Tax expert warns of trusts crackdown

Tax experts warn trust beneficiaries they may be at the mercy of the Tax Office for a few years longer than anticipated, following a recent tribunal ruling.

BDO tax partner Mark Molesworth says a recent case in the Administrative Appeals Tribunal found that “beneficiary” actually means a “potential beneficiary”. That means an applicant could be deemed a beneficiary even if they don’t derive income from a trust.

Now, he says, the ATO has confirmed the income tax amendment period for “potential” beneficiaries is four years, instead of the usual two years.

This, he says, can slip under the radar for many taxpayers.

“This is important, because this defines how long you’re at risk of the ATO coming back and suggesting that you’ve gotten something wrong in your return.”

There is one exception – small business. Molesworth says if the trust is a small business taxpayer as defined by the ATO (earning less than $2 million) then the four year amendment period does not apply.

But, for everyone else, the ATO will be able to review tax returns for two years longer than usual.

While Molesworth says this information on its own is neither positive nor negative, it can be left undiscovered by taxpayers for years before they actually realise what their liabilities are.

Molesworth says the tribunal decision in question – Yazbek and Commissioner of Taxation – highlights a common situation: It’s not necessarily uncommon for someone to be a potential beneficiary and not even know it.

“This is important not only because the ATO may come back three years later and suggest I’ve made a mistake, but it also extends my ability to do so as well.”

“If I as a taxpayer think I’ve made a mistake and have paid too much tax, I can go back and correct that.”

The extended amendment period also means potential action taken by the ATO could be greater given the larger number of years available for scrutiny.

“This isn’t necessarily a good or bad thing, but it’s just something that people need to take into account.”

“It’s a complex issue. So getting advice is probably the best outcome,” he said.

“Taxpayers could avoid the more serious outcomes by disclaiming their interest in the trust of which they are a potential beneficiary.”