Much has been written on the recent release by the Commissioner of the package of draft ruling and determination dealing with the ATO’s long-awaited views on the application of s 100A and repeal of the current administrative treatment of UPEs for Div 7A purposes with proposed effect from 1 July 2022.

I don’t wish to add anything to the commentary surrounding those documents, other than to observe that there has been a torrent of reaction both by professional commentators and practitioners who are faced with, literally, the most important and far-reaching changes to the tax landscape in the last decade.

But what caught my eye and remains an area of serious concern is the Commissioner’s Taxpayer Alert TA 2022/1 (TA), entitled “Parents benefitting from the trust entitlements of their children over 18 years of age”, reported at 2022 WTB 8 [170].

Nor do I want to add anything further about the stance taken by the Commissioner in TA 2022/1. It speaks for itself, but it contains a paragraph which literally blew me away! That paragraph says:

29. Penalties may apply to participants in, and promoters of, this type of arrangement. This includes serious penalties under Subdivision 290-B of Schedule 1 to the Taxation Administration Act 1953 for promoters. Registered tax agents involved in the promotion of this type of arrangement may be referred to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agent Services Act 2009.

Let’s unpack this to show the seriousness of the Commissioner’s attitude to the offending arrangement, which, as the title suggests, deals with present entitlements conferred on adult children as eligible beneficiaries of trust estates that are controlled by parents.

The concern rightfully focuses on the actual entitlement not being paid to the children, but retained by the parents and used for their own purposes.

A conflation of separate issues?

So, let’s go back to the TA; there appears to be a bifurcation between the reference to promoters under the Promoter Penalty (PP) provisions in the tax administration law, and tax agents under the Tax Agent Services Act 2009 (TASA), but there also appears to be a conflation between the two concepts when the Commissioner refers to registered tax agents as promoters.  It is this which causes me concern: the possibility that tax agents may be considered as being promoters and are now the target of the Commissioner, who reserves the right to refer a tax agent to the TPB.

The TPB issues

For tax agents, providing advice that relates to advising an entity about liabilities, obligations or entitlements of the entity or another entity that arise, or could arise, under a taxation law that is to be relied upon by the entity is a tax agent service within the meaning of TASA.

The Code of Professional Conduct applies to a registered tax agent, and a tax agent must ensure that the tax agent service that is provided is provided competently.

For example, a tax agent who is found to be involved in the arrangement referred to above could conceivably be alleged of having breached the following code items:

1. You must act honestly and with integrity.
2. You must act lawfully in the best interests of your client.
3. You must ensure that a tax agent service that you provide, or that is provided on your behalf, is provided competently.
4. You must take reasonable care to ensure that taxation laws are applied correctly to the circumstances in relation to which you are providing advice to a client.
5. You must advise your client of the client’s rights and obligations under the taxation laws that are materially related to the tax agent services you provide.

Needless to say, after a “please explain” from the TPB, there is a distinct possibility that it could then devolve into an investigation and, ultimately, disciplinary action being imposed on the tax agent for breaches of the Code of Conduct.

The Promoter Penalty issues

The PP provisions in the tax administration law referred to in the TA are succinct, but very broadly drafted.

In order to enliven the PP provisions, there needs to be a “promoter” and a “tax exploitation scheme” (TES).

Putting to one side the possibility that a tax agent could arguably be a promoter, the question is whether there is a TES that arises from the arrangement identified above.

A TES is a scheme that has been implemented, and it is reasonable to conclude that the promoter carried out the scheme with the sole or dominant purpose of getting a scheme benefit, and it is not reasonably arguable that the scheme benefit is available at law.

This is a very much generalised description about the operation of the PP provisions, but you get the gist. If you get a financial benefit because you have promoted a scheme that is not reasonably arguable, the PP rules arguably apply to you as a promoter.

The PP provisions also compel the Federal Court to impose serious financial penalties that reflect the community’s attitude towards the egregious conduct of promoters, who cause financial difficulties for unsuspecting taxpayers that have been duped into a “tax-effective” scheme.  The argument will then be raised that advisers who advise on tax planning arrangements, even those who advise favourably on a scheme later found to be a TES, won’t be considered as being a promoter, and are not at risk of a civil penalty to the extent that they have merely provided independent, objective advice to a client.  However, if the Commissioner doesn’t accept this argument, that does not prevent the Commissioner from referring the matter for prosecution.

Regardless though, it must now be implied from the TA that the giving of advice to trustees about trust entitlements that are tax effective will be open to the interpretation that such advice cannot be proper advice and therefore fails the objectivity test.

So how does this affect a tax agent?

Many accountants that I deal with on a regular basis are invariably challenged by trustee controllers to determine the annual trust distribution that includes adult children beneficiaries to take advantage of the arbitrage between the marginal rates of tax that apply to differing individual income levels.

There’s no rocket science here, and this is precisely the conduct that the Commissioner is targeting in the TA.

So, the typical agent that might have many trust clients in its practice, might have to deal with each such enquiry separately, advise a client and act on instructions. But looked at holistically, a tax agent engaging in such repetitive action across hundreds of firm clients invites the proposition that they have somehow become a promoter of a TES.

Although treating the matter as one worthy of being brought before the Court might conceivably be an overreaction, in most cases, a referral by the Commissioner to the TPB for investigation is arguably worse.  One can only imagine a situation where hundreds of clients’ private information is provided to the TPB under a statutory notice for the production of documents to be pored over by investigators for evidence of a breach of the Code of Conduct or that the tax agent is not fit and proper to maintain registration as a tax agent.

These really are concerning times in so many different ways, but the last thing a tax agent needs is to invite ATO and TPB scrutiny because of advising on the tax effect of trust distributions to eligible beneficiaries, so that the trustee can subsequently exercise its discretion to effect the conferral of the entitlements as advised by the agent.

Does the TA together with the Commissioner’s finally published views on s 100A spell the end of family trusts that conduct active or passive enterprises? The answer has to be yes – to a degree, and that would only support the anecdotal evidence that trusts have been established solely for tax-minimisation purposes.

But insofar as the agent is concerned, the Commissioner’s threat of referring the matter to the TPB (or to the DPP for prosecution) suggests that it’d be a brave or foolhardy tax agent who continues on advising and being a party to effecting tax-effective trust distributions for clients in much the same way as has occurred regularly in the past.

Unfortunately, many tax agents will err on the side of caution and now refuse to provide such advice, which now causes the tax agent to be in breach of the Code of Conduct by failing to provide a competent tax agent service!

A refusal by tax agents to properly provide tax agent services competently will also have the deleterious effect of compromising client relationships, losing clients and the goodwill of accounting practices being adversely affected.

Nothing good will come from this.

Final observations

The TA was released on 23 February 2022 together with Draft Taxation Ruling TR 2022/D1, Draft PCG 2022/D1 and Draft Taxation Determination 2022/D1.  However, the latter documents are subject to a public consultation before being finalised, but not the TA.  It is a final document in its own right.

Despite being some weeks old now, there doesn’t appear to be much public discussion about this part of the TA which is surprising.  There should be a deeper conversation with the Commissioner about his views on tax agents and the PP rules, and there should be guidance provided in the form of clear examples of what constitutes conduct by a tax agent that will raise the Commissioner’s ire.

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