The Australian Taxation Office (ATO) has released Taxpayer Alert TA 2017/1 which highlights the ATO’s concerns with certain stapled structures. The targeted structures typically involves a trust and a company (that may or may not have been stapled together for legal purposes) that operate in such a way that the trust (which holds the asset, e.g. land, equipment, intellectual property) is used to strip out passive income in relation to the operating entity’s trading business, for distribution to investors.
That is, the ATO is targeting structures that may or may not be legally stapled but involve the operations of a trust and company where a business is conducted and profits flow in a “contrived way” to investors at preferential tax rates, e.g. foreign investors. It is noted that Australian real estate investment trusts are not intended to be caught by the alert.
The ATO’s concern is that under such arrangements, the business income, when distributed through the trust, is able to be taxed at lower rates than where the same income would be distributed through the company (at the corporate tax rate).
At this stage, TA 2017/1 serves as a warning to those investors and operators of industries where such structures are commonly adopted (e.g. agribusiness, infrastructure etc.). The ATO have indicated that they intend to investigate the tax issues further in order to develop their technical position and will issue additional guidance.
As such, trustees, managers and investors involved in such structures are advised to review their investment structures in order to assess the implications of TA 2017/1, if any, and whether and what kind of preemptive action should be taken, with many advisors taking the view that such structures are now a high audit risk.
TA 2017/1 can be found on the ATO’s website here https://www.ato.gov.au/law/view/document?DocID=TPA/TA20171/NAT/ATO/00001).