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Posts by Angela Abejo

Trust Income Distribution Under Scrutiny: ATO's Warning to Trustees

Trust Income Distribution Under Scrutiny

The Australian Taxation Office (ATO) has issued a stern warning to trustees, emphasizing the importance of carefully considering how and to whom trust income is distributed. In recent years, trust distribution arrangements have faced increasing scrutiny, and trustees must meticulously review their practices to ensure compliance with relevant regulations. It is a good time to recapitulate this before the end of financial year distribution.

Understand your Trust Deed

One of the main concerns is that trustees may not be looking at their trust deed before distributing income. The trust deed is a legal document that outlines what the trust can do and who can receive income. It’s crucial to review this document before making any decisions.

Steps for Reviewing Your Trust Deed

  1. Check the Deed and Amendments: Make sure that any actions taken by the trustees are in line with what the trust deed says.
  2. Vesting Date: The trust deed specifies the procedures when the trust vests. Upon vesting, trustees may be required to distribute income and property to designated beneficiaries, losing their discretion in this regard.
  3. Identify Beneficiaries: Determine who the beneficiaries are and understand their entitlements to income and capital.
  4. Resolution Timing and Requirements: Review any conditions for trustee resolutions, including deadlines and the need for written resolutions, eg. it has to be done by 30 June.
  5. Streaming Income: If you plan to allocate capital gains or franked distributions to certain beneficiaries, ensure the trust deed allows this.

Family Trust and Interposed Entity Elections

A family trust election ties the trust’s operations to a specific family group, helping protect losses and franking credits but potentially causing tax issues if misused. An interposed entity election brings an entity into an individual’s family group. Trustees need to understand the consequences of these elections before distributing income, as distributing outside the family group can result in hefty family trust distribution taxes.

Who really benefits?

The ATO is also vigilant about arrangements where income is allocated to beneficiaries who do not actually receive the financial benefit. If such arrangements reduce the overall tax paid, they are likely to draw the ATO’s attention.

Increased Reporting Requirements

Recent changes mean more detailed information is now required on tax returns about trust income distributions. These include:

  • Trust Tax Return: Four new capital gains tax labels have been added, requiring information that matches what beneficiaries report in their returns.
  • Beneficiaries: All beneficiaries must now file a new trust income schedule that matches the trust’s distribution statement.

The Importance of Compliance

Trusts offer significant flexibility in income distribution, but this comes with stringent compliance and control requirements. The ATO is closely monitoring how trusts distribute income and the associated tax implications.

Trustees must take these warnings seriously and diligently review their trust deeds and distribution arrangements to align with regulatory expectations. Ensuring proper compliance not only safeguards against potential penalties but also maintains the integrity and intended benefits of the trust structure.

Pitt Martin Group is a CPA accounting firm, providing services including taxation, accounting, business consulting, self-managed superannuation funds, auditing and mortgage & finance. We spend hundreds of hours each year on training and researching new tax laws to ensure our clients can maximize legitimate tax benefit. Our contact information are phone +61292213345 or email info@pittmartingroup.com.au. Pitt Martin Group is located in the convenient transportation hub of Sydney’s central business district. Our honours include the 2018 CPA NSW President’s Award for Excellence, the 2020 Australian Small Business Champion Award Finalist, the 2021 Australia’s well-known media ‘Accountants Daily’ the Accounting Firm of the Year Award Finalist and the 2022 Start-up Firm of the Year Award Finalist, and the 2023 Hong Kong-Australia Business Association Business Award Finalist.

Pitt Martin Group qualifications include over fifteen years of professional experience in accounting industry, membership certification of the Australian Society of Certified Practising Accountants (CPA), Australian Taxation Registered Agents, certified External Examiner of the Law Societies of New South Wales, Victoria, and Western Australia Law Trust Accounts, membership certification of the Finance Brokers Association of Australia Limited (FBAA), Registered Agents of the Australian Securities and Investments Commission (ASIC), certified Advisor of accounting software such as XERO, QUICKBOOKS, MYOB, etc.

