Taxpayer Alert TA 2008/15: Profit washing scheme using a trust and a loss entity
Date of issue: 25 June 2008
Status: Current


Description: The alert applies to arrangements having some or all of the following features: | Arrangement 1 | 1. A trading entity (the 'taxpayer') derives income from a business that it carries on. The business is restructured into a hybrid trust (the 'new trust') which then derives the income. 2. The new trust has a number of classes of units. Each class of units has different rights attached. The taxpayer or associates hold units with income, capital and voting rights in the new trust (class A units). Another trust (the promoter trust) holds units in the new trust with income rights only (class B units). 3. The trustee of the new trust has discretion as to the distribution of the income to class A or class B income unit holders. 4. All the units in the promoter trust are held by a company with carry forward losses (the 'loss company'). 5. The new trust distributes a large proportion of the income to the class B unit holders. A smaller proportion may be distributed to the class A unit holders. 6. An amount, say 10% of the distribution to the class B unit holders, is paid in cash to the promoter trust. The balance of 90% is never paid and by agreement (usually verbal) between the parties is never intended to be paid. 7. The promoter trust then distributes all of the income distribution from the new trust to the loss company. The promoter claims that the loss company has carry forward losses that offset the distribution from the promoter trust. | 1. A trading entity (the 'taxpayer') derives income from a business that it carries on. The business is restructured into a hybrid trust (the 'new trust') which then derives the income. 2. The new trust has a number of classes of units. Each class of units has different rights attached. The taxpayer or associates hold units with income, capital and voting rights in the new trust (class A units). Another trust (the promoter trust) holds units in the new trust with income rights only (class B units). 3. The trustee of the new trust has discretion as to the distribution of the income to class A or class B income unit holders. 4. All the units in the promoter trust are held by a company with carry forward losses (the 'loss company'). 5. The new trust distributes a large proportion of the income to the class B unit holders. A smaller proportion may be distributed to the class A unit holders. 6. An amount, say 10% of the distribution to the class B unit holders, is paid in cash to the promoter trust. The balance of 90% is never paid and by agreement (usually verbal) between the parties is never intended to be paid. 7. The promoter trust then distributes all of the income distribution from the new trust to the loss company. The promoter claims that the loss company has carry forward losses that offset the distribution from the promoter trust. | Arrangement 2 | 8. In some arrangements a variation is used where the 90% balance of the distribution referred to in paragraph 6 above is actually paid but remains under the effective control of the taxpayer or associates through the use of a joint venture. 9. In these arrangements a joint venture is formed between the taxpayer or associates and the promoter trust. 10. By agreement the taxpayer or associates have effective control over the assets of the joint venture. 11. As described above in Arrangement 1 the new trust distributes the income to the promoter trust, however, pursuant to an agreement between the parties, the promoter trust then makes a capital contribution, say 90% of the distribution it receives from the new trust, to the joint venture thereby maintaining the effective control of the taxpayer or associates over those funds. In some cases the funds giving effect to the capital contribution by the promoter trust may be paid directly by the new trust to the joint venture. 12. The basic features of these arrangements can be summarised diagrammatically as follows: | 8. In some arrangements a variation is used where the 90% balance of the distribution referred to in paragraph 6 above is actually paid but remains under the effective control of the taxpayer or associates through the use of a joint venture. 9. In these arrangements a joint venture is formed between the taxpayer or associates and the promoter trust. 10. By agreement the taxpayer or associates have effective control over the assets of the joint venture. 11. As described above in Arrangement 1 the new trust distributes the income to the promoter trust, however, pursuant to an agreement between the parties, the promoter trust then makes a capital contribution, say 90% of the distribution it receives from the new trust, to the joint venture thereby maintaining the effective control of the taxpayer or associates over those funds. In some cases the funds giving effect to the capital contribution by the promoter trust may be paid directly by the new trust to the joint venture. 