Top 5 private group tax developments of 2022

Top 500 & Next 5,000 reviews gather pace

The Australian Taxation Office (ATO) has ramped up its reviews of the Top 500 and Next 5,000 largest privately owned groups in Australia. Both programs involve tailored one-to-one-engagements to build a comprehensive understanding of a private group’s tax affairs, aiming to detect any historic tax risks and increase forward-looking compliance. It is not uncommon for these reviews to result in tax audits or to result in a voluntary disclosure being made, so care is required in the way a Top 500 or Next 5,000 response is prepared.

One particular theme we have noticed throughout these reviews is an emphasis on tax governance and wealth extraction. The ATO has a strong preference for a written tax governance framework to be implemented regardless of the scale of operations undertaken by the private group.

Find out more by visiting our dedicated Tax Disputes Portal for private groups here.

ATO targets offshore income

Bolstered by its significant information gathering powers, the ATO continued its crackdown on undisclosed offshore income.

More recently, the ATO released a Taxpayer Alert (TA 2021/2). TA 2021/1, details the Commissioner’s concerns in relation to undeclared foreign income being disguised as a gift or loan. The ATO continues to view transactions involving payments by foreign parties to Australian residents with scepticism and we expect that they will persist with targeting and questioning receipts of offshore funds.

The ever-expanding network of tax information exchange agreements (at last count there were 36 agreements with different jurisdictions) and ongoing AUSTRAC reporting mean the likelihood of the ATO obtaining information related to the receipt of offshore funds is high. There are new information gathering tools at the ATO’s disposal, including the common reporting standards, a multilateral instrument to update Australia’s current treaty network, and the ATO’s AI tool dubbed ‘ANGIE’ (Automated Network & Grouping Identification Engine), which increases the likelihood of the receipt of foreign amounts being detected and investigated.

Section 100A and Division 7A Taxation Rulings

The ATO has finalised a suite of guidance documents and a Tax Determination on section 100A and Division 7A.

Section 100A

Section 100A is an integrity measure concerning reimbursement agreements, which operates to deem a beneficiary to have never been presently entitled to the income of the trust for a particular year, resulting in the trustee being assessed at the top marginal tax rate.

The section 100A guidance documents are illustrated by examples grouped around different coloured ‘risk zone’ scenarios identified in the PCG. TR 2022/4 and PCG 2022/2 are intended to apply both before and after the date of issue, although (with some broad exceptions) the ATO will generally not allocate compliance resources to pre-1 July 2014 arrangement.

The guidance accompanies two decisions (Guardian AIT Pty Ltd ATF Australian Investment Trust v Commissioner of Taxation (Guardian); BBlood Enterprises Pty Ltd v Commissioner of Taxation (BBlood)) handed down by the Federal Court in February and October last year which capped off an uncharacteristically busy year for section 100A developments. The Full Federal Court handed down their decision in the Guardian appeal on 24 January 2023 and provided important guidance on the use of reimbursement agreements but left some questions unanswered, particularly in respect of the ‘ordinary family or commercial dealing’ exception to section 100A. A copy of our summary of the judgment can be accessed here.

BBlood is subject to an appeal and is expected to be heard by the Full Federal Court early this year.

In the meantime, arrangements involving family trusts continue to be a focus for the Commissioner, and taxpayers should continue to consider the potential application of section 100A and Part IVA.

Division 7A

Division 7A operates to ensure private companies are not able to make tax-free distributions of profits to shareholders or their associates in the form of payments, loans or forgiven debts.

The Tax Determination regarding Division 7A brings to an end the use of sub-trust investment arrangements created by, and permitted, under PSLA 2010/4. 

To view our summaries of each of the documents, please follow the link to our recent Tax Bulletin.

The guidance documents and the provisions which they concern will remain in focus for the ATO as review and audit activity in respect of relevant arrangements is expected to increase over the foreseeable future.

Minerva Decision

In September 2022, the Federal Court handed down its decision in Minerva Financial Group Pty Ltd v Commissioner of Taxation [2022] FCA 1092. This case concerned the application of the general anti-avoidance regime in Part IVA of the Income Tax Assessment Act 1936 (Cth) in the context of a stapled structure and provides useful guidance as to how the Commissioner of Taxation may look to apply Part IVA to trust structures.

The facts involved a financial services business carried on by a group of companies, and a restructure of that group involving a securitisation trust which was implemented in anticipation of an IPO that was later abandoned. When the IPO was abandoned, the Taxpayer group elected to continue with the restructure and all future securitisation trusts were established with both the old and new structures remaining in operation. The ATO contended that the purpose of the restructure was to subject interest income distributed to non-resident owners to a 10% withholding rate on distribution, rather than to a corporate tax rate of 30% had the business continued to be run in the old structure.

Spanning 161 pages, the judgement handed down by Justice O’Callaghan considered three separate schemes put forward by the ATO which allegedly attracted the application of Part IVA. The first scheme turned on whether the restructure had any non-tax purpose, while the second and third schemes turned on whether the choice not to make cross-staple distributions of interest income had any non-tax purpose, rather than simply distributing it directly to the ultimate owners. The court accepted the Taxpayer’s argument that Part IVA did not apply to the first scheme because it was not entered into or carried out for the dominant purpose of obtaining a tax benefit. However, Justice O’Callaghan accepted that Part IVA applied to the second and third schemes.

The case has been appealed and could have wide-ranging effects on the application of Part IVA to trust structures should the Commissioner be successful.

NSW and Victoria State Tax Changes

The States and Territories have been looking to repair their budgets and pay for the COVID-19 expenditure of the last two years.

In NSW, several significant changes have occurred in 2022, including two new heads of duty: acknowledgements of trusts over dutiable property and changes in the beneficial ownership of dutiable property. The latter includes duty becoming chargeable on some lease arrangements and on the grant of an option to purchase land, whether the option is a call option or combined put and call option. Option arrangements are also a target of newly expanded anti‑avoidance rules. Revenue NSW has now released guidance outlining its interpretation of these new measures.

In Victoria, the SRO issued a much-anticipated draft ruling on the relatively new economic entitlement rules and its concession for fee-for-service arrangements. The rules charge duty on arrangements in which a person becomes entitled to share in profits, proceeds or income of land. Typically, these target profit-sharing for property developments, but have a wide application. Due to their breadth, the SRO’s guidance is that genuine fee arrangements are not caught by the rules. The SRO also issued rulings outlining its view of the availability of the land tax exemption for primary production land.

There have also been a number of developments in Victorian land tax. Of note is the new upfront exemption for renovated principal places of residence (replacing a pay-and-refund model) and new rulings on the exemption for primary production land.

If you have any questions about the information in this article, please contact one of our team members below.