On 22 November the Australian Taxation Office (ATO) released a Taxpayer Alert looking at professional partnerships in which the partners are, or as the ATO puts it, ‘purport to be’ trusts rather than individuals.
A Taxpayer Alert is the ATO’s way of giving early warning of their next major target for audits. The Alert indicates the ATO will attack these arrangements in three main ways:
- by saying they are simply ineffective and all the trust income should be taxed to the individual professionals;
- finding Capital Gains tax liabilities which they say should have been paid on the implementation of the structure; and
- potentially by applying the general anti-avoidance provisions.
While admitting that professional practices may legitimately operate as a partnership of discretionary trusts, the ATO clearly takes the view that many are misusing the arrangement and are obtaining tax benefits they are not entitled to.
The ATO concerns seem to centre around the individual professionals involved deriving less taxable income than they would as individual partners but without being able to demonstrate the integrity of the structure through which they are operating.
The ATO is currently reviewing these arrangements and conducting examinations in relation to the current financial year. Particular targets for the ATO include:
- inconsistencies in documentation, particularly where the individual professional contracts with third parties while the trustee purports to be the partner;
- the individual is held out to the public as a partner in the partnership;
- there is no employment or other contractual relationship between the individual professional and the partner entity;
- documents purport to give trustees entitlements like annual leave that can only be given to individuals;
- the trustee has neither employees nor significant assets; and
- the trustee makes no capital contribution to the partnership.
As with so many other structuring issues the key thing is always to get the documents correct and to act in accordance with documented agreements. Both are needed, documentation is not enough. It has been noted in the courts that “parties cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognises it as a duck.”
If you have any concerns about the structure and documentation for your professional practice or if you just want to check all your agreements cover all the issues that concern you and are up to date John Tucker can assist to ensure that the ATO does not find unexpected taxation issues for you and your business.