This content is for reference only and does not constitute advice on any individual or group’s specific situation. Any individual or group should take action only after consulting with professionals. Due to the timeliness of tax laws, we have endeavoured to provide timely and accurate information at the time of publication, but cannot guarantee that the content stated will remain applicable in the future. Please indicate the source when forwarding this content.

By Angela Abejo @ Pitt Martin Tax

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Federal Budget 2024-25 Tax Insight

Federal Budget 2024-25 Tax Insight

We take insight here of the mainly tax changes in the Federal Budget 2024-25 announced in May 2024, in relates to the topics of Individual & Families, Superannuation & Investors, and Business & Employers.

Individuals & Families

Personal income tax cuts confirmed

From1 July 2024

As announced before, the government has made permanent tax cuts for all Australian taxpayers starting 01 July 2024.

Compared to the earlier Stage 3 plan, these new cuts give more benefits to people with taxable incomes below $150,000.

Personal income tax rates from 1 July 2024

Resident individuals

Tax rate2023-242024-25
0%$0 – $18,200$0 – $18,200
16% $18,201 – $45,000
19%$18,201 – $45,000 
30% $45,001 – $135,000
32.5%$45,001 – $120,000 
37%$120,001 – $180,000$135,001 – $190,000
45%>$180,000>$190,000

Non-resident individuals

Tax rate2023-242024-25
30% $0 – $135,000
32.5%$0 – $120,000 
37%$120,001 – $180,000$135,001 – $190,000
45%>$180,000>$190,000

Working holiday markers

Tax rate2023-242024-25
15%0 – $45,0000 – $45,000
30% $45,001 – $135,000
32.5%$45,001 – $120,000 
37%$120,001 – $180,000$135,001 – $190,000
45%>$180,000>$190,000

Medicare levy low-income thresholds increase

From1 July 2023

Starting from 01 July 2023, the low-income thresholds for the Medicare levy will be raised for singles, families, and seniors and pensioners.

Medicare low-income thresholdThreshold as at 30 June 2023Threshold from 1 July 2023
Singles$24,276$26,000
Families$40,939$43,846
Single – seniors and pensioners$38,365$41,089
Family – seniors and pensioners$53,406$57,198
Family – for each dependent child or student[1]$3,760$4,027

These adjustments reflect recent changes in the CPI, ensuring that low-income taxpayers typically remain exempt from paying the Medicare levy.

$300 energy relief for households

From1 July 2024

Households will get a $300 credit on their energy bills, spread out in automatic payments every three months throughout 2024-25.

Eligible small businesses will also get energy relief with a $325 rebate.

This plan, costing $3.5 billion over three years starting from 2023-24, continues and grows the Energy Bill Relief Fund.

Capping indexation of HELP debts

FromLoan accounts that existed on 1 June 2023

Starting from 01 June 2023, the Government will set the HELP indexation rate to be either the Consumer Price Index (CPI) or the Wage Price Index (WPI), whichever is lower. This change affects all HELP, VET Student Loans, Australian Apprenticeship Support Loans, and other student loans that were active on 01 June 2023.

By adjusting the HELP indexation from 01 June 2023, the rate will drop from:

– 7.1% to 3.2% in 2023, and

– 4.7% to about 4% in 2024.

This change helps over 3 million Australians with HELP debt after the CPI rate jumped to 7.1% last year.

A person with an average HELP debt of $26,500 will save around $1,200 on their loans this year, depending on the approval of the new law.

Estimated indexation for HELP debts

HELP debt at 30 June 2023Total estimated credit for 2023 and 2024*
$15,000$670
$25,000$1,120
$30,000$1,345
$35,000$1,570
$40,000$1,795
$45,000$2,020
$50,000$2,245
$60,000$2,690
$100,000$4,485
$130,000$5,835

Note: The actual credit amount will depend on personal situations, including payments made during the year. All HELP debts that were adjusted in 2023 and are set to be adjusted again on 01 June 2024, will get a credit for the indexation.

Superannuation on paid parental leave

From1 July 2025

Starting from 01 July 2025, superannuation (retirement savings) will be included with Paid Parental Leave (PPL) payments. Eligible parents will get an extra amount equal to 12% of their PPL payments, which will be added to their superannuation fund. This is on top of the previous change that increased leave to 22 weeks. The leave will further increase to 24 weeks from July 2025 and to 26 weeks from July 2026.

