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ATO Updates Discretionary Trust Partnerships Guide

Wednesday, September 3, 2014

The Australian Taxation Office (ATO) has released draft guidelines on how professionals can assess the tax risks from the use of partnerships of discretionary trusts and similar structures.

The ATO is reviewing the remuneration arrangements used by accountants, lawyers, and other professions to make sure that such structures are being used appropriately. The ATO says that in some cases they may be used in ways that give rise to different tax consequences and result in tax compliance risks.

According to Deputy Commissioner Michael Cranston, "the draft guidelines set out what we consider to be low risk, legally effective arrangements, and what we consider to be high-risk arrangements that might attract our attention."

The document explains how the ATO will assess the potential application of Part IVA (the general anti-avoidance rule) of the Income Tax Assessment Act 1936 to the allocation of profits from a professional firm carried on through a partnership, trust, or company, where the income of the firm is not personal services income.

In particular, the ATO is concerned that Part IVA may apply to schemes that are designed to ensure that an individual professional practitioner (IPP) is either not directly rewarded for the services they provide to the business, or that they receive a reward that is substantially less than the value of those services.

Where an IPP attempts to alienate amounts of income flowing from their "personal exertion" (as opposed to income generated by the business structure), the ATO may consider cancelling relevant tax benefits under Part IVA.

The general anti-avoidance provisions have historically been applied to assess individuals on income generated by their personal exertion or application of their professional skills, rather than profits or income generated by a business structure. However, the ATO says that Part IVA also has potential application where an IPP arranges for the distribution of business profits or income to associates without regard to the value of the services the IPP has provided to the business.

The guidelines are being issued as a working draft for ongoing public consultation. They will apply to relevant arrangements within professional firms, including, but not limited to, those providing services to the accounting, architectural, engineering, financial services, legal, and medical sectors. The guidelines will apply from the 2014-15 income tax year.