Last week, the ATO announced it will be cracking down on arrangements that create artificial differences between taxable net income and distributable income of closely held trusts to improperly minimise tax.
Professional advisers should be aware that trusts are likely something the commissioner will want to see less of in the future, partner at Small Myers Hughes, David Hughes, told AccountantsDaily.
“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,” he 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.
“It’s like the frog in the boiling water. Each degree that the temperature goes up is not going to necessarily be a major problem in and of itself. But certainly if you were to tell people some 15 years ago this is where we would be today, they’d be gobsmacked, because when I first started practice, trusts were a very standard tool, and now most advisers would say use trusts with caution.”
The flexibility of trusts for taxpayers is likely to be one of the red flags that the Tax Office associates with the structures, Mr Hughes said.
“From commissioner’s point of view, their flexibility is not seen as a desirable thing. The exact thing that practitioners have thought to be useful for a very long time, the flexibility of a discretionary trust, is exactly what the commissioner doesn’t like.”
”When you have flexibility that increases options for taxpayers and as soon you have taxpayers with options, the commissioner sees that on one level as … the opportunity for abuse.”
Trusts are likely to move to being purely asset-holding entities if the commissioner’s patterns continue, Mr Hughes said.
“I think if it keeps going at this rate, I would see trusts being very much a rarity in the future. You would never trade through a trust, you would simply hold assets through a trust. If you go right back, it’s probably where trusts were originally designed to operate in the first place,” he said.
“Don’t assume that what is acceptable today is going to be acceptable in five years’ time.”