Advanced Revenue law

Question 2:

Sub-question 2.1: Discretionary trading trust for protecting assets

With the increasing of personal wealth, people are inclined to take measures to protect their assets and avoid financial risks. The risks of personal assets are mainly from trade creditors, Australian Securities and Investments Commission (ASIC) and ATO if the business is failed (Lambourne, 2008). Actually, these risks will be highly decreased when people running business or incurring debts without using their own name. Discretionary trust, also called family trust in Australia, is recognized as one effective and flexible method to protect personal assets, because it confers wide power on the trustees to own the assets. Discretionary trading trust is widely used by small or medium size business owners for assets protection consideration.

Once the assets are transferred into a discretionary trust, the third part will hold the title. In essence, creditors can not collect money from the trust because beneficiaries have no property rights to anything of the discretionary trust. The discretionary beneficiaries have no assets or liabilities related with the trust. If the beneficiary of the discretionary trust is bankrupted or sued personally, the assets in the trust is protected because these assets are not considered as the property of the beneficiary. Moreover, if the trustee is personally sued, the beneficiaries of the discretionary trust do not have obligations to make up shortfalls. It means, if the trust are in trouble the beneficiaries are protected, and if the beneficiaries are in trouble the trust assets are still preserved. It only gives trustees discretion to seek appropriate benefits for the beneficiaries. Comparing with unit trusts or companies, discretionary trusts may be more effective in protecting assets. When one shareholder is bankrupted or sued personally, his/her assets of the unit trusts or companies can not be protected. Personal assets and personal shares in a company are highly risk of loss by bankruptcy and creditors. However, the whole assets in discretionary trusts can be preserved whether beneficiaries are sued or not.

As well, the trustee should operate the trust under the guidelines and comply with legal requirements, such as Insolvency Act 2006. If one beneficiary was sued, the trustee has rights to not distribute income gain to that beneficiary. That is to say, Discretionary trading trust allows the beneficiary’s assets from divorce or bankruptcy.

Sub-question 2.2: The way to protect assets

Firstly, William Lee is suggested to register a road and bridge construction company with his name, then form a family trust (discretionary trust) for which his registered company is the trustee. The personal assets should be transferred into the trust instead of the company. The company as the trustee of Family trust will do business and so this trust will be a trading trust as well. Therefore, the company owns the ability to control and operate the assets of the trust. The trustee of trust is on behalf the beneficiaries to monitor the trust’s activities and the trustee can determine which beneficiaries can benefit from the trust gains. After that, the assets of William Lee will be comparatively safe. This is because only the trustee, as the relevant legal entity, is liable for the debts and transactions. If anything goes wrong, such as credits or lawsuits, the trustee will be sued other than the beneficiaries (Adkisson & Riser, 2004). As well, since the trustee is not the ownership of the trust, the assets of the trust can not be reached even if the trustee is sued. In additions, if anyone in his family is in trouble of credit or lawsuit, their trust assets is also protected.

Sub-question 2.3: Tax benefits in establishing a trust

Except for assets protection, paying less tax by income splitting is another benefit to establish a trust. William’s wife has no work and his three children have no income in University as well. As discussed before, the trustee own powers to distribute the trust gains to the beneficiaries. Using the discretionary trading trust, William can apportion the capital gain to his wife and children on the lowest marginal rate of tax with a most effective manner. Actually, this effective tax planning measure is accepted under Income Tax Ruling 276. This means income can be directly distribute to the members with lower tax rates. A trust does not have to pay tax on income distributed to the beneficiaries, while the rest income in the trust has to be taxed. The beneficiaries will pay tax individually on the incomes from the trust. That is to say, the income splitting will push William’s family adequately utilize the tax-free threshold. The tax rates of 2011/12 are as follow:

Taxable income

Tax on this income

0 – $6,000

Nil

$6,001 – $37,000

15c for each $1 over $6,000

$37,001 – $80,000

$4,650 plus 30c for each $1 over $37,000

$80,001 – $180,000

$17,550 plus 37c for each $1 over $80,000

$180,001 and over

$54,550 plus 45c for each $1 over $180,000

* The above rates do not include the Medicare levy of 1.5%. (ATO, 2011.)

