Earlier developments in this tale can be found here

Under the new regime, entering into an instalment agreement will not remove the director’s obligations under the DPN. The only thing an instalment agreement will do is to preclude the Commissioner from commencing proceedings to enforce the obligation of the director’s penalty notice for the period while payments are made.

The new regime confirms that a DPN takes effect from the date when it is posted — NOT when it is received by the director (DCT v Meredith).

The notice period of the DPN under the new regime has been extended from 14 days to 21 days before recovery proceedings can be taken against the directors.

To avoid personal liability, the company must appoint a Liquidator or Voluntary Administrator within 21 days from the date of the notice.

The defence of “illness or other good reason” is made more difficult for a director to rely on. In addition to establishing the director was ill or for some other good reason did not participate in the management of the company at the time the relevant tax liability fell due, the director must now also establish that it would have been unreasonable to expect her or him to have taken part in the management of the company at that time. This fixes drafting problems with the existing provisions.

The Court has no power under section 1318 of the Corporations Act to grant relief to a director from their obligations in respect of a DPN. This confirms the existing law in DCT v Dick.

The ATO has no discretion to remit a DPN regardless of circumstance.

1: Know why you have a service trust

Let me tell you a story with a fun multiple answer quiz:

Assume you get audited. The ATO shows up at your door and water-boards you. They ask why you set up your service trust. So why did you do it?

• I did it to save tax
• I did it for asset protection
• None of the above

If you choose (a) or (b), you need help from your accountant. Run, don’t walk.

Why is (a) wrong?

Repeat after me: Your service trust is not there to avoid tax. Etch this in your brain before reading any further. It helps you fight the urge to sing like a canary when the ATO gets out the crocodile shears.

But can’t I legitimately structure my affairs to save tax? You would think in a democracy that this is the case. But it isn’t. If the dominant purpose is to save tax then no. Remember, there is a fine difference between tax planning (legal) and tax avoidance (illegal).

The Part IVA general anti avoidance provision hovers over every action. If a reasonable person in your position believes the service trust exists solely for the purpose of avoiding tax – then think of a good place to hide your shank in jail.

Why is (b) wrong?

Cleverly (or so you think), you are adamant that your service trust is not there to save tax – you set it up for asset protection. And you’re a man of your word – you say the same thing in a suit in court (when the ATO is grilling you).

Later on, your business goes bust. Here lies the problem. You now can’t plead in the insolvency court that your service trust was there to save tax. The ATO transcripts where you swear your service trust is there for asset protection reasons don’t make good reading in the bankruptcy courts.

Why is (c) correct?

It is rarely wise to cite tax savings or asset protection as a reason for doing anything. If someone asks, service trusts are great to help your Business Succession Planning, Estate Planning and modern business structures – and they really are. Saving tax and asset protection are merely wonderful by-products.

2 – Set up your structures properly

The last thing you want to do is hand the ATO the ammunition to attack you. Poorly drafted or incorrectly implemented arrangements are the kiss of death.

So how do you set up a service trust?

• Make sure the core business structure is up-to-date. Update trust deeds and the Constitution.
• Set up the new service trust vehicle: family trust, unit trust, hybrid trust or company. You now have your service trust (or service company – quite rare). The service trust provides as many services as it can to the main business: this includes cleaning, secretarial, serviced offices, accounting, chattel leasing, property leases etc…
• Build a Service Trust Agreement. This is the ‘glue’ between the core business and the service trust. You need this so you don’t offend our preciously delicate friends at the ATO.

3 – Charge commercial rates

Remember those naughty people we spoke about at the start who got caught. Chances are they were being greedy and charging more than commercial rates. Or were lazy and failing to make the service trust look arms length.

The mantra is:

“My service trust always acts as though it is arms length and a genuine business”

Your service trust can’t be a sham or non-commercial. Forget about “mark-ups”. A commercial business doesn’t charge “mark-ups”. It charges what the market can bear. It can only charge what the market would charge in a normal arms length transaction. Not sure of what the market will bear? Then get some quotes from other businesses in that industry. Is your service trust providing exceptional quality administrative services? Then you can charge more – but only if the market would charge this amount anyway.

Phillips case is the most telling High Court authority regarding service trusts. In a subsequent tax statement the Deputy Commissioner of Taxation stated (correctly in my view):

“There may have been widespread use of service trust arrangements which involved payments that were grossly excessive in relation to the benefit conferred by the service arrangement.”

The Deputy Commissioner is correct. Service trusts are completely valid – as long as they are on valid commercial grounds. But what are valid commercial grounds?

4: Get professional help

Invest in help from your accountant. Their knowledge is invaluable and saves you more than just money.

5: Do what your documents say

If you have an agreement that says that the service trust will provide certain services, don’t let the main business entity pay for them directly. If you treat your two businesses as though they are really just one, don’t be surprised if the Tax Office does the same.

Between October 1995 and July 1998 two companies operated by Mr Soong deducted tax instalments totalling $6.7 million from the wages of their employees. This money was not remitted to the ATO.

When the first of these companies was liquidated the employees were moved into the second company where Mr Soong continued to withhold funds from his employees’ wages without forwarding it to the ATO.

