The Federal Court is currently considering a very important question for husband and wife business partnerships regarding tax issues.
Many people, particularly tradespeople, form or join partnerships with their spouses for tax purposes. This was supported by the December 2005 ATO practice statement PS LA 2005/24, which stated that tax avoidance schemes do not apply to a typical husband and wife partnership where there are no ‘unusual features’. Further, income splitting partnerships whereby a spouse takes takes 50% (fifty per cent) of the partnership liability were also approved. This was linked to section 170(1) of the Income Tax Assessment Act 1936 (Cth) (‘the Act’), which states ‘the Commissioner may amend an assessment of an individual for a year of income within 2 years after the day on which the Commissioner gives notice of the assessment to the individual’.
Mr Rod Douglass is currently challenging the Australian Taxation Office in the Federal Court, in proceedings wherein the ATO is demanding approximately $550,000.00 in taxes, interest and penalties, back-dated to 2006. Mr Douglass established business partnerships with his first and second wives following the 2005 ruling, and these partnerships and tax implications thereof are pertinent to his claims. From our reading, the Australian Taxation Office’s claim is based on another part of section 170(1) providing that the Commissioner may amend an assessment at any time if he or she is of the opinion that there has been fraud or tax evasion.
The crucial protection for businesses in section 170 of the Act restricts amendments of assessments to within two years and if this shield is removed, many small businesses may receive enormous taxation bills. This may lead to business insolvency or personal bankruptcy and set a precedent restricting the entrepreneurial and innovative enterprise championed by Malcolm Turnbull.
We shall keep you informed.