ATO to unleash carnage on family businesses, tax accountants if Anthony Albanese-led ALP wins federal election: Robert Gottliebsen

The ATO is set to unleash carnage on family businesses and tax accountants if Anthony Albanese and the ALP wins the upcoming federal election. Picture: Darren England/AAP Image

Late last year a section of the Australian Taxation Office began planning one of the most vicious attacks on family businesses and tax accountants ever attempted in Australia and the world.

The ATO plan jeopardised the survival of countless thousands of enterprises and made the earlier ATO machine gunning of the gold refining industry and the destruction of large parts of Australia’s research expertise akin to “child’s play”.

Political pressure has caused the attack to be suspended but its planners hope that under any ALP government it will be “all systems go”.

Under the plan, the attack would be launched both on family business via trusts and the accounting firms that advise them. At least 350,000 family enterprises are structured in trusts but the actual total maybe greater.

If the ATO attack was successful, most of the families would be impacted and a significant number would be put out of business.

For the ATO timing close to the election was important. In addition, a “softening up” attack was launched in the High Court which I described under the heading “High Court Ruling to Haunt Morrison Government”.

Accordingly, as the federal election approached the ATO attackers announced a draft set of new tax rules – back dated to 2014 – to reinterpret the 1979 trusts legislation.

The 1979 legislation included a section numbered 100A that states that distributions from trusts to beneficiaries where there is a “reimbursement agreement” in place are deemed not to have been paid to or applied to the benefit of the beneficiary. Instead the trustee is taxed on that income at the top marginal income tax rate.

But there was a vital caveat in 100A. The vulnerable “reimbursement agreements” did not include arrangements or understandings entered into in the course of ordinary family or commercial dealing.

Over the last 43 years countless “family arrangements” have been tested with the ATO and clear precedents on the meaning of the caveat established. In 2014, the ATO issued extra agreement guidance – the first since 1979 – but in the next eight years there was little action or changes by the ATO.

The largest number of family dealings likely to be attacked in the 2022 draft rules involve adult children who have turned 18 and can receive trust distributions that are taxed at normal rates. Families often want those distributions back in the business or to repay past or current outlays for the children such as school fees.

Good tax practitioners always make sure clients understand that entitlements declared to adult children are assets of that adult child. They must to be dealt with by the adult child or as directed by the adult child.

The 2022 draft ruling indicates that many of the previously approved family arrangements involving adult children were likely to be blocked.

But the draft went further. Those accountants who advised on the previously approved but now to be rejected arrangements could be struck off the tax accountants register.

As we have seen in countless other ATO business attacks the ATO dreams up a retrospective tax bill, often without disclosing its methods, and then adds interest and penalties. The huge claimed tax liability is due and payable immediately so threatening the survival of the business.

Banks and creditors soon get a whiff of what is happening and the business is endangered. The taxpayer has no rights, the bill remains in place while the business desperately tries to navigate the fragile appeal system. Justice often requires an expensive Federal or High Court appeal.

The ATO’s carefully structured plan was aimed at using this well tried machine gun technique to unfairly destroy family businesses that use the trust structure.

If the ATO had wanted to be “fair”, after consultation, any new rules would be properly legislated and apply from, say, July 1 2022. There might still be controversy but very few, if any, family enterprises would be destroyed.

The ATO is now reversing its previously stated position and says there will be no retrospectivity. But given previous ATO bad behaviour, they will return to full attack mode if the politicians let them.

The ATO know that by attacking the accounting profession, many accountants will be so scared of annoying the ATO that their advice will be compromised. Accordingly, this ATO attack goes heart of the independent tax advice industry in Australia

In recent days, top ATO executives have been issuing statements to soothe families and tax advisors saying that such a brutal attack was never intended. On a personal integrity basis, I accept their statements as being a truthful portrayal of their view.

But I am sorry, in my view this was a carefully planned and deliberate savage blow to family businesses and tax advisers.

Assistant Treasurer Michael Sukkar put out a statement saying:

“The Morrison Government recognises that trusts are a legitimate and important way for families – particularly those running small businesses – to manage their financial affairs.

“The government welcomes the Australian Taxation Office clarifying yesterday that its draft guidance on section 100A will not apply on a retrospective basis”

“The government will continue to monitor the consultation process closely and will consider any appropriate changes to the law should any adverse retrospective impacts arise.

“The ATO has recently extended the consultation period to 29 April 2022”.

In my words, Sukkar is saying if the ATO does not stick to its word then the Coalition will legislate. But the ALP is no friend of trusts – a fact that was well known by the ATO plotters.

What is desperately needed is legislation to clarify the matter and a taxpayers bill of rights.