Increasing commonwealth rent assistance

From20 September 2024

Starting from 20 September 2024, the highest amount of Commonwealth rent assistance will go up by 10%.

People who get payments from Centrelink or the Department of Veterans Affairs, as well as those receiving the family tax benefit, might also get rent assistance if they pay rent or similar payments that are above a set amount every two weeks.

Right now, the highest amount they can get every two weeks is $188.20 for a single person and $177.20 for a couple together.

This change will cost $1.9 billion over five years starting from 2023-24, and $0.5 billion per year from 2028-29. It follows a 15% increase in September 2023, making the maximum rates more than 40% higher than in May 2022.

Improving aged care support

The government will spend $2.2 billion over the next five years to improve aged care and follow the recommendations from the Royal Commission into Aged Care Quality and Safety. This funding includes 24,100 new home care packages in 2024-25. They have also decided to start the new Aged Care Act on 01 July 2025. The government is currently making and considering changes to how aged care is funded based on the 2021 Royal Commission report. This might affect the costs of home care and residential care in the future. Usually, past reforms have allowed current residents and home care recipients to keep their existing benefits.

Increased flexibility for carer payment

Date20 March 2025

Currently, to get the Centrelink Carer Payment, the caregiver must not be working, studying, or training for more than 25 hours per week. This is because they need to give constant care to the recipient.

From 20 March 2025, this 25-hour limit will change to 100 hours over four weeks. This limit will only apply to employment and won’t include time spent on study, volunteering, or travel.

Additionally:

– Carer Payment recipients who exceed this limit or take more than their allowed temporary break from care days will have their payments paused for up to six months, rather than stopped entirely.

– Recipients will also have the option to take single temporary breaks from care if they exceed the participation limit, instead of the current requirement of at least seven days.

Higher JobSeeker rate for partial capacity to work

Date20 September 2024

Starting 20 September 2024, the Government will expand the JobSeeker payment to include single recipients who can work a bit (up to 14 hours per week).

Right now, JobSeeker payments give higher rate to people aged 55 or older who’ve been on it for nine months in a row.

Relationship statusMaximum payment per fortnight
Single with no children$762.70
Single with dependent children$816.90
Single 55 or older after 9 continuous months of payments$816.90
Partnered (Each)$698.30

Freezing social security deeming rates

Date12 months until 30 June 2025

When Centrelink and the Department of Veterans Affairs calculate payments, instead of looking at the actual income from your investments like bank accounts, term deposits, shares, and managed funds, they assume a fixed rate of return based on the total value of these investments. The Government plans to keep these fixed rates (shown below) unchanged until 1 July 2025.

Deeming rateSinglePensioner Couple
0.25%Up to $60,400Up to $100,200
2.25%Amounts over $60,400Amounts over $100,200

Pharmaceutical Benefits Scheme co-payments

From1 January 2024

The Government will keep medicine prices low by stopping some price increases:

– The cost you pay for PBS medicines won’t go up from 1st of January 2025 to 31st of December 2025. After that, it will start going up again on 01 January 2026.

– If you have a concession card, the cost you pay for PBS medicines won’t go up from 1st of January 2025 to 31st of December 2029. After that, it will start to increase on 1 January 2030.

Also, the $1 discount on patient co-payments will be reduced each year until it’s gone.

Starting 1 January 2024, you may pay up to $31.60 for most PBS medicines, or $7.70 if you have a concession card. The Australian Government pays the rest, except for brand premiums and certain other charges.

Federal, state and territory governments focus on housing

Housing initiatives focus on three main areas:

1. Private Housing Development: The government aims to build 1.2 million homes by the end of the decade. The 2023-24 Budget introduced new measures to encourage investment in housing projects, especially for affordable rental homes. However, legislation needed to enable these incentives has just been released, which is crucial for certainty and large-scale investment.

2. Support for First Home Buyers: The 2023-24 Budget prioritizes helping first home buyers with a $5.5 billion funding over ten years through the Help to Buy scheme. No new incentives have been announced since then.