Suppose that William does not establish the trust, and his income is $ 70,000 in this financial year. In addition, his wife and his three children get no income in his year. Thus, he should pay tax for all income and capital gains in his name. According to the above tax rate, in the 2010-2011 financial income years, the income tax that he has to pay is: (70,000-37,000) 30%+ $4,650 = $ 14,550

If William establishes the trust, and he, his wife and his three children are all beneficiaries of this trust. His three children are supposed to be above 18 years old since they had attended university. He can split the income of trust to his wife and three children. Without considering the discount on some capital gain, one reasonable income distribution plan as an example is listed as follow.

Taxpayer

William Lee

His wife

Child 1

Child 2

Child 3

Income

10,000

30,000

10,000

10,000

10,000

Income Tax

600

3,600

600

600

600

In this condition, the five members of the family will pay tax on the income of the trust. The totally income of the family is 600 + 3,600 + 600 +600 +600 = $ 6,000.

By using a trust the income tax of William’s family will fall from $ 14,550 to $ 6,000, a saving of $ 8,550. Therefore, it proves that establishing a trust will create many tax benefits.

Sub-question 2.4: The advantage in establishing a service trust and the trading trust

Service Trust is aimed to provide services to a business entity in a professional practice environment. Usually, service trust is used to transfer income from professionals to others with lower tax rates. Moreover, a trading trust that carried on a business can empower trustees to carry on a business. The trust is striving for the benefits of beneficiaries instead of the trustees. Usually, the trustee will appoint a company in a trading trust structure for the sake of self-benefits.

In general, Service Trust as well as trading trust is used because of four main advantages:

  • Asset Protection- Service Trust arrangement will effectively transfer assets outside a business entity, so assets will be comparatively safe by keep away litigation and other liability claims. As well, trading trust can benefit family members without losing assets controlling. This trust structure ‘effectively creates an invisible or indeterminate beneficial owner or category of owners’, mostly are family members (CCH, 2009).
  • Income streaming – service trust will make it easy to split income to stakeholders. The trustee distributes the income and this form part of beneficiaries’ personal income. In fact, the income streaming will directly decrease the income tax of beneficiaries.
  • Regulation – the service trust’s regulation is far less than that of a company
  • Ease of succession – the assets can be transferred to one’s spouse or offspring easily. As well, it can maintain privacy in passing assets from one generation to another generation. 

 

Question 6:

Sub-question 6.1: The ATO’s rights under s 263 and 264, ITAA 36

Generally, Section 263 and 264 are together aimed to authorize the Commissioner with powers governing obtaining of information of persons. Section 263 is the primary provision that allows ATO to access all premises (buildings, places, and taxpayer records) and make copies for any of the purposes of the act. The Commissioner, or an officer, could require the occupier of the building or place to provide reasonable facilities and assistance for the effective exercise of powers under s 263(3). That is to say, the Commissioner can rend reasonable assistance, such as the manager, to help them in effecting access. The Officer’s powers are limited to some extent because they must be authorized by the commissioner in writing (see s. 263(2)). Complemented with section 162, section 263 also requires persons to lodge a tax return or information about their financial affairs. Virtually, the Commissioner has unlimited power to access to any place or thing for the purpose of the Act.

Moreover, section 264 authorises Australian Tax Office (ATO) with the power by two provisions. One requires persons to furnish information, and the other compels persons to provide evidence or produce any books or documents to ATO, either verbally or in writing. This information gathering power is broader than the power granted by Section 263 because s 264 can be directed to persons not only to taxpayers at issue. There is no doubt that the ATO has extensive information gathering powers. In this case, there is a statutory duty for Mr Bond to furnish information to ATO. ATO own a notice which gives them the right to access the information. Actually, this notice can be served irrespective of whether a notice of assessment has been issued to the recipient (Barkoczy, 1999), and ATO can make some preliminary enquiries without a specific matter in mind. There are two ways for ATO to access documents from the external professional accounts offices. One way is to enter the accountants’ premises for inspecting documents which related with certain clients. The other way is to issue a warrant from AFP to search the premises and seize documents.

Actually, Bond has no rights to incorporate with ATO or stop the ATO form accessing information under section 263 and 264. Moreover, as an account, I can be rented to give information and evidences to assist them with effecting assessment. ATO must be free to inspect the contents of the computers to see whether they are related to income for assessment of income tax. As long as the Commissioner exercises the power under the Act, Mr Bond is obligated to provide documents to ATO for the sake of tax purposes under section 263 and section 264.

