Tax Commissioner agrees to test case on trust crackdown

Tax Commissioner Michael D’Ascenzo has given his in-principle agreement for a test case to decide whether the ATO’s controversial crackdown on trusts will be supported by the courts.

Yasser El-Ansary, tax counsel for the Institute of Chartered Accountants, says D’Ascenzo had agreed to use money from the ATO’s litigation fund for a test case after a group of top tax bodies, including the Institute of Chartered Accountants, the National Institute of Accountants and Taxpayers Australia, voiced their disagreement with the ATO’s stance at a special meeting in Canberra yesterday.

“The Commission has given his in-principle support for a test case on this issue. He certainly has a keen interest to sort this out once and for all from a judicial standpoint,” El Ansary told SmartCompany this morning.

The ATO’s crackdown involves a trust structure commonly used by SMEs to fund working capital in their business.

Under the arrangement, a business that is owned through a trust distributes income to a corporate beneficiary to take advantage of the lower 30% company tax rate. However, the distribution actually remains inside the trust, where they can be used by the business owner as working capital to fund further growth. This is known as an unpaid present entitlement.

But the ATO is seeking to crackdown on unpaid present entitlements that it sees as “loans” from the corporate beneficiary to the trust and wants to tax these “loans” at the highest marginal tax rate, on top of the 30% corporate tax rate.

However, the alliance of tax bodies says the ATO’s stance could increase the cost of funding for SMEs, who will no longer be able to access a steady and cheap source of working capital.

El Ansary also says the ATO’s position is short-sighted – with more working capital, SMEs can grow their business and the Government’s tax base.

“Ultimately those business activities will grow and expand which in turn leads to greater revenue, greater profits and over time, greater tax being paid.”

The tax body alliance argues ATO’s position is legally flawed and after 12 months of having academics and tax experts pour over the ATO’s rulings, it wants the matter settled in court.

“We believe the ATO position is legally flawed and we don’t believe it will be supported in a court of law,” El Ansary says.

The tax bodies now have the job of trying to find an appropriate test case to bring before the ATO and ultimately the Federal Court. El Ansary says a fast-tracked case could be before the case within three to six months.

“The critical issue is all of this is that we need to get to a position where small businesses have a clear understanding of what the Government’s policy intent on this issue really is.”

In the meantime, he’s joining the calls for a fuller review of the way trust laws and tax laws interact.

“This issue on its own is really just the latest instalment in a very long chain around how to define trust common law and income tax law. It’s been a vexing issue for the better part of 30 or 40 years.”

“We are not talking about any radical moves away from the trust tax rules. All we are talking about is modernising the laws so they work in real-life scenarios.”