ATO in fresh crackdown on trusts after confusing ruling on asset sales

Tax experts are calling for clarification from the Australian Taxation Office after confusion was sparked by a new ruling on the tax treatment of asset sales made by trusts.

The Institute of Public Accountants says the ruling, which was made in April but it still the subject of much discussion in tax circles, has lead to confusion among tax practitioners and trust beneficiaries.

Under previously standing rules, trust beneficiaries could access capital gains tax discounts when a trust sold an asset that was held for more than a year. These asset sales were described as being on “capital account” as opposed to the “revenue account”, which includes various streams of income.

Trustees have particularly become used to treating the sale of shares as being on capital account, but an example provided in a Tax Office determination released earlier this year called that into question and suggested capital gains made from trading shares could be included on revenue account depending on a range of factors, including whether the shares were originally bought to produce dividend income, how long the shares have been held and how frequently the trust trades shares.

If share sales are treated as being on revenue account, then trustees must pay their full marginal tax rate and they are unable to access capital gains tax concessions.

“At the end of the day it’s a major concession,” the Institute of Public Accountants senior tax adviser Tony Greco told SmartCompany.

“After reading this ruling you’re going to be pretty confused. This ruling is sending a strong message that the ATO will come and have look (at asset sales) and decide for themselves.”

Greco says the ATO will look at a range of factors when deciding whether asset sales – and the sale of shares is the big focus here – is on the capital or revenue account.

This will include how long assets are held for, how regularly the trust trades (how regular trading is, the more likely the assets are bought for capital gain on the sale) and the percentage of assets traded in a year.

“Taxpayers are now going to have justify their position and I think you have to be careful now in what you document as your strategy,” Greco says.

“As an adviser, it becomes a lot more tricky.”

However, The Tax Institute’s Robert Jeremenko says the ruling is not such as big deal – the area was confusing before and remains so.

“It’s not particularly unexpected and it’s not the end of the world either. The Tax Office is quite rightly saying that just because an investment is being made by a trustee doesn’t mean that’s it’s automatically on the capital account.”

“There never has been a clear cut answer about whether stocks have been bought for capital growth or income.”

“One positive is that the ATO is actually coming out and giving its view.”