Planning firm owners face tax slug
Many financial planning firm owners could be forced to pay large amounts of extra income tax if the Australian Taxation Office (ATO) goes ahead with proposed changes to the treatment of certain tax strategies adopted by discretionary trusts.
It is understood the ATO plans to release a draft ruling by Christmas outlining plans to target these strategies within the trusts, which include family trusts, the predominant structure by which planning firms are owned and operated.
The draft ruling is the upshot of a recent spate of audits by the ATO on tax planning methods by high-net-worth investors and business owners, including those who use trusts.
Last month the ATO convened a meeting with leading tax practitioners to discuss changes to how it will treat certain trust distributions to private companies, known as ‘unpaid present entitlements’.
The ATO wants to treat these distributions as a loan in future — a move some tax specialists believe would expose a common tax planning structure that has been in place for 12 years to penalty tax rates.
The meeting took place after the ATO said its audits had revealed a common trend of very large levels of funds being accumulated within trusts, which were being allocated to a private company but not actually paid.
This creates an ‘unpaid present entitlement’, reducing or deferring income tax for the trust because funds can accumulate in the trust and be invested for the benefit of individual beneficiaries.
Andrew O’Bryan, taxation partner at law firm Hall & Wilcox, said a reason trusts ‘distribute to a company’ is to cap the tax rate on trust income to 30 per cent, rather than the 46.5 per cent rate if the income is kept within the trust.
O’Bryan said there would be “significant implications” for financial planners from any ATO changes if they are “running a business through a family trust and have adopted this distributions strategy in the past”.
He told Money Management that a “big issue” is whether the ATO will seek to issue assessments or amended tax assessments for past years, adding there “could well be a lot of financial planners caught up in that”.
“After all, the ATO has said it has already identified $1 billion of unpaid distributions to private companies out of trusts — and that’s only from the audits it has done so far.”
Matt Taylor, associate of buyers consultant Radar Results, said “most (non-aligned) firms are owned within family trusts, and many may need to review their structures post the ATO ruling”.
“It’s probably safe to say a fair number of them would have gone down the path of using the strategy of distributing to companies to minimise their tax.”
Recommended for you
After seven years at the company, Iress’ chief technology officer for wealth management APAC, Anthony Gerrits, has departed as the firm commences a search process to fill the role.
With advice firms thinking about scaling up in 2025, research has detailed the main avenues financial advisers say they have used for successful recruitment.
The board of Insignia Financial has reached a decision regarding the possible acquisition of the firm by US private equity giant Bain Capital.
Six of the seven listed financial advice licensees have reported positive share price growth in 2024, with AMP and Insignia successfully reversing earlier losses.
