Part IVA anti-avoidance rules: $60 billion in trust payments under cloud following ATO court loss

Already a subscriber?Payments of around $60 billion from family trusts are under renewed legal scrutiny as the Australian Taxation Office considers whether to appeal its defeat in a landmark decision about tax avoidance.

The court, in dismissing the use of trusts as a tax-avoidance scheme, repeatedly referred to their “real economic and financial effect” and warned the ATO cannot dictate to taxpayers how they should arrange their affairs. “Nothing supports a conclusion that any part of the schemes either entered into or carried out any of the schemes for dominant purpose of enabling a tax benefit,” the court ruled.and a possible application for leave to appeal to the High Court, which means scheme trustees could be left in limbo about the treatment of trust structures for possibly up to 12 months.The case targeted a ‘big end of town’ billion-dollar company and distributions totalling nearly $100 million.

That the Federal Court’s decision was unanimous against the ATO adds to the uncertainty about whether an appeal application to the High Court will be successful. Jeffreys says in many cases the decision about which beneficiaries receive income is determined by the overall tax outcome for the family, or family group.“It is an accepted fact of Australian small business and family investment life. But can the decision of trustee to make distribution to beneficiaries in the most tax effective manner be a ‘scheme’ to which the anti-avoidance provisions of tax law apply?”hundreds of thousands of trustee decisions intended by families to save tax”.

The trustee typically pays zero tax on income that flows through the trust, including capital gains and franked dividends. The income is distributed to the beneficiaries, who are taxed at their personal tax rates.

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