3. Crisis and Social Housing Support: The government allocated $1 billion towards crisis and transitional housing for vulnerable groups like women, children fleeing domestic violence, and youth. Additionally, Commonwealth Rent Assistance was increased by 15% in the 2023-24 Budget.

New measures include:

– Providing $1 billion to states and territories for building infrastructure like roads, sewers, and energy for new housing.

– Introducing a new $9.3 billion National Agreement on Social Housing and Homelessness over five years. This includes doubling Commonwealth funding for homelessness to $400 million annually, with matching contributions from states and territories.

Domestic violence

DateFrom mid-2025

As mentioned before, the Government has promised nearly $1 billion over 5 years to make the Leaving Violence Program permanent. This program helps people escaping violence by providing them with financial support, safety checks, and referrals to get help. Those who qualify can receive up to $5,000 in financial aid, along with referrals, risk assessments, and safety planning.

Superannuation & Investors

Expanding CGT regime for foreign residents

DateCGT events commencing on or after 1 July 2025

Here’s a simpler version:

The rules for how foreign residents are taxed on capital gains will be changed to:

– Clearing up and expanding the kinds of assets that foreign residents must pay capital gains tax on.

– Changing the test for the main asset from a single point in time to a period of 365 days.

– Requiring foreign residents to tell the ATO before they sell shares or other ownership rights worth more than $20 million.

Currently, foreign residents must pay capital gains tax when they sell property in Australia that counts as ‘taxable Australian property’ (TAP). These rules make sure that people who don’t live in Australia pay Australian tax when they sell property that’s closely linked to Australian land and used in Australian business.

Shares in a company and parts of a trust can be TAP if the taxpayer and some family members own at least 10% of the business and more than 50% of the gross market value of the assets that the business owns are property in Australia and things like that.

The changes are to make sure Australia can tax foreign residents on their direct and indirect sales of property closely connected to Australian land. Similar to what Australia does with Australian residents.

The new ATO way of telling them what you’re doing will help make sure the rules about withholding tax for foreign residents are followed. You need to check that the thing you’re selling isn’t TAP.

The plan will also make sure Australia’s rules for foreign residents paying capital gains tax are more like what other countries do and what experts think is best.

The government will talk to people about how to make the changes, and they think it will make $600 million more over five years and cost $8 million more.

Business & Employers

$325 energy relief for small business

Date1 July 2024

About one million small businesses will get a $325 discount on their energy bills from 2024 to 2025. This support will be given as a credit every three months.

Households will also get energy relief with a $300 rebate.

This measure will cost $3.5 billion over three years starting from 2023 to 2024. It expands the Energy Bill Relief Fund.

$20k Small business instant asset write-off extended

Date1 July 2023 to 30 June 2025

Small businesses that earn less than $10 million can immediately deduct the full cost of certain assets that cost less than $20,000. This applies to assets used or ready to use between July 1, 2023, and June 30, 2025.

“Immediately deductible” means that the business can claim the entire cost of the asset as a tax deduction in the same year it was bought and used or installed.

For businesses registered for GST, the asset’s cost must be under $20,000 after subtracting any GST credits. For those not registered, it must be under $20,000 including GST.

Each asset can be written off individually, allowing a business to deduct the cost of multiple assets.

These rules apply only to assets covered by depreciation rules. Capital improvements to buildings aren’t eligible.

Assets valued at $20,000 or more can’t be immediately deducted. Instead, they can be put into a small business depreciation pool and depreciated at 15% in the first year and 30% each following year, if the business chooses simplified depreciation.

The rule preventing small businesses from re-entering simplified depreciation for 5 years if they opt-out will be suspended until June 30, 2025.

The proposed increase in the instant asset write-off from $20,000 to $30,000, extending it to medium-sized businesses, is not yet law.

The Future Made in Australia initiative

The Government has announced a big plan to make Australia a leader in renewable energy. They will spend $22.7 billion on several projects to encourage private companies to invest in industries that will help Australia move towards net zero emissions. This will secure Australia’s position in the global economy and make sure the country is ready for future challenges. The Future Made in Australia Act will set the rules for this plan, focusing on industries where Australia is strong economically, helps reduce emissions, and improves national security and economic strength in different parts of the country.