12. The basic features of these arrangements can be summarised diagrammatically as follows: | FEATURES WHICH CONCERN US | The Tax Office considers that an arrangement of the type described above gives rise to taxation issues that include whether: a. such an arrangement or certain steps within it are a sham; b. the right entities have been assessed in respect of any ordinary or statutory income; c. section 100A of the Income Tax Assessment Act 1936 (ITAA 1936) applies to the trust distributions made in connection with or as a result of reimbursement agreements; d. the loss company has available carry forward losses, and if so, whether those losses are deductible; e. any steps within the arrangement may give rise to capital gains assessable to the taxpayer under Part 3 of the Income Tax Assessment Act 1997 (ITAA 1997); f. the arrangement may constitute a scheme to which the general anti avoidance rules in Part IVA of the ITAA 1936 apply; and g. any entity involved in the arrangement is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). | a. such an arrangement or certain steps within it are a sham; b. the right entities have been assessed in respect of any ordinary or statutory income; c. section 100A of the Income Tax Assessment Act 1936 (ITAA 1936) applies to the trust distributions made in connection with or as a result of reimbursement agreements; d. the loss company has available carry forward losses, and if so, whether those losses are deductible; e. any steps within the arrangement may give rise to capital gains assessable to the taxpayer under Part 3 of the Income Tax Assessment Act 1997 (ITAA 1997); f. the arrangement may constitute a scheme to which the general anti avoidance rules in Part IVA of the ITAA 1936 apply; and g. any entity involved in the arrangement is a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). | The Tax Office view on the above arrangements is outlined in Taxation Determination TD 2005/34, which applies to assess the trustee of the new trust on the purported distribution. Note 1 : Base penalties of up to 50% of the tax avoided may be imposed where Part IVA applies. Base penalties for intentional disregard of the tax law are imposed at 75% of the tax avoided. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the Tax Office. If you have any information about the current arrangement, phone us on 1800 060 062. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 2 : In appropriate cases possible sanctions under criminal law may also apply. Where a taxpayer makes a voluntary disclosure and that disclosure indicates possible criminal offences, the Commonwealth Director of Public Prosecutions has indicated that favourable consideration will be given to granting an indemnity from criminal prosecution in relation to the taxpayer's involvement in the scheme where: • the case does not exhibit a significant degree of criminality by the taxpayer • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and • the taxpayer co-operates with the investigation and consequential proceedings . Note 3 : Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the Taxation Administration Act 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. Note 4 : A registered tax agent may have their registration cancelled or suspended by the Tax Agents' Board under section 251K of the Income Tax Assessment Act 1936 if they are guilty of misconduct as a tax agent or are not considered a fit and proper person to prepare income tax returns. A person under a sentence of imprisonment for a serious taxation offence is not a fit and proper person. | • the case does not exhibit a significant degree of criminality by the taxpayer • the taxpayer provides information about how the arrangements worked, including the role and identity of the promoter, and • the taxpayer co-operates with the investigation and consequential proceedings . | Date of amendment Comment 3 May 2024 Updated Tax Agent tip off hotline number 19 January 2024 Updated ATO tip-off hotline numbers | Date of Issue: 25 June 2008 | Date of Effect: 25 June 2008 | Related Rulings/Determinations: TD 2005/34 | Related Practice Statements: PS LA 2005/13 - Taxpayer Alerts | Subject References: Losses Hybrid trusts Trust distributions Liquidation | Legislative References: Income Tax Assessment Act 1936 Section 100A Part IVA Section 251K Section 251BC Income Tax Assessment Act 1997 Part 3 Division 165 Taxation Administration Act 1953 Division 290 of Schedule 1 | Related Taxpayer Alerts: | Contact Officer: Bruce Collins Business Line: Aggressive Tax Planning Section: Technical & Case Leadership Phone: (02) 6216 2710





Related documents: TD 2005/34 | PS LA 2005/13 - Taxpayer Alerts | Section 100A | Part IVA | Division 165 | Division 290 of Schedule 1 | TA 2005/1

This Taxpayer Alert describes arrangements where a taxpayer attempts to minimise tax liability by using tax losses in an unrelated entity. The business of the taxpayer is restructured so that the income of the business passes through a chain of trusts and on to a loss company. The income, less an amount for promoter fees, remains effectively under the control of the taxpayer, or associates. This Alert covers substantially the same arrangement as described in TA 2005/1 as well as highlighting additional features of concern. In TA 2005/1 we formed the view that arrangements of this type are not likely to be effective.