- trusts or trust beneficiaries who have received substantial income and have not lodged returns or activity statements;
- arrangements whereby income is distributed to low-tax beneficiaries while the benefits of the distribution are enjoyed by others; and
- artificial characterisation of amounts so that the economic substance and tax outcomes do not correlate (ie the party receiving the substantial benefit does not bear the tax liability).
Although these measures are targeted at high-risk taxpayers and not ordinary trust arrangements, it remains to be seen what “ordinary trust arrangements” are and how they will be dealt with by the taskforce. There is no doubt that there will be increased activity with trusts and trust law changes over the next year or so.
Serious financial hardship and release from tax debts
Tax advisers should be aware that section 340-5 of Schedule 1 to the Taxation Administration Act 1953 provides that a taxpayer may apply to the Commissioner of Taxation for release in whole or part from a tax liability. In the case of an individual taxpayer, the taxpayer must show that they would suffer serious financial hardship if they were required to meet the liability. Not all liabilities are covered – only those set out in section 340-10.
In Balens v FC of T 2013 ATC 10-314, the AAT reviewed a decision of the Commissioner to refuse an application for relief on the grounds of serious hardship and declined to release the taxpayer from his taxation liabilities as it was not satisfied that the taxpayer would suffer serious financial hardship.
The key issue before the AAT was whether the taxpayer would suffer serious financial hardship if he had to pay the tax liability. There is no statutory definition of ‘serious financial hardship’, but PS LA 2011/17 provides some guidance. To demonstrate serious financial hardship, it must be shown that the requirement to pay the tax liability would result in the person being left without the means to achieve reasonable acquisitions of food, clothing, medical supplies, accommodation, education for children and other basic requirements. On the other hand, elements of hardship may be regarded as marginal or minor – rather than serious – if the consequences of payment of tax are seen, for example, as limitation of social activities or entertainment or loss of access to goods or services of a more luxurious nature or standard (see paragraph 38 of Practice Statement PS LA 2011/17). The three tests used in determining serious financial hardship are:
- income/outgoing test;
- assets/liabilities test; and
- other factors.
Although the taxpayer showed a net deficiency in fortnightly income of $294.00, he had net assets of at least $78,028. Taking into account all of the taxpayer’s circumstances, the AAT concluded that he treated his tax obligations with scant regard and granting relief would not necessarily result in an improvement in his overall financial position, particularly in relation to enjoying the necessities of life.
