The ATO has put the misuse of trusts for tax purposes in its sights.

Australia’s tax authority has fired a warning over the use of trusts to minimise tax in certain ways, signs of how the country is aggressively targeting types of avoidance, following earlier campaigns against certain avoidance ploys (see examples here and here).

The Australian Taxation Office last week issued one of its “taxpayer alerts” cautioning against “arrangements that minimise tax by creating artificial differences between the taxable net income and distributable income of closely held trusts”.

"The ATO is investigating arrangements where trustees are engineering a reduction in trust income to improperly gain favourable tax breaks, or sometimes pay no tax at all,” Michael Cranston, deputy commissioner at the organisation, said in a statement. 

“Trusts are an important structure used by many people appropriately and in accordance with the law. Unfortunately we have seen some trustees enter into arrangements that create contrived differences between the trust net income and distributable income. These trustees exploit the differences to have the net income assessed to individuals and businesses that pay little or no tax, and allow others to enjoy the economic benefits of the net income free of tax,” Cranston said.

“Ten of the cases we are examining show lost revenue of more than A$40 million ($29.5 million) and go far beyond legitimate tax planning, raising a number of red flags. We are looking closely to see if arrangements comply with trust law, constitute a sham, or are captured by anti-avoidance provisions or integrity rules,” Cranston said.

The Trusts Taskforce was established in 2013 to undertake targeted compliance action against people involved in tax avoidance or evasion using trusts. Since this time, the ATO has raised A$772 million in liabilities and collected A$164.5 million. In addition to cash collected, assets of A$55 million have been restrained under proceeds of crime legislation.