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Income Tax Part IVA Planning Stuff Rulings

Part IVA and partnerships of discretionary trusts

The most annoying habit of the Commissioner is to let everyone do something for years and then to finally try to close it down. Take the Commissioner’s announcement on 16 December 2009 that an unpaid present entitlement from a trust to a corporate beneficiary is a loan to which Division 7A applies. So 12 years of saying every trust should have a corporate beneficiary and 12 years of auditing these structures saying nothing is overturned overnight… Well it is about to happen again I fear…

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Thirty years ago, every accounting and legal partnership was a partnership of individuals. But this has changed to the point where the most common structure today is a partnership of discretionary trust rather than individuals. Actually these partnerships of discretionary trusts are becoming old hat as everyone moves to a company where the shareholders are discretionary trusts.

But in Taxpayer Alert TA 2013/3, the Commissioner raises concerns about the restructure from a partnership of individuals to a partnership of discretionary trusts. He does his norm “sham” argument but it is obvious he thinks these restructures may be schemes to which Part IVA might apply. The Commissioner states that professional practices may operate as a partnership of discretionary trusts, but may not be used for the to avoid tax obligation through income splitting.

This is only a Taxpayer Alert. And the Commissioner is very clear he is only considering tax benefits arising in the 2013/14 and later income years. So if you undertook a restructure like this before 1 July 2013 it appears it is safe.

But it starts to look like December 2009…

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Income Tax Part IVA Planning Stuff

Part IVA applies to small businesses

I don’t get that so many small business advisors think Part IVA can not apply to their clients. Yes it does not happen often but if it does your business is on the line. And here is where it is most likely to apply…

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You just read my post below and want to inject income into a loss trust. So a professional working though a company that has multiple clients, business premises, works for results and employs a second staff member (a PSB 100% sure) decides to inject income into a loss trust. To do this the company makes the trust its manager and pays the trust a management fee. This management fee would have been paid out to the professional otherwise as a salary but now it goes into the trust to use up the losses.

The Commissioner has made it clear that alienating personal services income, even if you managed to avoid the PSI rules as your are a personal services business, can still be subject to Part IVA (see NAT8028 factsheet). Sending the personal service income to a trust with losses so that no tax is payable is more likely to be subject to Part IVA than just leaving it in the company to be taxed at 30% as this fact sheet states. The scheme has one extra step (not leaving it in the company but paying to the trust as a management fee) and the tax benefit is larger (not paying 30% tax on the income but paying no tax on it at all.

If you advice ignores that the Commissioner has already got a position on Part IVA and personal services income in entities, you are not giving good advice.

I should mention that my former boss at KPMG, Chris Jordan, is more likely to go after the big end of town rather than the small end… but is that an excuse for bad advice?