Disclosure of business tax debts
The ATO is in the process of writing to taxpayers
that may be eligible to have their tax debts disclosed
to credit reporting bureaus (‘CRBs’).
The ATO can potentially report outstanding tax
debts to a CRB where the following criteria are
satisfied:
- The taxpayer has an Australian business number and is not an excluded entity;
- The taxpayer has one or more tax debts and at least $100,000 is overdue by more than 90 days;
- The taxpayer is not engaging with the ATO to manage their tax debt; and
- The taxpayer does not have an active complaint with the Inspector-General of Taxation about the ATO’s intent to report its tax debt information
Excluded entities are a deductible gift recipient,
a complying superannuation fund, a registered
charity and a government entity.
The purpose of this letter from the ATO is to raise
awareness of the actions that the ATO can now
take under the Disclosure of Business Tax Debts
measure.
The letter will be sent to all taxpayers with business
tax debts that currently meet the criteria (discussed
above) for disclosure.
This letter from the ATO provides business
taxpayers with information on how to effectively
engage with the ATO to manage their tax debt.
Taxpayers can avoid disclosure to a CRB by making
payment in full or negotiating a payment plan.
If an eligible taxpayer does not take steps to actively
manage their debt, they will remain eligible for
disclosure.
Before the ATO takes any final action to disclose
a tax debt, it will issue the taxpayer with a formal
Intent to Disclose Notice.
If a taxpayer receives an Intent Notice, asking them
to 'Act now or your tax debt will be reported to credit
reporting bureaus', the taxpayer or their tax agent
must contact the ATO within 28 days of receiving
the notice to avoid the debt being reported.
It is crucial for taxpayers to engage with the ATO
early before their debts become unmanageable.
Editor: If the ATO reports a taxpayer that has an
outstanding debt to a CRB, this can have a negative
impact on the client’s credit rating.
This in turn may affect the client’s ability to borrow
from banks and other financial institutions
High Court rejects attempt to disclaim interest in trust distribution
The High Court has rejected a taxpayer’s attempt
to disclaim an interest in trust income that arose
as a result of a default beneficiary clause being
triggered.
Facts
The taxpayer, Ms Natalie Carter, was one of
five default beneficiaries of the Whitby Trust, a
discretionary trust.
For the 2014 income year the trustee had failed
to appoint or accumulate any of the income of the
Trust.
The Trust Deed contained a default beneficiary
clause, nominating Ms Carter and four other
beneficiaries, as the default beneficiaries, in the
event that the trustee had failed to allocate trust
income for the benefit of beneficiaries by 30 June
of a particular year.
The ATO issued each of Ms Carter and the four
other default beneficiaries with an assessment for
one-fifth of the income of the Whitby Trust for the
2014 income year on October 2015.
This was done on the basis that they were “presently
entitled” to that income within the meaning of
S.97(1) of the Income Tax Assessment Act 1936.
An initial unsuccessful attempt was made by the
default beneficiaries to disclaim their entitlement
to default distributions in November 2015.
A further attempt by the default beneficiaries to
disclaim their interest in trust income for the 2014
income year was made in September 2016 in what
was referred to as the “Third Disclaimers”.
The Administrative Appeals Tribunal held that the
Third Disclaimers were ineffective whereas the Full
Federal Court found in the taxpayers’ favour that
they were effective.
The High Court was then asked to consider the
legal status of the Third Disclaimers.
Decision
It was the unanimous decision of the High Court
that the Third Disclaimers were ineffective.
The High Court carefully analysed the words of
S.97(1).
In particular, the phrase “is presently entitled to a
share of the income of the trust estate” in S.97(1)
is expressed in the present tense.
The plurality found that expression "is directed to
the position existing immediately before the end of
the income year for the stated purpose of identifying
the beneficiaries who are to be assessed with the
income of the trust – namely, those beneficiaries of
the trust who, as well as having an interest in the
income of the trust which is vested both in interest
and in possession, have a present legal right to
demand and receive payment of the income."
The High Court took the view that the question of
the "present entitlement" of a beneficiary to income
of a trust must be tested and examined "at the close
of the taxation year", not some reasonable period
of time after the end of the taxation year.
Accordingly, Ms Carter and the other four
beneficiaries had been appropriately assessed by
the ATO under S.97(1) given their status as default
beneficiaries under the Trust Deed.
For the sake of completeness, the High Court also
rejected the taxpayers’ argument that a beneficiary
of a discretionary trust, with reference to events
that may occur in a “reasonable period” after the
end of an income year, can trigger an event that
would disentitle the beneficiary to a distribution.
Editor: This decision is significant, because it
backs the proposition that disclaimers of trust
income cannot be effective if they occur after the
end of the income year that gave rise to a present
entitlement.
It will be interesting to see in any subsequent
Decision Impact Statement how the ATO intends
to apply the decision in Carter’s case.
As we head towards the end of another income
year, this case serves as a timely reminder to ensure
for discretionary trusts, that steps are taken before
the end of the income year to effectively distribute
trust income.
This is done to avoid the operation of default
beneficiary clauses, or the situation where no
beneficiary is presently entitled to trust income and
the trustee is assessed at the highest marginal rate.
Please Note: Many of the comments in this publication are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstances.