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On 12 August 2013, the ATO issued Taxpayer Alert TA 2013/1 entitled "Arrangements to exploit mismatches between trust and taxable income".

The Taxpayer Alert describes an artificial arrangement where a deliberate mismatch is created between the amounts beneficiaries are entitled to receive from a trust and the amounts they are taxed on.

The arrangement concerns a situation where a trust has generated a small amount of income and a large capital gain during the year. The trust distributions are made in such a way that one beneficiary receives the funds generated from the capital gain, tax free, whilst another beneficiary (a new incorporated company) receives the tax liability attached to that capital gain. The newly incorporated company receives no funds from the capital gain to pay this tax liability, and winding-up proceedings are commenced. This process is designed to avoid the payment of tax on the large taxable capital gain.

The ATO considers that arrangements substantially of this type give rise to taxation issues that include whether:

(a) the arrangement, or steps within it, may be a sham;
(b) income may be assessable to any entity involved in the arrangement and their associates under s 100A of Division 6 of ITAA 1936;
(c) the arrangement may constitute a scheme to which the general anti-avoidance rules in Part IVA of the ITAA 1936 may apply;
(d) any entity involved in the arrangement is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953;
(e) any entity involved in the arrangement that is a tax practitioner may be referred to the Tax Practitioners Board under the Tax Agent Services Act 2009 regarding matters relevant to the Code of Professional Conduct; and
(f) any civil or criminal offences have been committed by any entity involved in the arrangement (where the ATO becomes aware of such offences, the matter may be referred to the appropriate authority).

The ATO says that it is currently reviewing these arrangements.


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