ATO pushes ahead with crackdown on trusts

The ATO is refusing to budge from its view that unpaid entitlements held in discretionary trusts should be treated as loans and taxed as such, despite approving the use of these structures as late as February this year.

The crackdown, originally foreshadowed in September, concerns the use of discretionary trusts with corporate beneficiaries. It is believed there are around 200,000 of these trusts in operation.

Under the structure the ATO wishes to target, distributions from a trust are allocated to a corporate beneficiary, but not actually paid (this is known as an “unpaid present entailment”). This allows the owners of the funds to reduce or defer income tax. The funds can then accumulate in the trust and be reinvested.

Yasser El-Ansary, tax counsel at the Institute of Chartered Accountants in Australia, says the ATO has become increasingly concerned that some taxpayers are using the unpaid entitlements to fund personal use assets such as a holiday houses and luxury cars.

“If there has been abuse, the ATO is well entitled to go and attack that, but our question is how widespread is that issue and how systemic is it?”

He argues that if the abuses are from a small number of taxpayers, the ATO’s compliance procedures should pick this up. If the abuses are widespread, El-Ansary suggests the laws may have to change.

However, what concerns him most is how the ATO applies their new interpretation.

“Up until February this year, the ATO has actually sanctioned the idea that unpaid entitlements don’t ever convert into loans that are subject to tax. There are taxpayers and tax agents who have relied on this advice.

“What we don’t want to see is the ATO applying its new view retrospectively.”