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GWM Lawyers and Conveyancers

Welcome to the March edition of this Law Update Newsletter, informing friends and clients of GWM Lawyers and Conveyancers of changes in the law that might impact on their personal or business lives.

In this newsletter:

• Accountants - Are you providing Legal Advice?
• Business Bench Marks
• Income Splitting
• Asset Protection & Tax Planning

Income Splitting

The Australian Taxation Office (ATO) is currently scrutinising arrangements whereby spouses and other family members are paid a salary in respect of their administrative contribution to the family business.

In a recent Administrative Appeals Tribunal decision (Jones & Commissioner of Taxation [2003] AATA 84 (31/1/03)) the Taxpayer was successful in defending claims made by the ATO that the entity by which his business was conducted, namely a partnership with his spouse, breached anti-avoidance provisions.

The ATO argued that the partnership was an arrangement designed to split income and avoid tax.

The Administrative Appeals Tribunal held that in the circumstances the tax benefits that inured as a result of the partnership structure was not a high priority or dominant purpose for the Taxpayer.

It appears highly likely that the ATO will seek to attack both purported partnership arrangements and circumstances whereby spouses and other family members are paid salaries by family operated entities.

It is recommended that businesses that either operate by way of a partnership structure or pay salaries to family members ensure that the arrangements are capable of being defended as being on a commercial basis and not have the primary intent of obtaining a tax advantage.

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Asset Protection & Tax Planning

In a recent decision of the Full Federal Court of Australia (Commissioner of Taxation v Mochkin [2002] FCAFC15) it was held that the taxpayer conducted his business via a corporate entity for the dominant purpose of asset protection and limited liability and not the accompanying taxation advantages.

In this case the taxpayer was a stockbroker who had established corporate and trust entities and operated his business via this structure thereby resulting in significant taxation advantages. The Australian Taxation Office (ATO) claimed that the dominant purpose of the taxpayer's arrangement was that of obtaining a tax benefit and accordingly sought to attack it through Part IVA of the Income Tax Assessment Act, 1936.

Taxpayers that operate businesses via corporate and trust entities should ensure that such arrangements cannot be classified as being purely tax driven but as a form of liability limitation and asset protection.

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