Making Australia a renewable energy ‘super power’

DateFrom 2027–28 to 2040–41

As part of the Future Made in Australia initiative, the Government plans to invest about $19.7 billion over ten years starting from 2024–25. This money will be used to speed up investment in key Australian industries like renewable hydrogen, green metals, low-carbon fuels, and the processing of critical minerals.

These investments include two time‑limited tax incentives to encourage new industries:

– A tax incentive for Critical Minerals Production, starting from 2027–28 to 2040–41, to support refining and processing of Australia’s 31 critical minerals. It will be valued at 10% of processing and refining costs, applicable for up to 10 years per project that will reach final investment decisions by 2030.

– A Hydrogen Production Tax Incentive, also starting from 2027–28 to 2040–41, for producers of renewable hydrogen. This will be $2 per kilogram of renewable hydrogen produced, for up to 10 years per project that will also reach final investment decisions by 2030.

These tax incentives are planned to be active from the 2027–28 to the 2040–41 financial years.

Other funding measures include:

– $10.2 million in 2024–25 for pre-feasibility studies on common-user processing facilities for critical minerals.

– $1.3 billion over ten years from 2024–25 for the Hydrogen Headstart program to support early-mover renewable hydrogen projects.

– $17.1 million over four years from 2024–25 for the 2024 National Hydrogen Strategy, including planning, social license, and safety training.

– $1.5 billion over seven years from 2027–28 for renewable energy investments by the Australian Renewable Energy Agency.

– $1.7 billion over ten years from 2024–25 for the Future Made in Australia Innovation Fund, focusing on projects in priority sectors.

– $1.4 billion over 11 years from 2023–24 to support manufacturing of clean energy technologies.

– $20.9 million over four years from 2024–25 for further consultation on incentives for low carbon liquid fuels.

– $18.1 million over six years from 2024–25 for foundational initiatives in the green metals industry.

– $11.4 million over four years from 2024–25 to fast track the Guarantee of Origin Scheme for green hydrogen and accelerate work on green metals.

These measures aim to enhance Australia’s capability in processing critical minerals, support the growth of a competitive hydrogen industry, and advance clean energy technologies.

Film producer tax offset

Date2025-26 income year

The Producer Tax Offset is a refund given for Australian spending on making Australian films, if certain conditions are met. The amount of the offset is:

  • 40% of the company’s spending on a feature film made in Australia.
  • 20% of the company’s spending on other films made in Australia.

The minimum time needed for the production depends on what type of production it is.

As part of the Government’s National Cultural Policy, changes will be made to the Producer Tax Offset from 2025–26. These changes will:

  • Remove the minimum length rules for content.
  • Remove the cap that restricts spending on certain production costs to 20% of the total.

Small business support services

DateOver four years from 2024–25

The Government plans to provide $41.7 million over four years starting from 2024–25 for several initiatives to support small businesses:

  • Improve how quickly small businesses get paid, including publicly identifying slow-paying businesses.
  • Support the mental health and financial wellbeing of small business owners, including extending the Small Business Debt Helpline and NewAccess for Small Business Owners program, which offers tailored, free, and private mental health support.
  • Update the Franchising Code of Conduct based on the 2023 Schaper Review, with a $3 million investment to remake and improve the code. This includes promoting best practices between franchisors and franchisees and making it easier for small businesses to operate, including better access to dispute resolution.
  • Provide $2.6 million to the Australian Small Business and Family Enterprise Ombudsman to help small businesses, including resolving disputes.

Pitt Martin Group is a CPA accounting firm, providing services including taxation, accounting, business consulting, self-managed superannuation funds, auditing and mortgage & finance. We spend hundreds of hours each year on training and researching new tax laws to ensure our clients can maximize legitimate tax benefit. Our contact information are phone +61292213345 or email info@pittmartingroup.com.au. Pitt Martin Group is located in the convenient transportation hub of Sydney’s central business district. Our honours include the 2018 CPA NSW President’s Award for Excellence, the 2020 Australian Small Business Champion Award Finalist, the 2021 Australia’s well-known media ‘Accountants Daily’ the Accounting Firm of the Year Award Finalist and the 2022 Start-up Firm of the Year Award Finalist, and the 2023 Hong Kong-Australia Business Association Business Award Finalist.

