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16 Jun 14 “Profit washing” scheme ineffective - Mack

The Administrative Appeals Tribunal has found that two taxpayers were properly assessed to income tax on proceeds of what the Commissioner described as a "profit washing" scheme. The Tribunal also affirmed the Commissioner’s imposition of penalties.

The taxpayers were husband and wife. The husband operated an accountancy practice. They became involved in what the Tribunal described as a “crude” scheme. The scheme involved the creation of a new hybrid trust in which an entity associated with the promoter would hold units which entitled it to the income of the trust. The controllers of an underlying business would determine to conduct business through the newly created trust. The trustee would determine to distribute the business income to the promoter entity although it would seem that, in reality, only 15% of the income, presumably representing the promoter’s fee, was ever actually paid to the promoter entity. The balance of the distribution would be notionally, at least, “washed” by the promoter through a loss trust and be available to the participants.

The Commissioner issued amended assessments to the taxpayers, treating certain trust distributions emanating from the scheme as income in their hands.

The Commissioner contended that the taxpayers had participated in the arrangement, the scheme was a sham and the purported trust distributions were in fact shared equally between the taxpayers. Alternatively, the Commissioner argued that Part IVA of the Income Tax Assessment Act 1936, the general anti-avoidance provision, operated to cancel the tax benefit with the result that the amounts of the distributions ought to be regarded as income shared equally between the taxpayers.

The Tribunal held that, whether or not the taxpayers participated in the scheme, the result was the same. If they did participate, the scheme was a sham. If they did not, the evidence did not show that the purported trust distributions had actually been made. Either way, the amounts in contention had remained in the taxpayers’ family trust.

The Commissioner’s amended assessments proceeded on the premise that Part IVA operated to deny the tax benefit and that, but for the scheme, the claimed distributions would have been available for the use and benefit of the taxpayers equally. The Tribunal found that the taxpayers had not discharged their onus to demonstrate that the assessments were excessive.

The Tribunal also found that the Commissioner was authorised to amend the assessments on the basis that this was a plain case of evasion.

Re Mack and FCT [2014] AATA 367 (P E Hack SC, DP, 11 June 2014).

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