Tax Commissioner Michael D’Ascenzo said this case was an example of a ‘phoenix’ arrangement which involves the deliberate liquidation of a company to avoid paying outstanding debts.

The conviction is the result of a long standing joint investigation conducted by the Australian Federal Police and the ATO.

Soong will serve two years jail before being eligible for parole and has been ordered to pay back $6.7 million to the Commonwealth.

The draft legislation is an attempt to stop companies and directors engaging in phoenix activity.

The ATO estimates that the level of suspected phoenix cases may be in the order of $600 million and that this is an unacceptable risk to the governments revenue.>

Section 255-100 of the proposed Bill says:

The Commissioner may require you to give security for the due payment of an existing or future tax related liability of yours if: (a) the Commissioner has reason to believe that: (i) you are establishing or carrying on an enterprise in Australia; and (ii) you intend to carry on that enterprise for a limited time only; or (b) the Commissioner believes that the requirement is otherwise appropriate, having regard to all relevant circumstances.

The Bill gives the ATO power, at any time, to require such security deposits as the Commissioner considers appropriate. It is expected that the ATO will use this power in high risk industries known to be at risk for phoenix transactions and against directors with a history of failed companies with large tax debts.

• concreters;
• construction and plumbers assistants;
• electricians;
• sales and marketing managers;
• sales representatives;
• university lecturers and tutors; and
• truck drivers

advising them of their obligations for the year ended 30 June 2009. On average, targeted taxpayers decreased their claims by 7.6%, with a total work-related expenses claim change of $40.3 million.

This year they will focus on:

• occupations with a pattern of large and/or rising claims or with issues identified from our intelligence
• returns which do not fit the pattern or norm for a particular occupation across the community, and
• returns lodged by tax agents that are significantly outside the norm for their average claim for their clients.

Due to previous claim patterns and behaviours, the ATO will be specifically focussing on people employed as:

• engineers
• mechanics, and
• teachers.

The most common mistakes by people in these occupations include:

• insufficient documentation available to support motor vehicle and travel expenses
• incorrectly claiming motor vehicle expenses on the basis that they are carrying bulky equipment
• incorrectly claiming travel or motor vehicle expenses when they are required to travel from home to work more than once per day, and
• incorrectly claiming home office, mobile phone and internet expenses.

The Tax Office has now scaled back its new  computer system after it delayed 1 million tax returns, sent out return letters without cheques and failed to communicate with other computers.

Detailing a litany of mishaps the Second Commissioner, David Butler, has told a Senate estimates hearing that cost overruns and the new need to work on changes resulting from the Henry review meant the supercomputer would no longer become the ”integrated system for everything” originally planned.

The Tax Office will terminate its contract with Accenture to introduce the system and engage a separate consultant, CPT Global to advise on how to make it work during the coming tax season. It has employed an extra 330 staff in an effort to make the tax season work.

A Victorian Supreme Court jury yesterday found Paul John Gregory, 60, guilty of conspiring to cause a risk of loss to the Commonwealth by hiding offshore $400,000 Mr Wheatley had earned promoting a world title fight between Tszyu and Jesse James Leija in Melbourne in 2003.

The jury, which deliberated for a day before returning its verdicts, found Gregory had participated in a scheme to pay the amount to a fake company, called Overseas Promotions Inc, as its pretend share of the Tszyu promotion.

The money was transferred into an offshore account kept for Mr Wheatley by two men who ran British Channel Islands-based accountancy firm Strachans, Philip Egglishaw and Philip de Figueiredo.

Gregory acted as a conduit to Egglishaw and de Figueiredo, who took a 15 per cent cut for handling the funds.

Some push-back is to be expected given account balances struggled to fight the pull of gravity over the last two years, falling lower and lower for what seemed like an eternity to most members.

But what’s really interesting is what’s driving the distrust and scepticism of super. It’s not so much the performance of funds during the financial crisis but instead a fear that the Government will change the rules.

This message came through loud and clear in a recent Focus Group held by CoreData with pre and post-retirees aged 50 to 70.

Brad, a 55-year-old male, says he’s never trusted super because he doesn’t trust the government. He says successive governments keep “changing the laws arbitrarily” and we’re in for another wave of that this year with the election looming.

Brad is not alone in his line of thinking. Indeed there was wide consensus around the table that super is not the safe haven that the industry would have you believe, and while there are tax incentives to saving through super, this is irrelevant if the goal posts keep shifting.

Bruce, a 52-year-old male, thinks relying on super could cause him big problems in retirement. He’s developing his assets outside of super as well because he’s convinced that the Government has dug itself “such a deep debt hole” that they’ll use the superannuation system to recoup that.

The building scepticism is reflected in a recent study by CoreData which found superannuation is the number one financial concern for the average Australian.

Super, including fund rollover, Government super policy, planning for retirement, retirement income options and pensions, ranked ahead of tax, family financial matters, paying off loans, investing and saving.

Industry bodies such as the AIST, ASFA and IFSA have recently repeated calls for a hike of Superannuation Guarantee (SG) to 12% to avoid a $695 billion retirement savings gap.
If the dissent among consumers continues to grow, a legislated increase might just be the only way to boost contributions to the system.

From Burning Pants