Taxpayer Alert
TA 2008/15
Profit washing scheme using a trust and a loss entity-
This document incorporates revisions made since original publication. View its history and amending notices, if applicable.
FOI status: may be released
| Taxpayer Alerts are intended to be an "early warning" of significant new and emerging higher risk tax planning issues or arrangements that the Australian Taxation Office has under risk assessment, or where there are recurrences of arrangements that have been previously risk assessed.
Taxpayer Alerts will provide information that is in the interests of an open tax administration to taxpayers. Taxpayer Alerts are written principally for taxpayers and their advisers and they also serve to inform tax officers of new and emerging higher risk tax planning issues. Not all potential tax planning issues that the Tax Office has under risk assessment will be the subject of a Taxpayer Alert, and some arrangements that are the subject of a Taxpayer Alert may on further examination be found not to be of concern to the Tax Office. In these latter cases the Taxpayer Alert will be withdrawn and a notification published which will be referenced to that Taxpayer Alert. Taxpayer Alerts will give the title of the issue (which may be a scheme, arrangement or particular transaction), briefly describe the issue and will highlight the features which are of concern to the Tax Office. These issues will generally require more detailed analysis to provide the Tax Office view to taxpayers. Taxpayers who have entered into or are contemplating entering into an arrangement similar to that described in this Taxpayer Alert can seek a formal determination of the Tax Office's position through a private ruling (noting that the Taxation Administration Act 1953 sets out circumstances where the Commissioner may decline to issue such a ruling). Such taxpayers might also contact the tax officer named in the Taxpayer Alert and/or obtain their own advice. This Taxpayer Alert is issued under the authority of the Commissioner. |
This Taxpayer Alert describes arrangements where a taxpayer attempts to minimise tax liability by using tax losses in an unrelated entity. The business of the taxpayer is restructured so that the income of the business passes through a chain of trusts and on to a loss company. The income, less an amount for promoter fees, remains effectively under the control of the taxpayer, or associates. This Alert covers substantially the same arrangement as described in TA 2005/1 as well as highlighting additional features of concern. In TA 2005/1 we formed the view that arrangements of this type are not likely to be effective.
DESCRIPTION
The alert applies to arrangements having some or all of the following features:
Arrangement 1
- 1.
- A trading entity (the 'taxpayer') derives income from a business that it carries on. The business is restructured into a hybrid trust (the 'new trust') which then derives the income.
- 2.
- The new trust has a number of classes of units. Each class of units has different rights attached. The taxpayer or associates hold units with income, capital and voting rights in the new trust (class A units). Another trust (the promoter trust) holds units in the new trust with income rights only (class B units).
- 3.
- The trustee of the new trust has discretion as to the distribution of the income to class A or class B income unit holders.
- 4.
- All the units in the promoter trust are held by a company with carry forward losses (the 'loss company').
- 5.
- The new trust distributes a large proportion of the income to the class B unit holders. A smaller proportion may be distributed to the class A unit holders.
- 6.
- An amount, say 10% of the distribution to the class B unit holders, is paid in cash to the promoter trust. The balance of 90% is never paid and by agreement (usually verbal) between the parties is never intended to be paid.
- 7.
- The promoter trust then distributes all of the income distribution from the new trust to the loss company. The promoter claims that the loss company has carry forward losses that offset the distribution from the promoter trust.
Arrangement 2
- 8.
- In some arrangements a variation is used where the 90% balance of the distribution referred to in paragraph 6 above is actually paid but remains under the effective control of the taxpayer or associates through the use of a joint venture.
- 9.
- In these arrangements a joint venture is formed between the taxpayer or associates and the promoter trust.
- 10.
- By agreement the taxpayer or associates have effective control over the assets of the joint venture.
- 11.
- As described above in Arrangement 1 the new trust distributes the income to the promoter trust, however, pursuant to an agreement between the parties, the promoter trust then makes a capital contribution, say 90% of the distribution it receives from the new trust, to the joint venture thereby maintaining the effective control of the taxpayer or associates over those funds. In some cases the funds giving effect to the capital contribution by the promoter trust may be paid directly by the new trust to the joint venture.
- 12.
- The basic features of these arrangements can be summarised diagrammatically as follows:
FEATURES WHICH CONCERN US
The Tax Office considers that an arrangement of the type described above gives rise to taxation issues that include whether:
- a.
- such an arrangement or certain steps within it are a sham;
- b.
- the right entities have been assessed in respect of any ordinary or statutory income;
- c.
- section 100A of the Income Tax Assessment Act 1936 (ITAA 1936) applies to the trust distributions made in connection with or as a result of reimbursement agreements;
- d.
- the loss company has available carry forward losses, and if so, whether those losses are deductible;
- e.
- any steps within the arrangement may give rise to capital gains assessable to the taxpayer under Part 3 of the Income Tax Assessment Act 1997 (ITAA 1997);
- f.
- the arrangement may constitute a scheme to which the general anti avoidance rules in Part IVA of the ITAA 1936 apply; and
- g.
- any entity involved in the arrangement is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953).
The Tax Office view on the above arrangements is outlined in Taxation Determination TD 2005/34, which applies to assess the trustee of the new trust on the purported distribution.
- •
- the case does not exhibit a significant degree of criminality by the taxpayer
- •
- the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and
- •
- the taxpayer co-operates with the investigation and consequential proceedings.
Amendment history
| Date of amendment | Comment |
|---|---|
| 3 May 2024 | Updated Tax Agent tip off hotline number |
| 19 January 2024 | Updated ATO tip-off hotline numbers |
Date of Issue: 25 June 2008
Date of Effect: 25 June 2008
Related Rulings/Determinations:
TD 2005/34
Related Practice Statements:
PS LA 2005/13 - Taxpayer Alerts
Subject References:
Losses
Hybrid trusts
Trust distributions
Liquidation
Legislative References:
Income Tax Assessment Act 1936
Section 100A
Part IVA
Section 251K
Section 251BC
Income Tax Assessment Act 1997
Part 3
Division 165
Taxation Administration Act 1953
Division 290 of Schedule 1
Related Taxpayer Alerts:
TA 2005/1 Authorised by:
Stephanie Martin
Deputy Commissioner
| Contact Officer: | Bruce Collins |
| Business Line: | Aggressive Tax Planning |
| Section: | Technical & Case Leadership |
| Phone: | (02) 6216 2710 |
| Date: | Version: | |
| 25 June 2008 | Original alert | |
| 19 January 2024 | Updated alert | |
| You are here | 3 May 2024 | Updated alert |