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09 Jul 10 On unpaid present entitlements (TR 2010/3 and (draft) PSLA 3362)

MEMBER 208 writes:

"'The hardest thing in the world to understand is income tax.'

The above quote is attributed to Albert Einstein - one of the greatest minds of all time who received numerous honorary doctorate degrees for his work in science, mathematics and philosophy.

If Albert Einstein was alive today and living in Australia he would no doubt have sought professional taxation advice as to the appropriate structure in which to hold all of the numerous patents and other intellectual property that he developed. In the course of getting this advice he would, almost as a matter of course, have been told about the advantages and disadvantages of using a trust as part of the structure for holding these assets.

We can only speculate on what Einstein's reaction would have been as his advisor laboured to explain the current approach of the ATO towards trusts and, in particular, unpaid present entitlements and trusts - i.e. that something that is not legally a loan can, in fact, be a loan according to the ATO.

Certainly if Albert Einstein thought that the tax laws in the 20th Century were hard to understand, then even his great intellect would have been tested if he tried to make sense of what the ATO is doing by overturning decades of accepted practices regarding the taxation of trusts.  

He might start to think that the ATO is, in continuing to argue that 'income' does not necessarily mean what a trust deed states it to mean (i.e. despite the decision of the High Court in Bamford's case), "doing the same thing over and over again and expecting different results" - which he defined as insanity.

It is even possible, after contemplating TR 2010/3 and (draft) PSLA 3362, that Albert Einstein may have felt it necessary to add a proviso to E=MC2 to try and deal with the 'black holes' and 'parallel universes' that seem to reflect ATO thinking in this area."

And MEMBER 208 also writes of the material under the heading "Champion" on pages 36-37 in the Compliance Program 2010-11:

"Division 7A - the ATO believes that what it is doing is an example of fostering and championing the promotion of voluntary compliance. Division 7A - can you believe the 'gall' of the ATO in putting the following material in its 2010-11 Compliance Program?  

'We foster and champion the promotion of voluntary compliance by examining how the law affects taxpayers and assessing where the law falls short of its intent and seeking rectification where required. Our work on Division 7A is an example of this.

Division 7A of Part III of the Income Tax Assessment Act 1936 is an important integrity measure. It ensures that dividends paid by private companies are taxed whatever their form.

We assessed its effectiveness and concluded that the division needed extra attention...

Championing improvements to the operation of the tax and superannuation systems requires a sound understanding of underlying policy and whether the law in operation produces unintended consequences or higher than expected compliance costs.'

What particularly annoys me is the fact that the ATO believes that it has a sound understanding of the underlying policy in this area."

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