Pitt Martin Group qualifications include over fifteen years of professional experience in accounting industry, membership certification of the Australian Society of Certified Practising Accountants (CPA), Australian Taxation Registered Agents, certified External Examiner of the Law Societies of New South Wales, Victoria, and Western Australia Law Trust Accounts, membership certification of the Finance Brokers Association of Australia Limited (FBAA), Registered Agents of the Australian Securities and Investments Commission (ASIC), certified Advisor of accounting software such as XERO, QUICKBOOKS, MYOB, etc.

This content is for reference only and does not constitute advice on any individual or group’s specific situation. Any individual or group should take action only after consulting with professionals. Due to the timeliness of tax laws, we have endeavoured to provide timely and accurate information at the time of publication, but cannot guarantee that the content stated will remain applicable in the future. Please indicate the source when forwarding this content.

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Navigating Generational Succession: A Comprehensive Guide for Family Businesses

Transitioning a family business from one generation to the next is a complex process that demands careful planning and execution. While the idea of passing the torch to the next kin may seem straightforward, the reality is often far from it. Disputes, misunderstandings, and financial challenges can arise, jeopardizing both the business and familial relationships. In this article, we delve into the key considerations and strategies for successful generational succession.

1. Assessing Capability and Willingness:

The first step in generational succession is to determine whether the next generation is both capable of and willing to take on the business. This requires a realistic assessment of their skills, experience, and passion for the industry. While some successors may view it as their birthright, mere willingness is not enough; they must also possess the necessary competencies to lead the business forward. Conversely, the exiting generation must be open to the possibility that their children may have different career aspirations.

2. Managing Capital Transfer:

Determining the amount of capital to be extracted from the business during the transition to maintain its financial stability is another pivotal concern. Exiting generation may require a substantial sum, exerting pressure on both the business and its stakeholders. Often, the incoming generation lacks the necessary funds for a complete buyout, necessitating ongoing investment from the exiting generation or increased debt for the business. Clear documentation of the capital transition plan is vital to ensure transparency and alignment between all stakeholders.

3. Establishing Fair Compensation:

Remuneration should be based on commercial terms rather than meeting the personal needs of the owners. Formalizing compensation structures for directors and shareholders is essential to avoid disparities and conflicts of interest. Performance incentives should be clearly defined and tied to measurable outcomes to align incentives and drive accountability.

4. Defining Operating and Management Control:

The transition of control is often a sensitive issue in generational succession. It’s crucial to establish clear guidelines for operating and management control and to ensure buy-in from all parties involved. This may involve gradual transitions over time or event-driven milestones, depending on the circumstances of the business and the preferences of the stakeholders.

5. Setting Realistic Timeframes:

Generational succession is not an overnight process; it requires careful planning and implementation over an extended period. Setting realistic timeframes and expectations is essential to manage the transition effectively. Ensuring that all stakeholders have a common understanding of it to avoid misunderstandings and delays is crucial. This realistic timeline must be defined and documented in the succession plan.  

6. Embracing Formality and Structure:

Finally, generational succession often necessitates a greater level of formality and structure within the business. This includes defining roles and responsibilities, establishing clear decision-making processes, and implementing key performance indicators (KPIs) for management. By fostering a culture of accountability and transparency, family businesses can navigate the complexities of succession more smoothly.

In conclusion, generational succession is a multifaceted process that requires careful consideration of financial, operational, and interpersonal dynamics. By addressing key issues such as capability assessment, capital transfer, compensation, control transition, timeframe management, and organizational structure, family businesses can increase the likelihood of a successful transition and ensure the continuity of their legacy for future generations.

Pitt Martin Group is a CPA accounting firm, providing services including taxation, accounting, business consulting, self-managed superannuation funds, auditing and mortgage & finance. We spend hundreds of hours each year on training and researching new tax laws to ensure our clients can maximize legitimate tax benefit. Our contact information are phone +61292213345 or email info@pittmartingroup.com.au. Pitt Martin Group is located in the convenient transportation hub of Sydney’s central business district. Our honours include the 2018 CPA NSW President’s Award for Excellence, the 2020 Australian Small Business Champion Award Finalist, the 2021 Australia’s well-known media ‘Accountants Daily’ the Accounting Firm of the Year Award Finalist and the 2022 Start-up Firm of the Year Award Finalist, and the 2023 Hong Kong-Australia Business Association Business Award Finalist.

