Government to clarify key trust rules as ATO warns on use of trusts in labour-hire sector

Assistant Treasurer Bill Shorten has delivered good news to the 1.5 million users of trusts, fast-tracking laws that will allow a commonly-used tax minimisation strategy to continue, and signalling the Government is committed to supporting the use of trusts.

“We don’t believe trusts are any form of tax avoidance,” Shorten said in a speech on Friday to the Taxation Institute of Australia.

“We see trusts as a legitimate feature of how Australians conduct their financial affairs.”

Late on Friday Shorten also announced that the Government will allow trust owners to continue the practise of “income streaming, a process by which a trust can send different incomes types (for example, normal business income, interest income and dividend income) to different beneficiaries to better manage their tax affairs.

Income streaming had been at the centre of a landmark High Court case known as Bamford, and there had been fears in the accounting profession that the common income streaming strategy would be the subject of an ATO crackdown.

In addition, the Government will clarify the definition of the income of a trust so that is shifts from the ‘income of the trust estate’ with ‘net income of the trust estate’.

“This will address situations where the tax burden falls on a beneficiary despite not receiving the economic benefit,” Shorten said.

Institute of Chartered Accountants senior tax counsel Yasser El-Ansary describes Shorten’s announcement as a “really good first step” towards a broader review of Australia’s complex and ageing tax rules.

“We’ve been talking to the Government over about 18 months to explain the importance of the Government taking steps to put to bed all these issues around how trusts are currently trusts,” he says.

He says that the sheer number of SMEs using trust arrangements makes this a matter of urgency.

“It’s critically important that we get the tax rules right in this area.”

In other tax news, the ATO has warned labour hire and recruitment firms against the practise of recommending a tax minimisation strategy whereby a worker attempts to split their income (usually with their spouse) through the use of a trust.

“We are concerned that individuals may enter into these arrangement to reduce tax liabilities by splitting their income with an associate and that the arrangement may not satisfy the personal services income tests and that the anti-avoidance provisions could possibly apply,” Tax Commissioner Michael D’Ascenzo said in a statement.

“The ATO is reviewing these arrangements and will be writing to entities facilitating them about our concerns that they may risk contravening the promoter penalty laws.”

The ATO wants anyone who has participated in these arrangements to make contact by April 30 to discuss them.

El-Ansary says it is pleasing to see the ATO has provided those in the sector with a period in which they can respond to the concerns.

“I think the ATO certainly has every right to look at how those types of arrangements are established and used in the marketplace.”