Accountants warn against ATO’s harsh family trust approach

Major accounting group, CPA Australia has warned that family trust changes being implemented by the Australian Taxation Office (ATO) are placing considerable pressure on the accounting profession leading to increased litigation risk for historical liabilities.

As well, CPA Australia has told Treasury that the absence of a statutory limitation period means claims can arise many years after the original event, and professional indemnity insurers may reject those claims.

“This situation discourages professionals from preparing income tax returns or offering tax advice, particularly in areas involving discretionary trusts, potentially reducing the availability of advisory services,” the submission to Treasury’s consultation on Amendments to the Family Trust Election provisions said.

CPA Australia said that the trust loss provisions had been enacted in 1995 and had introduced Family Trust Elections (FTEs) and Interposed Entity Elections to provide exceptions for trusts managed for the benefit of a family group.

It noted that the Family Trust Distributions Tax (FTDT) was introduced as an anti-avoidance measure, applying to distributions made outside the defined ‘family group’.

“Importantly, the Government’s original expectation was that FTDT would be “optional” and would “never need to be paid”, serving primarily as a deterrent against tax avoidance,” it said. “Despite this original intent, the Australian Taxation Office has identified a number of issues with the provisions and has made it clear that it is bound to apply the law as written, resulting in significant FTDT liabilities being imposed (or being at risk of being imposed) on taxpayers.”

The CPA Australia submission said the accounting body believed the FTDT should serve its original purpose as a deterrent for clear and unintended breaches, but the legislative framework should provide appropriate options for inadvertent errors.

Commenting on the submission, CPA Australia Tax Lead, Jenny Wong said Australian family businesses ae facing significant financial distress due to the current application of the tax laws affecting family trust.

“What was intended as a deterrent is now imposing disproportionately harsh penalties with unintended consequences,” she said.

“The provisions are incredibly complex, leading to historical misunderstandings and the imposition of FTDT due to technical deficiencies, even when distributions remain within the “economic” family group with no mischief involved.”

“Many taxpayers are struggling to evidence valid Family Trust Elections made decades ago, and there are limited opportunities to alter these elections even for genuine mistakes or unforeseen events,” Wong said. “This leads to inadvertent breaches and ongoing liabilities, often for distributions that remain within the ‘economic’ family group with no mischievous intent.”