CA ANZ calls on government address ‘critical issues’ with FTE, FTDT provisions

“These targeted reforms are essential to urgently restore fairness, reduce compliance burdens, and remove existential threats for businesses and advisers,” Susan Franks, CA ANZ’s Australian leader of tax, superannuation and financial services, said.

CA ANZ said that there were “critical issues” with Australia’s FTE rules which were causing significant compliance challenges and existential risks for taxpayers and their advisers.

Trusts had been exposed to unexpected liabilities due to lost or invalid elections stemming from changes in tax agents, poor ATO systems and inconsistent record-keeping, CA ANZ said. They added the current FTE rules were inflexible and didn’t allow elections to be revoked or varied even when errors were discovered.

CA ANZ added that the definitions of ‘family group’ and ‘family control’ did not reflect modern family structures, and multiple elections within family groups boosted red tape and the risk of expensive errors.

The professional body also noted that the unlimited review period meant that FTDT liabilities could be raised decades after the triggering event, leading to disproportionate penalties and general interest charges (GIC) that threatened businesses’ viability.

Furthermore, the Commissioner of Taxation had no discretion to disregard or reduce FTDT liabilities, leading to penalties “out of proportion to the actual ‘mischief’ involved,” CA ANZ said.

As previously reported, CPA Australia has also called on Treasury to legislate a fairer, more modern framework to allow for the correction of genuine errors and provide the ATO with limited discretion to remit family trust FTDT where no tax avoidance occurred.

“At the heart of the problem is Australia’s family trust election rules – an anti-avoidance measure introduced in the late 1990s to prevent the trafficking in trust tax losses that provided benefits to a person who did not bear the economic loss,” Jenny Wong, CPA Australia tax lead, said.

“These rules were designed to ensure tax benefits remained within a defined 'family group'. But in practice, they’ve become a complex trap, where a simple paperwork error can trigger an FTDT of 47 per cent, the top marginal rate, with no discretion for the ATO to provide relief.”

The call came after the news that one of Australia’s wealthiest families (the Thomas case) is facing a $13.2 million tax bill for an administrative mistake.

According to Wong, the Thomas family had been hit with the $13.2 million FTDT bill based on accountants inadvertently nominating the wrong individual as the head of the family group.

It was added that the Thomas family had also been hit with this whopping bill despite no tax avoidance, no mischief and no revenue loss to the government, which Wong attributed to the Tax Office having no power to waive or correct the outcome, which left the Federal Court as the only avenue for resolution.

In their submission, CA ANZ said that reform was necessary to restore fairness, reduce compliance burdens and ensure FTE and FTDT provisions kept pace with modern family and business structures.

The full list of CA ANZ’s proposed reforms included:

• A one-off opportunity for trustees to revoke or vary FTEs and interposed entity elections (IEEs) outside the current 4-year limit, especially where historical compliance can be demonstrated.

• Introducing a 4-year amendment period for FTDT liability to improve certainty and fairness.

• Providing the Commissioner with discretion to disregard or reduce FTDT for inadvertent breaches where the benefit remains within the economic family group.

• Broadening the definitions of “family group” and “family control” to accommodate contemporary family structures and intergenerational transitions.

• Permitting automatic revocation of elections upon sale to third parties.