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Australia Tightens Screws On Trusts

Lachlan Colquhoun


14 February 2010

The Australian government continues to crack down on tax structures traditionally used by wealthy families with the release of draft legislation to extend withholding tax arrangements to family trusts.

Assistant treasurer Nick Sherry released the draft legislation for public comment this week. The recommendations would enable the Australian Taxation Office (ATO) to detect the non-disclosure of income earned by the trusts, and then attribute it to individuals and assess it along with their other income.

The government has proposed implementing the changes from 1 July this year, and has estimated it would raise an additional A$50 million (around $43.9 million) a year.

“This measure is part of the Rudd government’s initiative to improve fairness and integrity in the tax system and will help ensure everyone is paying their fair share of tax,” Mr Sherry said.

"This important measure will improve the fairness and integrity of the tax law by shedding light on income derived from certain types of trusts...Income streams from closely held trusts, by their very nature, can be problematic for the ATO to assess,” he said.

Although they are waning in popularity, family tax structures – often involving multiple trusts – have traditionally been a favourite way for wealthy families to protect their income and assets from the scrutiny of the ATO.

Another practice in the ATO’s sights is that of “cloning” between trusts, where capital gains can be avoided when assets are transferred between trusts where the beneficiaries are the same.

The family trust crackdown is part of a wider policy to ramp up auditing of wealthy Australians, with the ATO expanding its use of data-matching and access powers to fight tax evasion.

The government has given the ATO an additional A$302 million over four years to target wealthy, large and medium sized companies, a structure also often used by wealthy families to write off expenses and claim losses. But only time will tell whether the increased spending will be justified by results.

In November last year, the ATO sent letters to small and medium sized enterprises warning them they would be scrutinised for any tax losses they claimed. The ATO said it believed that nearly A$100 million in false tax losses were claimed in this way in 2008-9.

As part of this exercise, an 11-page questionnaire was sent to targeted individuals asking them about trusts and offshore investments, although the ATO said responding was “voluntary at this stage”.

The recent moves come after the four-year investigation by the ATO into wealthy Australian’s offshore arrangements, known as Operation Wickenby, has reaped more than A$300 million for the government as well as resulting in some high-profile prosecutions.