Tax crackdown on partnered discretionary trusts

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The Tax Office is warning accountants, lawyers and other professionals like financial planners not to misuse legal structures that have been set up to minimise tax through partnering discretionary trusts.

While the Tax Office conceded some professional practices set up in this way may legitimately operate as a partnership of discretionary trusts, other people are misusing these structures to avoid tax obligations, second commissioner Bruce Quigley said.

Trusts that have been used to divert income earned from professional services to associates not actually working in the business are particularly in the firing line.
Quigley aims to stamp out siphoning of profits from such trust partnerships to spouses, children and other lesser-taxed individuals.

The Tax Office’s compliance warning relates to the 2013-14 income tax year and will be ongoing. It warns it will look at these arrangements closely to determine if they are effective at law, and whether they may trigger the application of the general anti-avoidance rules.

Professionals operating under these structures should examine their arrangements as they may need to review their business and documentation supporting their positions, said Taxpayers Australia taxation products and services head Mark Chapman.

“The use of trust arrangements in partnerships is quite common but the Tax Office is concerned that they are being used to siphon profits of the practice into the hands of lower taxed individuals – family members for instance – who actually contribute nothing to the generation of those profits.

“Every professional practice which uses such an arrangement needs to be looking closely at both the substance and the form of their partnership structures and asking themselves if they can justify the way profits are distributed if the Tax Office comes calling.”

The Tax Office is also concerned whether the correct amount of capital gains tax is being applied when firms change their structure.

Income splitting for professional practices is not a new concern, Chapman said.

“However in light of this renewed focus by the Tax Office, practitioners should take steps to ensure relevant clients are made aware of this risk and can take steps to address it appropriately.”

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