Proactive approach from IR?

As I alluded to in my previous article, the proposed increase in the trustee tax rate to 39% effective April 1st, 2024, is yet to be legislated for, which therein potentially raises the question of whether IR is jumping the gun by issuing GA 24/01 – ‘Proposed increase in the trustee tax rate to 39%.’

I suppose that I shouldn’t jump the gun myself for being too critical of the Revenue for this release. As firstly, they have clearly used the word “proposed”. And secondly, as advisors, we are regularly looking for guidance from Big Brother as to how they may potentially view a change in tax position taken by our clients, purely to mitigate (not avoid) the amount of tax they have to pay each income year.

I have to say that when I first saw the reference GA 24/01, I thought it was quite cute of the Revenue to start issuing general avoidance commentaries. Hence, we knew exactly where we stood on that age-old passive/aggressive scale when it came to giving our clients advice on how the Revenue may perceive their tax position if a review was ever undertaken. Of course, once I opened the actual document, I discovered that it was instead a five-page general article on the topic – duh!

So, GA 24/01 provides IR’s high-level view on whether the following five scenarios could amount to tax avoidance:

1. A company is owned by a trust and changes its dividend-paying policy – unlikely to be tax avoidance (although caution around paying out huge dividends pre-April 1st via simple current account journal credits, where the company has no real ability to pay those credit balances if it were to be liquidated.
2. A trustee distributes income to a beneficiary so it is taxed to the beneficiary rather than at the trustee tax rate (resulting in less tax payable) – unlikely that any distribution in accordance with the trust deed, trust law and tax law would be seen as tax avoidance.
3. A trustee adopts a company structure and transfers its income-earning assets to the company – considering this is probably the primary restructuring opportunity being considered by most advisers right now, useful indeed to see that IR does not consider any tax avoidance purpose exists. Do take care, though, if considering the insertion of a holding company into an existing operating company/trust structure – dividend stripping concerns raised in IR’s Revenue Alert 18/01 will come to the fore.
4. A trustee chooses to wind up the trust – no avoidance concerns; and
5. A trustee chooses to invest in a portfolio investment entity (PIE) – again, no avoidance concerns, probably sensible since it was the Government's desire to encourage the use of PIEs that the favourable 28% top tax rate was set for the investment vehicle.

In addition to the above five scenarios, GA 24/01 also comments on further scenarios that may cause the Revenue some concern and lead to further questions being asked:

• Beneficiary distributions, where taxed at lower rates but amounts then resettled on the trust, or cases where the beneficiary actually has no knowledge of the allocation or no expectation of receiving the income, which may indicate that they are not, in reality, benefiting from the distribution.
• Replacing dividend income with loans in an artificial manner such that the loans do not reflect the reality of the arrangement; and,
• Artificially altering the timing of (bringing forward or deferring) any taxable or deductible payment or alternatively creating or increasing income or expenditure that does not reflect the reality of the structure or arrangement (e.g. interest, dividends or management fees or other similar transactions between related parties).

I’d suggest that if your client’s behaviour involves the last of the bulleted items, irrespective of the increase in the trustee rate, then they may already find themselves in hot water should IR come knocking on their door.

This article from the 'A Week in Review' newsletter was originally published on Monday, 5th February 2024. If you have any questions or would like a second opinion on any national or international tax issues, please contact me [email protected].?

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