What is happening?

On Friday 22 November 2013, the Australian Taxation Office issued Taxpayer Alert TA 2013/3. Refer attached link: http://law.ato.gov.au/atolaw/view.htm?DocID=TPA/TA20133/NAT/ATO/00001 In connection with professional firm partnership structures that contain partners that are trustees of discretionary trusts, the ATO is focusing on the following:

  • whether transfers of partnership interests to, and the holding of partnership interests by, trustees of discretionary trusts are legally effective;
  • the CGT issues around the acquisition of partnership interests by trustees of discretionary trusts;
  • whether the general anti-avoidance rules in Part IVA of the ITAA 1936 apply to cancel tax benefits obtained by
  • the individual related to the partner trust;
  • reviewing relevant Tax Rulings and Determinations concerning professional firm partnerships;
  • arrangements which the ATO considers are a sham or ineffective in alienating the individual's income, or
  • where CGT has not been correctly recognised.

What is the history of the ATO’s review of professional firm structures?

The following shows us the ATO’s recent history of focus in this area:

  • There was of course the service entity review that culminated in the ATO issuing Taxation Ruling TR 2006/2.
  • In 2009 a speech by a deputy commissioner, certain National Tax Liaison Group minutes and then various newspaper articles confirmed the ATO’s intent on an ongoing professional firm structure review to follow on and in addition the service entity review project.
  • “No goodwill” partnerships (and associated transactions) came under closer scrutiny with the issuance of Taxation Determination TD 2011/26.

Who is the focus of the attention?

The focus is clearly on the discretionary trust partners in accounting and legal professional firms structured as partnerships.

We take it from past speeches from the ATO that the area of primary focus of the taxpayer alert will be lawyers and accountants. Also the media release that accompanied Taxpayer Alert TA 2013/3 issued on Friday 22 November 2013 confirms that the initial focus is on accountants and lawyers.

In addition to specifically naming accountants and lawyers, the media release confirms that other professions will also be considered.

Also, it is possible that the methodology that is being considered by the ATO in the taxpayer alert for the professional firm structures will be used in reviews of partnerships of discretionary trusts in SME businesses structures generally. 

Next steps

Professional firm structures that are partnerships and that have partners that are trustees of discretionary trusts will need to review their structures against the concerns the ATO are raising in the Taxpayer Alert 2013/3.