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The ATO “pushed beyond the limits” on trust taxation, says BDO partner.
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‘Aggressive’ 100A audits prompted calls for guidance
27 May 2022
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“Aggressive” pursuit of “vanilla situations” under 100A by the ATO was the reason why accountants began asking for guidance on trust taxation, said BDO partner Mark Molesworth.
He said the office went after relatively small sums in cases that would now fall into the safe zone under the 100A PCG and taxpayers who fought back – or simply cut a cheque – footed the bill.
“The tax office says the profession was begging for guidance on 100A – that’s only true because the tax office was starting to run some pretty aggressive audits on 100A, and hitting people where the profession was not expecting 100A to be raised,” Mr Molesworth said.
These were “not egregious tax avoidance” but “very vanilla situations”.
“The claims that tax officers were making were extraordinary, in my view, and in those circumstances you can understand why the profession was saying we don’t think 100A applies here but you’re saying it is and you’re aggressively auditing our taxpayers in relation to that,” Mr Molesworth said.
“So can you please explain where you think the boundaries of 100A lie?”
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Mr Molesworth said he had handled 100A cases that were subject to audit, and in all of them the ATO “walked away”.
“But that was after three or more years of hard work including the Tax Office pulling in the taxpayers and all their family for compulsory interviews on oath, which is an extremely unpleasant experience when you’ve got a barrister employed by the Commissioner effectively cross examining you,” Mr Molesworth said.
“We’re talking about relatively unsophisticated people here, not captains of industry. We’re talking about people and their spouses and their children.
“That’s an extreme power – which the Commissioner of Taxation should have – but in my view, should take care when exercising and the use of that power needs to fit the level of the taxpayers’ behaviour.”
His clients cooperated, he said, and the Tax Office blinked.
“The Commissioner gave up, walked away. That’s an extreme exercise of the Commissioner’s really heavy powers on areas where that wasn’t really justified,” Mr Molesworth said.
He said while it was widely known in the profession that the ATO audits were “pushing beyond the limits” of 100A, it was unknown how many taxpayers had simply “decided to cut a cheque to just settle the matter”.
It was now clear his audit cases would fall in the safe “green zone” in the ATO’s colour-coded risk analysis on 100A, and that was “frustrating”.
“When the Tax Office guidance finally came out it was based upon the sweat and tears and the large amounts of money that my clients spent with me to convince the Tax Office that the cases they were going after, at least the ones I had, were not ones that they should be pursuing under 100A,” Mr Molesworth said.
He said the ATO guidance gave examples that typified the level of taxpayer it was targeting and the amounts in most cases were modest.
An example was a situation where mum and dad were on the top marginal rate and distributing $180,000 to newly adult offspring. The tax saving would be approximately $30,000, he said.
But if that were not an option, the alternative in most cases would be distribution to a company and the tax rate would be 30 per cent, so the tax result would be about the same.
“We’re not talking about sheep stations. The numbers I was dealing with in the audits I’ve been working on, it was significantly less than that,” Mr Molesworth said.
He said the number of taxpayers committing egregious avoidance was probably “very small”.
And the 100A guidance still fell short because outside the safe “green zone” or straightforwardly egregious “red zone”, there was a “blue zone” that lacked examples and “that’s where most of the population lives”.
That made advising clients very difficult and ultimately, the ambiguities would probably be resolved by litigation.
He said 100A was an example of a broader problem that was becoming more common in tax law, in that the taxpayer bears the onus of proof.
“It comes back to a question of ordinary family or commercial dealing and tax avoidance purpose. And both of those things are going to be very difficult to deal with in every case,” he said.
“So I think there’s going to be a sense in which the parties are going to be feeling each other out jockeying through litigation or the lead up to litigation.
“The problem with that, philosophically, logically, is [where] you are then required to prove a negative. How do you prove that I did not do this to reduce my tax bill? Or how do I prove that I did not engage in fraud or evasion?
“That positive onus to prove a negative is a real issue. It essentially makes fraud or evasion findings, or in the case of 100A, not an ordinary family or commercial dealing finding, really hard if not functionally impossible to deal with.”
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