ATO targets trusts in new alert, directors warned on new penalty notice scheme

The Tax Office has put workers on notice over share scheme arrangements, as tax experts warn that company directors need to be aware of new legislation that will make directors more personally liable for unpaid tax debts.

“There are so many thousands of companies that aren’t up to date with their personal outcomes, and there could be huge liabilities there,” says company liquidator Cliff Sanderson.

The ATO announced a taxpayer alert yesterday about share scheme arrangements where an employer repays money paid to employees through a type of share trust.

Under the agreement, an employer sets up an arrangement where an employee can acquire shares in the trust using money funded by the company. The loan is then repaid by the employer, which arranges salary sacrificing for certain amounts from the employees who have acquired those shares.

Tax commissioner Michael D’Ascenzo said in a statement that he is concerned some companies may not have considered the consequences of this type of action, which could make them liable for fringe benefits tax.

“An employer in such an arrangement needs to ensure that they include the taxable value of the benefit provided in its FBT liability. An employer who fails to do so could be subject to penalties,” he says.

“Employers who are unsure of their situation should seek independent advice or contact the ATO for advice on their individual circumstances.”

Deepti Paton, tax counsel at the Tax Institute, says employees and employers need to look at the overall scheme and account for how the ATO will view it, rather than simply accounting for their small part.

While Paton says there is a possible legal way to avoid tax while setting up trusts for employees, the particular system referenced by the ATO was designed to avoid tax.

“What you’re doing to is moving the money from the company to the employee, back to the trust, and back to the company. It’s convoluted and does have an aura of tax avoidance around it.”

Meanwhile, Sanderson says companies need to prepare for new laws introduced in the 2011 budget which will make company directors more personally liable for tax debts.

While the legislation has not yet been introduced into Parliament, the scheme is part of a $146 million round of funding for the ATO which will see it crack down on directors who are seen to be perpetrating phoenix schemes.

The new laws will give the ATO authority to start recovery processes against directors without the need for a 21-day grace period for liabilities left unreported for three months after they are due. The director penalty notice regime will also be extended to superannuation accounts.

After July 1, if companies have outstanding returns for more than three months, the director can be personally liable for that tax. Sanderson says businesses need to prepare for this.

“Now, there is some interpretation needed over whether that means the tax needs to be three months overdue at any time, or three months after July 1, but the intention is clear.

“You need to be up to date with your tax returns and quarterly BAS forms. One thing is clear, and that is directors are going to be held personally liable.”

Tax experts have complained the legislation could allow for some company directors to be seen as operating phoenix schemes when in fact they are just behind on tax. But Sanderson says directors simply need to stay on top of their liabilities.

“We do lots of little liquidations, and in the vast majority of those the directors won’t be up to date with their returns. It is very possible that the tax man can opt to put the debt in its back pocket, and then go back later on and say “You are personally liable for this debt for back in June 2010.”