overall, the message is clearly that tax practitioners, along with their clients, are the focus of investigations here. Please call me for a confidential discussion about these issues, including the application of s 100A to trust distributions and if you are ultimately subject to an investigation by the TPB: + 61 3 8644 3522.