Potential ATO data-matching prompts taxpayers to disclose FTDT liabilities early

“The point of [this ATO transparency] is that there may be a number of private groups out there who have decided ‘Okay, I've tripped family trust distribution tax (FTDT) in prior year or years’ and they may have decided to do nothing on the basis that they believe it's unlikely it would be discovered by the ATO.”

In a statement provided to Accountants Daily by an ATO spokesperson, the tax office said: "The ATO uses a variety of methods to detect potential non-compliance by taxpayers with their tax obligations. We also conduct regular campaigns reminding taxpayers and their advisers of what needs to be done to meet their tax obligations, including what needs to be done to avoid an FTDT liability."

Montani said that companies in particular might be failing the family-control test and that their interposed-entity election was therefore valid.

“We can't tell a client what to do. All we can do is lay out the situation,” he said.

“As tax agents we must fulfil our obligations under the Code of Conduct under the Tax Agent Services Act and our professional and ethical obligations but ultimately it's the client's decision.”

He noted that this is why tax advisers must inform their clients of the ATO’s data-matching capabilities if its use comes to light.

Montani said a major issue that makes taxpayers liable for FTDT is administrative, with gaps in recordkeeping stemming from incomplete records and changes in tax advisers. However, he echoed that there is also a policy design issue that is 30 years out of date.

“The laws as they are, are misfiring and causing people to trigger a liability for family trust distributions tax in circumstances where there's no tax mischief, no revenue leakage.”

Montani stressed that the 30-year FTDT integrity measure, Schedule 2F to the Income Tax Assessment Act 1936, must be reformed as the legislation is too restrictive. 

“With the passage of time, the design of the laws is no longer fit for purpose. It's really around the family group, [and] who's in the family group. It's unnecessarily restrictive.”

With Schedule 2F dating back to 1998, Montani said the provision's archaic nature increases scrutiny of trustees who are at risk of FTDT and GIC liabilities.

“What [taxpayers] then [discover] is that, under a complex series of laws, it turns out that a company is not in the family group of that trust…That trust could have been distributing to that company for many years, and [they have] been triggering family trust distributions tax.”

“The professional bodies have approached the Assistant Treasurer Daniel Mulino to raise awareness of this issue,” Montani said.

“The laws need to change because it'd be unconscionable to allow this to continue happening.”

Previously, in a joint submission, accounting bodies called for changes to the legislation, asking Mulino to attend a round table with them to address the “unexpected and disproportionate tax outcomes” arising from the “outdated” Schedule 2F.

"It is important for electing entities to manage their elections and ensure where FTDT is triggered it is identified and paid. The ATO will continue to consider ways to support electing entities and their advisors and communicate these messages to ensure they are aware of their obligations and what they can do to limit the risk of triggering FTDT," the ATO told the masthead.

Editor's note: This story has been updated since publication.