Sub-question 6.2: The rights of the Accountant

Sections 263 and 264 are criticized that these provisions rarely concerns about the taxpayers’ rights. Nevertheless, there are some rights for Accountant in protecting him and his client in facing with ATO. In the Access and Information Gathering Manual, the ATO accepts the Accountant’s Concession which places the accountant-client relationship into protection to some extent. ATO officers permit the legal position of Accountant, and need not to access some documents that covered the accountants’ advice (Brown, 2004). This administrative concession is considered as a safe harbour mechanism because it protects some documents with Accountant’s Concession from accessing by ATO. Mr Bond is an ordinary client of my accounting practice and I am not an internal person of his company. Therefore, the legal advices to Mr Bond are prepared by an external professional accounting advisor who is independent of him.

Generally, there are three types of documents indentified in the guidelines (ATO, 2010):

  • Source documents (records of transactions)
  • Restricted source documents (advice documents prepared by external professional accountants with the purpose of advising clients on taxation)
  • Non-source documents (other advice documents)

According to the guidelines, the ATO is freely access to all source documents, but they can not directly inspect restricted source documents and not source documents for the sake of the Accountant’s concession. If the offices seek to access to restricted source documents, the taxpayer and professional accounting advisor is allowed to consult a third part for legal advices. In the Act, The Taxation Office does not directly own the power to inspect all documents from Tax Agents and accountants who provide taxation advice to their clients. Hence, the independent accountant in the tax agent can not be compelled to provide all documents relating to his clients.

Nevertheless, it is imperative for the accountant to ‘explain to the client the operation of the client safe harbours from administrative penalties (for false or misleading statements and late lodgement) to comply with this principle of the code’ (Gaal, 2010). Although the Accountants would require the ATO not to access all documents by the accountant’s concession, it is the obligations for accountants to ensure that there are no tax problems for their clients.

Sub-question 6.3: The rights of taxpayer

Mr Bond, as a taxpayer, can claim legal professional privilege (LPP) for documents received from lawyers, so the ATO could not access them unless permitted by the Court at a later date. If necessary, the taxpayer can resort to judge for an injunction with the purpose of protecting the legal professional privilege documents from inspecting by ATO. Actually, ATO accepts the position of legal professional privilege although it may hinder the investigations by ATO such as the Daniels v ACCC (‘Daniels’) corporation case. In the Access and Information Gathering Manual (ATO, 2001), ATO announced that the Tax office policy on accessing and information gathering will not override legal professional privilege. The taxpayer can require a search delayed for a short time so that he can resort to legal advice. As well, he has the power to arrange a reasonable time to collect any information or documents that is required.

Without authorisation signed by the Commissioner, the taxpayer can refuse to give information or documents to the investigation. Moreover, in the Guidelines to Accessing Professional Accounting Advisor’ Paper (ATO, 2010), the ATO strive to give the accountant- client relationship the similar position as the lawyer-client relationship. When ATO inspecting documents and information with his information gathering powers, in usual circumstances, he accepts some class of documents consulted with their professional accounting advisors. This approach is also called the Accountant’s Concession in Access to Professional Accounting Advisor’s Papers. As discussed in the above section, the taxpayers can claim Accountant’s Concession in order to protect their documents from entirely accessing by ATO.

Therefore, if Mr Bond claims legal professional privilege or Accountant’s Concession for the documents in my possession, ATO will not access all of the information in the computer. If there are still some disputations in these documents, Mr Bond can resort to Court to an injunction under the Private Act. In addition, he can ask for an interview if ATO wants to get his information or documents. It is the right for taxpayer to have an advisor, such as lawyer, accountant or tax-agent, present at any interview with ATO. He can require a search delayed for a short time and to attend an interview with some legal advices.

