Fed Court ruling tipped to unleash tax ‘bombshell’

Fed Court ruling tipped to unleash tax ‘bombshell’

A recent Federal Court decision points to the “odd outcomes” current trust tax law can produce and highlights the need for urgent reform, according to one major accounting body.

The recent Full Federal Court decision of Thomas v Commissioner of Taxation (2017) FCAFC57 is tipped to cause the government more grief, and is reminiscent of the landmark Bamford case, according to Institute of Public Accountants chief executive officer Andrew Conway.

Following the Bamford case, the government had to make some changes - which Mr Conway labels as “hasty” and “complex” - and it seems the government is now in a similar position again.

“In this particular case the taxpayer allocated dividend franking credit entitlements as it saw fit. The long established trust law principal is that franking credits must flow to beneficiaries in the same proportion as the dividend income, and they cannot be specifically allocated to achieve an optimal tax outcome even if permitted by the trust deed,” said Mr Conway.

“It seems the decision in the Full Federal Court has allowed a taxpayer franking credits to flow to beneficiaries not in a way the legislation was intended to operate, underscoring the odd outcomes that can still arise with trusts.

“The distribution of franking credits to beneficiaries independently of the related dividends goes against established principles.

“Franking credits should ordinarily flow to the shareholder who received the dividend, but this seems to be different in this case.

Trust tax reform has long been publicly discussed and debated, yet there is still a long way to go before the uncertainties and anomalies are ironed out, according to Mr Conway.

“After many years of trust tax reform discussions and various court rulings, there is still a considerable degree of uncertainty in our tax system when it comes to trusts and the need to reform remains, especially in light of the fact that many businesses use trusts as the vehicle to operate their business,” he said.

Late last year, partner at Queensland law firm Small Myers Hughes, David Hughes, told Accountants Daily he thinks trusts are out of favour with the government and the regulators. 

“The concern that I have is the commissioner has increasingly shifted the goalposts on what constitutes a dodgy scheme. Something that would be considered to be very plain and vanilla even five years ago, or 10 years ago, is now starting to be characterised as something that … only the really dodgy operators are doing,” Mr Hughes said.

“The point really is that, once upon a time, in the not-so-distant past, trusts used to be fairly easily understood and often used,” he added.

Fed Court ruling tipped to unleash tax ‘bombshell’
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