According to the ATO, there are particular behaviours, characteristics and tax concerns that draw its notice.
But because it concentrates more on making sure that taxpayers get things right rather than on the trouble and costs of pursuing every tax offender, the tax office has revealed the incidents or circumstances that are more likely to raise a red flag.
Below are the behaviours and characteristics that may land you in trouble with the ATO:
- Tax or economic performance is not comparable to similar businesses
- Low transparency of tax affairs
- Huge, one-time or odd transactions, including transfer or shifting of wealth
- A record of aggressive tax planning
- Tax outcomes that conflict with the objective of tax law
- Electing not to follow or habitually taking contentious interpretations of the law
- Standard of living not substantiated by after-tax income
- Managing private assets as business assets
- Using business assets for tax-free personal use
- Poor governance and risk-management systems.
Also, the ATO’s risk antennae is more sensitive to certain matters of taxation, such as CGT, FBT, private company profit extraction (including Div 7A), the taxation of financial arrangements, and more. The use of trust is also included in this list.
With trusts, there are a number of compliance issues that draw the ATO’s attention, such as the distributions from discretionary trusts to SMSFs, which “are subject to the non-arm’s length income rules and the amount is treated as non-arm’s length income and taxed at the highest tax rate of 45%”.
The ATO’s pays particular attention to the following details:
- The complying superannuation fund (generally SMSF) is a beneficiary of a trust.
- The trust is not a fixed trust (or one with fixed entitlements to income) and is not widely held.
- Distribution by trust to complying superannuation fund.
- Superannuation fund does not report amount as non-arm’s length income.
Differences between distributable and taxable income, and distribution to tax-preferred entities
Of particular interest to the ATO is the differences between distributable and taxable income of a trust and its taxable (or net) income, which can be used by individuals getting the monetary benefit of trust distributions to escape paying tax on them.
The setups consist of:
- The trustee settles on a drastically decreased trust distributable income contrasted against the trust taxable income.
- The inclusion of a tax concessional beneficiary to receive entitlement to the small trust distributable income along with the huge liability to tax generated from the trust taxable income.
Here are the possible circumstances for the tax concessional beneficiary:
- Have huge losses in the past year.
- Have minimal resources that are insufficient to cover the tax liability arising from the distribution.
- Be assessed at a significantly lower rate (or not at all) than those ultimately getting the monetary benefits through this setup.
- While these situations may generally be the standard, they are not standard where the trustee directs the trust’s distributable income for this purpose.
Another red-flag to the ATO is distributing mostly to tax-preferred entities. This is a situation where a beneficiary is exempt from tax, in a loss circumstance or is a newly-established company.
Treating income as capital
The ATO also has their eye on trusts that are running a business of divesting an asset as part of an income-generating operation. It is the job of the tax office to make sure these trusts are not claiming the 50% CGT discount on the profits earned by selling an asset, or establishing this as part of a business.
The ATO says: “Inappropriate characterisation as capital can occur where property developers set up special purpose trusts and report any profits from the ultimate sale of the property on capital account in order to claim the 50% CGT discount. These profits should be on revenue account for tax purposes because the property is sold as part of a profit-making undertaking.”
The ATO advises that if you have concerns about a particular tax or super position to (1) seek guidance from the ATO or (2) request a self-amendment or make a voluntary disclosure to correct a mistake.
See a qualified tax advisor, accountant or bookkeeper if you have questions or concerns about tax matters. This will prevent you from making a mistake, or worst drawing the attention of the taxman. PJS Accountants can help you organise your tax affairs. We work with large companies, SMEs, family businesses and individuals. For enquiries, contact PJS Accountants.