 

Question 8:

Sub-question 8.1: Whether Brigitte and Roger are Australian tax residents

In general, Australian Tax Residents will pay tax on worldwide income, no matter whether it arises in Australia or abroad. However, the non-residents are only taxed their income which sourced or derived in Australia. Therefore, it is very significant for a taxpayer to recognize his taxation category for the sake of differences treatments between resident taxpayers with non-resident taxpayers. According to the subsection 6 of ITAA 1936, there are four main tests for residency of Australia, which are:

  • ‘Resides’ in Australia (the ‘resides’ test)
  • Own their domicile in Australia, unless the Commissioner approbates their overseas permanent place of abode (the ‘domicile’ test)
  • Continuously or intermittently been in Australia for more than 183 days in a financial years, unless the commissioner approbates their overseas place (the ‘183 days’ test)
  • Or, participate in the superannuation scheme under the Superannuation Act 1990, or participate in some federal government schemes (the superannuation test)

An individual will be considered as Australian tax resident if any of above tests is satisfied. An individual may be an Australian resident under one or more of four tests in ITAA 1936 s 6(1) (CCH Australia Limited, 2011). In addition, a non-resident is defined as a person who does not meet any of the four criteria for residency set out above (see subsection 6). Therefore, in order to indentify Brigitte and Roger’s tax role, it is better to test them on these categories.

(1) The ‘resides’ test

According to Levene v CIR [1928] AC 217, the word ‘resides’ defines as ‘to dwell permanently or for considerable time, to live in or at a particular place’ (Barkoczy etc, 2010). It seems Brigitte and Roger did not live in Australia for those two income years. In essence, they are considered to not ‘reside’ in Australia since that:

  • Their extent of person’s family or business ties with Australia is not very extensive, because they only been Australia once per year.
  • Their social and living arraignments are mostly in US of those income years.
  • Their economic ties are in outsides of Australia
  • They intend to live for a permanent period (more than three years) in US and establish their home in there.

Actually, they did not intend to maintain their residence status since they had planned to live outside of Australia for more than three years. Therefore, the ‘resides’ test is not satisfied which means Brigitte and Roger should be Australian tax non-residences in that two income years.

(2) The ‘domicile’ test

Although Roger and Brigitte own their house in Sydney, it is noticeable that their permanent place of abode is in New York. Roger and Brigitte brought a small apartment on Fifth Avenue in New York. It seems that Roger and Brigitte has an intention to reside in US with an indefinite period (at least for 3 years) since they did not consider an early return to Australia likely. It is the person’s intention, not the length of stay, determines whether he/she reside in a place of domicile (Cassidy, 2007). In addition, their permanent place of abode is in New York. They only leased their house other than selling their house in Sydney. However, their place of abode in Sydney is just used for temporarily lived where enable them to return at short notice. Under Taxation Ruling IT 2650, Roger and Brigitte own a domicile in Australia so the ‘domicile’ test is not satisfied.

(3) The ‘183 days’ test

In detail, according to the above characters of Australia tax residents, they actually are not continuously or intermittently been Australia more than a half year (183 days) during the last income financial years (ATO, n.d). As we can find, Roger and Brigitte returned to Australia only for a week once a year to visit their children and Roger’s mother. The rest of their time is totally spent in US. It is obvious that the visiting their family is not a regular and continuous activity in these related years. As a result, the ‘183 day’ test of them is not satisfied.

(4) The superannuation test

This test is the third statutory test which aimed to indentify Australian tax residents if they are a member of the superannuation scheme under superannuation Act 1990 or legal employees under Superannuation Act 1967 (ATO, n.d.). In respect to Roger and Brigitte, they do not participate in such schemes, so they are not satisfied with the superannuation test.

In summary, through these four tests, they are not considered as Australian tax residents for taxation purposes during the period of 1 July 2009 to 30 June 2011.

Sub-question 8.2: The source of the income derived by them both

The assessment of non-resident’s income is the gross income directly or indirectly derived from all sources in Australia (see section 25, ITAA 36). The non-resident individuals have a slightly different income tax rates compared with residents. They are not entitled to the tax-free threshold (see figure 2) and to pay the Medicare levy. As well, the non-residents can not claim for certain tax offsets and tax credits which are available to residents. The bank will withhold tax from your Australian Bank account for interest payments with a rate of 10%. People can easily find that the income tax rate of non-residents is different with that of residents.

Taxable income

Tax on this income

0 – $37,000

29c for each $1

$37,001 – $80,000

$10,730 plus 30c for each $1 over $37,000

$80,001 – $180,000

$23,630 plus 37c for each $1 over $80,000

$180,001 and over

$60,630 plus 45c for each $1 over $180,000

Figure 2 – Tax rates 2010-11 of non-residents (ATO, 2010)

For Brigitte and Roger, there are five main types of incomes in the last two income years, which are (1) Roger’s annual salary income of $ 200,000; (2) the interest on Roger’s overseas bank account; (3) Brigitte’s salary of working on the television drama; (4) Brigitte’s other working salary in other roles; (5) their common monthly income of real estate rent of $ 2,000. In the case, there are no other incomes made by them. Having a look at the source of these incomes derived by them both, they will get clear which income should be taxable in the last two income years.