Pitt Martin Group qualifications include over fifteen years of professional experience in accounting industry, membership certification of the Australian Society of Certified Practising Accountants (CPA), Australian Taxation Registered Agents, certified External Examiner of the Law Societies of New South Wales, Victoria, and Western Australia Law Trust Accounts, membership certification of the Finance Brokers Association of Australia Limited (FBAA), Registered Agents of the Australian Securities and Investments Commission (ASIC), certified Advisor of accounting software such as XERO, QUICKBOOKS, MYOB, etc.

This content is for reference only and does not constitute advice on any individual or group’s specific situation. Any individual or group should take action only after consulting with professionals. Due to the timeliness of tax laws, we have endeavoured to provide timely and accurate information at the time of publication, but cannot guarantee that the content stated will remain applicable in the future. Please indicate the source when forwarding this content.

By Angela Abejo @ Pitt Martin Tax

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ATO cracks down on Professional Services Firms' Tax Avoidance Tactics

ATO cracks down on Professional Services Firms’ Tax Avoidance Tactics

The Australian Taxation Office (ATO) is tightening its grip on professional services firms suspected of diverting profits to evade taxes.

Two recent cases brought before the Administrative Appeals Tribunal have underscored the ATO’s commitment to ensuring that businesses, including lawyers, accountants, architects, medical practices, and engineers, fulfill their tax obligations.

In both instances, the ATO invoked Part IVA of the income tax law, a powerful tool that allows the Tax Commissioner to dismantle schemes designed solely to secure tax benefits. Even if a structure is legally sound, if its primary aim is tax reduction, then Part IVA can be exercised by the Commissioner to nullify any tax advantages obtained through such arrangements. Moreover, offenders under Part IVA may face additional tax liabilities along with hefty administrative penalties of either 25% or 50% of the tax shortfall.

The core of these cases involved a solicitor who oversaw multiple practice trusts generating profits from marketing and facilitating tax planning schemes.

Despite the complexity of these case arrangements involving intricate steps, the core strategy involved the practice trusts channeling their business profits through a series of trusts to entities with existing tax losses or tax-exempt status to ensure that the business profits are being shielded from taxation. However, the actual funds tied to these trust distributions, minus a commission paid to these entities, were funneled back to the solicitor or related entities in the form of loans.

Professional services firms have long been under the ATO’s scrutiny for their profit distribution practices. In 2021, the ATO issued comprehensive guidance on profit allocation within professional firms, establishing risk ratings and gateway tests. These recent cases showed the ATO’s determination to address the matter through litigation, leveraging the Commissioner’s authority outlined in Part IVA.

Professional services firms must be informed of various avenues through which the ATO can challenge their profit distribution arrangement. Here are some scenarios:

1. Personal Services Income (PSI): If a trading entity derives PSI primarily from the skills and efforts of an individual, the ATO expects profits to be attributed to that individual for tax assessment.

2. Business Structure Income: For income derived from professional practice business structures, the ATO scrutinizes arrangements that fail to allocate a reasonable level of profit to individual practitioners.

3. Trust Distributions: For a trust making paper distributions to entities with losses to manipulate deductions, the ATO can refer to the integrity rules under section 100A of the tax law.

Professional services firms must heed these warnings and ensure compliance with tax laws to avoid potential legal and tax repercussions. The ATO’s recent actions signal a heightened focus on combating tax avoidance tactics, underscoring the importance of transparent and lawful business practices within the professional services sector.

Should you please have any question in regards to above, please feel free to contact our friendly team in Pitt Martin Tax at 0292213345 or info@pittmartingroup.com.au.

The material and contents provided in this publication are informative in nature only.  It is not intended to be advice and you should not act specifically on the basis of this information alone.  If expert assistance is required, professional advice should be obtained.

By Angela Abejo @ Pitt Martin Tax

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