Publications / Taxation

11 Jun 13
Tax office to target discretionary trusts and private company ‘dividend access shares’

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Increased funding for Trusts Taskforce

On 14 May 2013, the government announced increased funding in the 2013-2014 Federal Budget for the Australian Taxation Office (ATO) Trusts Taskforce.

The ATO recently announced further details of the activities and targets of the Trusts Taskforce.  In addition to the stated focus of ‘egregious tax avoidance and evasion using trust structures’, the Taskforce will examine a number of arrangements including:

  • arrangements which result in income being assessable to low-tax beneficiaries where the benefits of the income are enjoyed by others
  • arrangements which involve artificial re-characterisation of amounts to change the tax outcomes, and
  • ‘sham’ transactions and round-robin circulation of income between related trusts.

Tax advisers and taxpayers who use discretionary trusts need to be aware that a number of trust arrangements, including some which have historically been accepted as common and uncontroversial, will now be subject to greater ATO scrutiny.

Trustee resolutions must be made by 30 June

The ATO has also released an information sheet which sets out the ATO approach to trustee distribution resolutions for the 2013 year.
The key points are:

  • trustee resolutions to distribute the income of the trust must be made by 30 June 2013
  • the ATO will not accept resolutions which purport to:
    • change the entitlements of beneficiaries in the event of future adjustments to the trust’s taxable income by the ATO
    • distribute (create a present entitlement to) notional income which does not result in an accretion to the trust (e.g. franking credits and non-deductible expenses), and
    • stream other types of income (other than capital gains and franked dividends) to different beneficiaries.

Tax advisers and taxpayers need to be aware it is now critical that trustee resolutions are made by 30 June each year.  This is a significant change from the historical practice of determining the exact income of the trust and the income distributions after 30 June, for example when the tax returns are being prepared.

The ATO information sheet states that informal written records of a resolution of the trustee before 30 June (which are later documented in a formal minute or resolution) will be acceptable evidence of a resolution being made before 30 June.

Generally, if the trust deed allows, an oral resolution will be effective to distribute the income of the trust before 30 June, and the resolution can be later recorded in writing.  However, it appears the ATO would be likely to challenge the efficacy of an oral resolution alone, on the basis of a lack of evidence of theresolution being made before 30 June. Challenges may occur particularly if the resolution purported to have been made before 30 June included information that was unlikely to have been known at the time (e.g. exact dollar amounts of income).

Five tips for trustees

  • Make a resolution in writing, and where possible, have every trustee, or every director of the corporate trustee, sign the resolution by 30 June 2013.
  • Be wary of dealing with franking credit gross up amounts and non-deductible expenses, including under a ‘section 95’ income equalisation clause Draft Taxation Ruling TR 2012/D1.
  • Use percentages and ‘balance’ distributions to ensure all of the income and capital gains of the trust are effectively distributed by 30 June 2013.
  • Do not make resolutions which change ‘in the event of a future amended assessment by the Commissioner of Taxation...’
  • If the trust has a discount capital gain, make sure the total gross amount (i.e. the discount and non-discount parts) of the gain is distributed to the beneficiaries who are intended to be assessed on the capital gain.

Dividend Access Shares

The ATO view as stated in a 2012 Taxpayer Alert is that the use of ‘Dividend Access Shares’ could potentially be subject to a number of the tax integrity measures.

Draft Taxation Determination TD 2013/D5 now confirms the ATO view that the use of Dividend Access Shares could be subject to the dividend stripping integrity measures within Part IVA.

The ATO view is that the integrity measures can apply where the economic benefit of the company’s profits are delivered to the company’s ordinary shareholders or their associates in a more tax effective manner than if a dividend were to be paid on the ordinary shares.

The dividend stripping provisions can only be applied if a dominant purpose of the scheme is a tax avoidance purpose.

The ATO has made it clear that it will not accept there is another ‘non-tax’ reason for the use of Dividend Access Shares (e.g. asset protection or succession planning) unless the taxpayer can demonstrate that:

  • the use of the Dividend Access Shares actually achieves the non-tax objectives, and
  • those objectives could not have been achieved in a simpler manner without the use of the Dividend Access Shares.

Taxpayers and advisers should exercise caution when implementing Dividend Access Share arrangements and in particular when declaring and paying dividends on these shares.  

We are aware of a number of genuine business, family and commercial arrangements in which the use of Dividend Access Shares would be able to be defended as not having a tax avoidance purpose, but it should not be assumed that this will always be the case.

For further information on any of the issues raised in this alert please contact:

  • David Marschke on +61 7 3233 8883 or +61 2 9270 8619
  • Mark West on +61 7 3233 8871
  • Reuben Bramanathan on +61 7 3233 8588 or +61 2 9270 8641

Focus covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. Focus is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.

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