Four of Australia's leading professional tax and accounting bodies (The Institute of Chartered Accountants in Australia, National Institute of Accountants, Taxation Institute of Australia and Taxpayers Australia), representing over 100,000 accountants and tax advisers, have united to call for sweeping reforms of the antiquated laws governing the taxation of trusts. The professional bodies believe the Tax Commissioner's technical interpretation of Div 7A that applies to unpaid present entitlements (UPEs) is not supportable and is at odds with the original policy intent.
While the recently released Practice Statement PS LA 20 10/4 on Div 7A and UPEs (see 2010 WTB 44 ) embraced some of the practical recommendations put forward by the professional bodies, they consider that the fundamental incorrectness of the ATO interpretation remains. The professional bodies have called for an urgent test case to challenge the Tax Commissioner's interpretation of the laws that apply to UPEs. They raised the issue again at a meeting of the National Tax Liaison Group held in Canberra on 18 October.
The recommendation is for the test case to be heard by the Federal Court and funded under the ATO's test case litigation program, to provide judicial guidance on whether the Commissioner's position on this important aspect of the law is correct. The professional bodies say the Commissioner has accepted the proposition that a test case is an appropriate vehicle through which to resolve this issue.
The bodies consider that the UPE issue, alongside a High Court decision earlier this year on the taxation of trust income and distributions [Bamford], highlights the need for major review into the taxation of trusts. The professional bodies believe that the Henry tax review, along with recommendations made recently in Treasury's "Red Book", both indicate that the Government should re-write the trust laws which are more than 50 years old and are not adequate to deal with the modern use of trusts as trading and investment vehicles.