Written by Jerome Tse, King Tan and Melissa Simpson
The start of a new year is often a good time to reflect on the past year and, before things get busier, plan for the upcoming year. We have taken the opportunity over the summer break to reflect on some of the relevant private group and high net wealth family developments in tax law in 2017.
ATO Tax Avoidance Taskforce to target private groups and trusts
The Tax Avoidance Taskforce was established in 2016 to enhance, extend and bolster the ATO's compliance activity efforts by reviewing the Top 1000 public groups and the Top 320 private groups.
During 2017, the ATO continued its focus on private groups with an announcement that the Taskforce would target higher risk trust arrangements in privately owned and wealthy groups. The Taskforce focused on the following risks:
the accurate completion and lodgement of tax returns;
present entitlements of exempt entities;
distributions to superannuation funds; and
inappropriate claiming of capital gains tax concessions by trusts.
Taxpayers in receipt of substantial income who have not filed returns or activity statements and taxpayers with offshore dealings in secrecy or low tax jurisdictions will continue to attract the ATO's attention over the course of 2018.
The Taskforce is working closely with a number of government agencies, including the Australian Federal Police, Australian Securities and Investments Commission (ASIC), Australian Prudential Regulation Authority (APRA) and the Australian Competition and Consumer Commission (ACCC), to pursue cases of tax abuse using trusts and are actively undertaking joint projects to gather intelligence on and deal with specific risks (see also Leaks below).
ATO's Top 320 private groups tax performance program
A Top 320 private groups program was announced under the Tax Avoidance Taskforce in late 2017.Taxpayers that are part of the program have been or will be subjected to 'intensive one-to-one engagement'.
The Top 320 private groups are identified based on the following criteria:
groups with over $350 million turnover, regardless of net asset value;
groups with over $500 million net assets, regardless of turnover;
groups with over $100 million turnover and $250 million net assets; and
market leaders or groups of specific interests.
The intensive engagement seeks to promote the ATO's understanding of the private group and its business, drivers and risk position, and to improve the ATO's risk detection measures. Focus areas include large and unusual transactions, misuse of trusts and lifestyles that do not match after-tax income. Further, after many years of encouraging large businesses to improve their tax governance frameworks, the ATO is now focusing on the governance frameworks of the Top 320 private groups.
Expansion of Top 320 private groups to over 1200 private groups
In addition, the 'intensive one-to-one engagement' under the Top 320 private groups program is expected to roll over to the next 1200 private groups. This is consistent with the ATO's view that review of multinationals has reached a level where resources can now be focussed on private groups and high net wealth families.
ATO continues to tackle issues relevant to the private group and high net wealth sectors in Court
During 2017, we also saw the ATO being willing to tackle issues relevant to private groups and high net wealth families in Court. For example:
Lewski v Commissioner of Taxation  FCAFC 145: This case concerned the interpretation and validity of trust resolutions to distribute trust income. The Full Federal Court of Australia determined that: (i) the taxpayer was not presently entitled to the trust income as at 30 June because the distribution resolution was contingent on events which may or may not take place; (ii) the taxpayer did not validly disclaim her trust entitlements as her agent had knowledge of the distributions and this knowledge could be attributed to the taxpayer; and (iii) where it is open to the Court to adopt two different constructions of a resolution, the construction which preserves the validity of the resolution is preferred.
Sandini Pty Ltd v Commissioner of Taxation  FCA 287: The Federal Court of Australia held that a share transfer made pursuant to a family court order from a corporate trustee controlled by the husband to a corporate trustee controlled by the wife was entitled to the marriage breakdown capital gains tax rollover relief. The Commissioner has appealed this decision.
Spence v Commissioner of Taxation  AATA 307: The Administrative Appeals Tribunal upheld the Commissioner's decision to disallow the taxpayer's claimed deductions due to the taxpayer's failure to produce sufficient evidence to substantiate claimed tax losses available to offset income derived from his share trading business.
Commissioner of Taxation v Miley  FCA 1396: The Federal Court of Australia held that the AAT erred in its decision on the market value of the taxpayer's shares for the purposes of the maximum net asset value test required to be satisfied to access the small business capital gains tax concession.
LDGL v Commissioner of Taxation  AATA 2779: The AAT held that the taxpayer had failed to discharge the burden of proof required of her including her contention that movements in the balances owed by a private company to her did not constitute a loan for Division 7A purposes.
A consistent theme across many AAT decisions involving private groups concerns the burden of proof. In tax disputes, the taxpayer bears the onus of proof and must file adequate evidence that the relevant assessment is not excessive. Determining what evidence is adequate and in what form that evidence should be provided is a highly strategic matter that requires consideration and input from experienced tax litigators.
In recent times, advances in technology and the increasing prominence of 'citizen journalism' have led to large-scale leaks of highly confidential financial information.
The Panama Papers leak in 2016 comprised over 11.5 million leaked documents that detailed the financial and privileged information of more than 214,488 offshore entities. The ATO revealed that it had identified over 800 individual taxpayers in those papers, a substantial figure, with over 100 of those taxpayers linked to an offshore service provider in Hong Kong.
More recently, the Paradise Papers leak in 2017 comprised 13.4 million confidential electronic documents relating to offshore investments. They contain the names of more than 120,000 people and companies.The ATO advised the Senate Economic References Committee in its January 2018 submission that it has since used the Paradise Papers data to develop a master list containing the names of 731 Australian taxpayers and 344 corporate entities, and is sharing that list with the ACIC, AUSTRAC and ASIC. Although not all of the identified taxpayers will necessarily have done the wrong thing, each of them are likely to be the subject of close ATO scrutiny in 2018.
Digitalisation and globalisation are likely to make leaks a more common occurrence. This may be especially so in Australia as a result of reassurances by the Government to examine the scope of additional proposed whistle-blower laws. The ATO has also turned to the internet to gather intelligence given the sheer quantum of publicly available information available online. For example, the ATO has built substantial data analytics capabilities and is using online signals like Facebook posts to cross-check taxpayers' reported income and expensive cars and luxury holidays purchases.
Overall, taxpayers are facing an ever-increasingly well-informed ATO and it is becoming easier for the ATO to monitor private groups and high net wealth families, identify tax risks and combat tax evasion.
What lies ahead in 2018 for private groups and high net wealth families?
Wealthy individuals and private groups continue to be a focus of the Tax Avoidance Taskforce with new initiatives announced in 2017 continuing for the foreseeable future. In particular, the impact of the Tax Avoidance Taskforce will be felt more acutely by the private groups and high net wealth family sector as the "intensive one-to-one engagement" is rolled out beyond the Top 320 private groups to the next 1200 private groups down the list.
Although the ATO will continue to monitor and audit large corporate taxpayers, it is clear that the ATO's focus has turned to the private group and high net wealth sectors, in addition to tackling the "cash economy". The first CRS exchange of information in 2018 may also assist the ATO to identify potential private groups for review.
We are continuing to see a number of private groups and high net wealth family audits involving the full spectrum of taxes administered by the ATO. Tax governance frameworks for larger groups is now a critical focus area.
Where formal disputes arise, pathways to settlement should be considered whilst acknowledging that in some cases, formal litigation is inevitable. The key in these situations is to review historical events for tax risks and mitigate any risks found (including by ensuring that there is supporting material to substantiate the tax position taken). For new transactions, the key is to manage the tax risks appropriately, including through the use of and adherence to a robust tax governance framework.