On January 31, 2017, the Australian Taxation Office (ATO) issued Taxpayer Alert TA 2017/1 (TA 2017/1) expressing his concern over contrived arrangements that fragment integrated trading businesses in order to re-characterise trading income into passive income which may be taxed more favourably.

As first mentioned in the November edition of this publication, the ATO has begun issuing Taxpayer Alerts to notify large business taxpayers where there are new or emerging areas of considered higher tax risk. These alerts do not constitute the ATO’s final view on particular arrangements, but rather notifies taxpayers of the global tax planning arrangements that will be under increased scrutiny going forward. 

TA 2017/1 states that the stapled structures raising the most concern are those when trading income is re-characterised as passive income and diverted to a flow-through trust with the result that: 

• the Asset Trust is a flow-through entity for tax purposes when the investors are ultimately subject to tax on the net income of the trust

• distributions from the Asset Trust may be subject to tax at rates between 0% to 30% in the hands of investors, and

• the Operating Entity is unlikely to have significant taxable income, largely because of deductions in respect of payments to the Asset Trust.

PwC observation: Taxpayers will need to be proactive in reviewing their existing cross staple arrangements and, going forward, it will be important to engage with the ATO in relation to any stapled structure to understand the ATO’s position as to whether any particular stapled structure would be acceptable in the relevant circumstances.