FTDT issues pose 'existential threat' to family businesses, advisers: joint bodies

"Provisions intended to prevent trust loss trafficking are producing unexpected and disproportionate tax outcomes for family groups of all sizes — including many small and medium-sized businesses, not just large, high-wealth groups — in circumstances that generally do not involve mischief or tax avoidance," the bodies said.

The four accounting bodies said the emergence of FTDT issues across family businesses and private groups was "deeply concerning".

"While taxpayers must meet their obligations, the scale of these issues underscores the urgent need for legislative reform to address the significant impact on affected taxpayers and advisers," they said.

"Emerging FTDT liabilities are also placing severe pressure and stress on the accounting profession, increasing litigation risk for historical matters that were unforeseeable at the time."

The bodies noted that the ATO is unable to disregard the application of FTDT or to extend time frames for revoking or varying elections.

"This is due to the automatic operation of FTDT 21 days after a distribution is made by a trust that has made an FTE, or an entity that has made an interposed entity election (IEE), outside the family group of the individual specified in the FTE."

As FTDT liabilities are not subject to an assessment process or a limited review period, the ATO can enforce FTDT obligations dating back to the inception of the provisions.

In review and audit cases, tax investigations can potentially examine matters that occurred more than 30 years ago, the joint bodies warned.

The four associations outlined five major concerns with the provisions, which are currently impacting family businesses and private groups nationwide.

The government has been advised to make legislative amendments to address the unlimited period of review for FTDT liabilities and the imposition of the general interest charge (GIC) 81 days after a triggering distribution is made, without the Commissioner of Taxation raising an assessment.

It also wants amendments to be made to address the limitations on varying or revoking elections, the application of rules to companies, and the ATO’s lack of flexibility to disregard the application of FTDT or extend timeframes to revoke or vary elections.

The joint bodies noted that the FTDT is not subject to the normal period-of-review limitations, which has led to liabilities accumulating over many years, potentially back to 1995.

"FTDT and exponential GIC liabilities can result from minor or repeated errors occurring many years ago," they said.

"The absence of a statutory limitation period allows professional indemnity insurance (PII) claims to arise decades later, raising the risk of rejected PII claims. The situation is also discouraging practitioners from advising on discretionary trusts, ultimately constraining access to tax advisory services for Australian businesses."

In most cases, FTDT liabilities arise from benign circumstances such as the complexity of the provisions, missing documentation or incomplete information relating to earlier elections, the bodies noted.

"Such administrative failures are not comparable to fraud and evasion, tax avoidance or even mischief, giving rise to disproportionate tax outcomes," the accounting bodies said.

"These issues can inadvertently recur over multiple years and are compounded by gaps in ATO records, which do not fully reflect all elections that have been made."

The accounting associations said their overarching concern was that the current regime is "unsustainable and poses an existential threat to some businesses and their advisers".

The bodies are seeking an urgent roundtable with Assistant Treasurer and Minister for Financial Services Daniel Mulino, together with Treasury and the ATO, to discuss the operation and impacts of the provisions, and potential legislative solutions to restore fairness, reduce compliance burdens, and address the existential risk the provisions pose.

"In particular, we wish to consider ways to alleviate the disproportionate tax outcomes for families and businesses without undermining the purpose and intent of the regime," they said.