Taxation Ruling

IT 2291

Trust stripping : collection and recovery of tax

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FOI status:

MAY BE RELEASEDFOI number: I 1078066

PREAMBLE

This Ruling provides instructions for collection and recovery of tax in respect of trust strip assessments issued in accordance with Taxation Ruling Nos. IT 2059 and IT 2102.

2. The assessing guidelines applicable to trust stripping (IT 2059, IT 2102) require that, where possible, two types of assessments be issued. Firstly, assessments are raised against the trustee or default beneficiaries of a head trust on the basis of sham and/or section 260 and/or fiscal nullity. Secondly (but not necessarily at the same time) assessments are raised against persons or entities downstream from the head trusts on the basis that they have derived a profit assessable under section 26(a) or section 26AAA. These two types of assessments are referred to as "sham" and "section 26(a)" assessments respectively. In some cases a section 99A assessment against the trustee may also have been raised prior to the issue of Taxation Ruling Nos. IT 2059 and IT 2102. These cases are dealt with in this Ruling under a separate heading.

3. While the assessing guidelines, as outlined above, provide for the raising of more than one assessment in respect of trust stripping schemes, the primary objective, from a collection point of view, is to secure payment of the sham assessment either by way of final settlement or pending resolution of matters in dispute. This approach is consistent with the view that the stripping arrangements have no fiscal validity. It also takes account of the belief that it would not be proper at this stage to seek to obtain payment of both a sham and a section 26(a) assessment where the bases of both are disputed.

RULING

No Objection Lodged - Sham and section 26(a) assessments issued.

4. Where an objection is not lodged within the statutory period, recovery action for the full amount outstanding will be commenced, initially on the sham assessment only. No recovery action will be taken on the section 26(a) assessment without reference to Head Office. Any requests for extensions of time to pay should be dealt with according to Taxation Ruling No. IT 2091.

Objection Lodged - Sham and section 26(a) assessments issued.

5. Irrespective of whether or not a taxpayer enters into an arrangement as outlined in the following paragraphs, legal recovery action is not, subject to the exception contained in paragraph 37 of Taxation Ruling No. IT 2156, to be taken while the objection remains undetermined.

6. Because the main thrust of our recovery policy is directed at the sham assessment, where the group of taxpayers who were recipients of sham and section 26(a) assessments pay an amount approximating the amount due on the sham assessment (including additional tax for late payment accrued to the date of payment), then recovery action may be deferred. A tolerance of up to 10 per cent may be allowed for this purpose. Where more than one sham assessment has issued to a single group of taxpayers, then an amount approximating the total amount due for all of the sham assessments (including the total of additional tax for late payment accrued to the date of payment) is required to defer recovery action.

7. As part of the deferment arrangement, each taxpayer should be advised that the payment will not be regarded as applied against any particular assessment until the substantive issues have been resolved. When that occurs, the payment will be applied against the assessment in respect of which the issues have been resolved in favour of the Commissioner, but from the date that it was actually paid. This will mean that additional tax for late payment will not be imposed from the date of original payment unless the amount paid is insufficient to cover that assessment.

8. On the other hand, should the Commissioner not succeed in any of the resolved issues, interest will be paid on any amount subsequently refunded or credited to the taxpayers involved.

9. It is stressed that any arrangement to defer recovery is to be on the understanding that taxpayers will co-operate in providing information necessary to resolve disputed assessments and that accounts will be settled promptly once a Court or Board of Review has ruled on the substantive matter. Furthermore, it should be made clear to the taxpayer that any arrangement ceases upon determination of the objection.

10. Cases which cannot be dealt with in accordance with the above guidelines should be referred to Head Office together with the recommendations of the relevant Deputy Commissioner.

Objection Lodged - Single Assessment Cases

11. Where a section 26(a) assessment issues before a sham assessment, or vice versa, and an objection has been lodged against that assessment legal recovery action is not to be taken whilst the objection remains undetermined. Instead every effort should be made to issue the "back-up" assessment as soon as possible. When this occurs an arrangement for deferment of recovery action should be on the basis described in paragraphs 6-9 of this Ruling. As stated earlier, where no arrangement has been entered, recovery action should not be instituted on the section 26(a) assessment without reference to Head Office. Where a single sham assessment has issued and there are no alternative assessments to be raised legal recovery action should be taken against any unpaid amount once the objection has been determined.

12. Where an objection on a sham assessment has been determined and no arrangements have been entered into, legal recovery action should be taken against that assessment irrespective of whether the section 26(a) assessments are issued or their objections determined.

Objections Determined - Appeals Lodged

13. Taxation Ruling No. IT 2156 provides that once an objection is wholly or partly disallowed and the taxpayer does not pay the amount of tax required, and the general guidelines contained in Taxation Ruling No. IT 2091 do not apply, legal recovery action should commence. This notwithstanding, it is considered that in any case where arrangements have been entered into in accordance with paragraphs 6-9 above, legal recovery action may continue to be deferred on both assessments until the substantive issues have been finally resolved.

14. Where a taxpayer seeks to enter into an arrangement at the appeals stage for deferment of legal action, the arrangement will only be acceded to where the taxpayer makes a payment according to the requirements detailed in paragraphs 6-9 above and agrees to the conditions contained in those paragraphs.

15. Accordingly, it is only where the taxpayer has not agreed to the arrangements under paragraphs 6-9 that consideration needs to be given to instituting legal recovery action at the appeals stage. In such cases, where the sham assessment has not been paid in full, recovery action should be instituted on any amount outstanding on that assessment. Recovery action should not be taken on the section 26(a) assessment until the substantive issues have been resolved, unless approval otherwise has been given by Head Office.

Section 99A Assessments Issued

16. Taxation Ruling No. IT 2059 includes instructions concerning the issuing of section 99A "sham" assessments to trustees. However, a number of section 99A assessments, which do not fall into the category of sham assessments, were raised before the issue of those instructions. These section 99A assessments have been maintained in some cases and consideration given to the issue of additional assessments on the basis of sham and section 26(a).

17. Where such section 99A assessments have issued, it is possible that three assessments could have issued in respect of the one trust strip, viz., the section 99A (pre IT 2059 guidelines), a sham assessment and a section 26(a) assessment. From a collection point of view our primary objective remains constant, i.e., to secure payment of the sham assessment. That is to say, collection and recovery action follows the same principles as those set out in paragraphs 6-9 above. Recovery action should not be taken on these section 99A assessments without reference to Head Office.

18. Where the section 99A assessment has issued and an objection has been lodged, but the sham and section 26(a) assessments are yet to issue, legal recovery action is not to be taken. Instead, every effort should be made to issue the section 26(a) and sham assessments as soon as possible. When this is done, and assuming objections against the assessments have been lodged, an arrangement for deferment of recovery action on the basis described in paragraphs 6-9 may be entered into.

Winding-up and Bankruptcy

19. In accordance with Taxation Ruling No. IT 2156, winding-up applications and bankruptcy petitions should be issued only after approval has been received from Head Office.

COMMISSIONER OF TAXATION
8 May 1986

References

ATO references:
NO 85/444-1

Date of effect:
Immediate

Date original memo issued:
6 July 1984

Related Rulings/Determinations:

NOTICE OF ARCHIVAL
IT 2091
IT 2156

Subject References:
COLLECTION OF TAX
RECOVERY OF TAX
TRUST STRIP ASSESSMENTS

Legislative References:
ITAA 26(a)
ITAA 26AAA
ITAA 99A
ITAA 260