  • The income of monthly rent of his house in Sydney is sourced in Australia. It is easily to understand that the rental income from Australian real estate owned by a non-resident individual is considered to own an Australia source. Hence, this rent income should be taxable in Australia. The bank will withhold the interest income tax in advance under Section 128 B.
  • In respect to Roger’s and Brigitte’s salary (income type (1), (3) and (4)), these incomes are earned from the services which are performed in US, other than Australia. Their Salary is sourced from USA because “Employment income is sourced where the services are performed” (Deloitte, 2004). Although their contracts are made by an Australia Company in Melbourne, their working places are US and the working services are performed in there. Accordingly, as non-residents they need not to pay tax on their salary income to Australia. 
  • The interest income in Roger’s overseas bank account is also not sourced from Australian. This income should not be included in their Australian income tax return. Since the interest is not produced in Australia, they need not to pay tax to ATO for it. However, any interest income from their Australia bank account will be taxable although they are living overseas. 

As non-residents for purposes, Brigitte and Roger are liable to pay tax on their income in Australia. In general, non-residents would not be taxed on any income with an overseas source, while the rental income or capital gains in Australia should be taxable (BAN TACS, 2010). In sum, they have to pay tax on the rental income of $ 2000 with a non-resident tax rate, and they do not have to pay tax for their overseas salary because these incomes are not sourced from Australia. In addition, they will be protected from double taxation since non-residents can claim exemptions under ‘double taxation agreement’ or ’92-day’ rule. If they can establish their non-resident status during the overseas periods, Brigitte and Roger’s Australian tax exposure can be minimized.

 

Reference list

Lambourne, P. (2008). Asset protection planning and discretionary trusts. Taxation in Australia, 42(8), 485-488.

Adkisson, J. & Riser, C. (2004). Asset Protection: Concepts and Strategies for Protecting Your Wealth. New York: McGraw-Hill Companies.

ATO. (n.d.). Individual income tax rates. Available at: http://www.ato.gov.au/ Accessed on: 2011/11/24.

Barkoczy, S. (1999). The Nature of An Income Tax Assessment. Journal of Australian, 2(1), 36-47.

Australian Taxation Office (n.d.), Access and Information Gathering Manual. Available at: http://www.ato.gov.au/ Accessed on: 2011/11/23.

Australian Taxation Office (n.d.), Guidelines to Accessing Professional Accounting Advisors’ Papers. Available at: http://www.ato.gov.au/ Accessed on: 2011/11/26.

Barkoczy, S. & Rider, C. & Baring, J. & Bellamy, N. (2004). Australian tax casebook. Kingsgrove: McPherson’s Printing Group.

Cassidy, J. (2007). Concise Income Tax. Leichhardt: The Federation Press.

ATO. (2010). Tax rates 2010-11 for non-residents. Aavailable at: http://www.ato.gov.au/ Accessed on: 2011-11-27.

CCH. (2009). Australian master accountants guide 2008/09. Kingsgrove: McPherson’s printing Group.

Brown, R. (2004). A history of Accounting and Accountants. New York: Cosimo Inc.

ATO. (2010). Guidelines to Accessing Professional Accounting Advisor’ Paper. Available at: http://www.ato.gov.au/ Accessed on: 2011-11-19

ATO. (n.d.) Residency- the 183 day test. Available at: http://www.ato.gov.au/ Accessed on: 2011-11-24

ATO. (2001). Access and Information Gathering Manual. Available at: http://www.ato.gov.au/ Accessed on: 2011-11-28

CCH Australia Limited. (2011). Top 100 tax Q&As 2011. AU: McPherson’s printing Group.

Gaal, J. (2010). Tax Agents Manual. Kingsgrove: McPherson’s Printing Group.

Deloitte. (2004). Taxation of Australian nationals working overseas.  Available at: http://ias.deloitte.com.au/ Accessed on: 2011-11-19.

BAN TACS Accountants Pty Ltd. (2010). Newsflash Booklet Overseas.  Avaiable at: http://www.bantacs.com.au/ Accessed on: 2011-11-30.

原文链接:Advanced Taxation Law