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You may think you’re out of the woods – think again

Tax Telegraph, October 2013

You may think you’re out of the woods – think again.Many people would likely be familiar with the fact that the time limits that apply for amending their tax return is two years for individuals and small businesses and four years for most other categories of taxpayers.  Some taxpayers may let out a sigh of relief when the amendment window closes. But perhaps, in several of these cases, the sighs have come a little too soon.

The lines between the two categories of taxpayers can sometimes be blurred. This can cause confusion and as a consequence, the taxpayer receiving a nasty surprise in their mailbox. Take Mr Yazbek as an example.

Yazbek v Federal Commissioner of Taxation

Mr Yazbek lodged his 2005 tax return and received his assessment from the Commissioner on 18 April 2006. The Commissioner however, changed his mind and issued a Notice of Amended Assessment to the taxpayer on the 12 April 2010. This amended assessment included an additional amount of about $2.1 million of income. The taxpayer was evidently displeased with his new amended assessment and contended that the Commissioner was unable to amend his tax return as the Commissioner had missed his two year window.

The key focus of the Commissioner in this dispute was that Mr Yazbek was an eligible beneficiary of a discretionary trust under the trust deed, and therefore a four year amendment period should apply to him. The taxpayer argued that he was not ‘beneficiary of a trust estate’ during that year as he did not receive a distribution in the income year which the Commissioner was amending the assessment. With neither side relenting, the dispute ended up in the Administrative Appeals Tribunal (AAT).

Under the Tax Act, an individual’s assessment may only be amended up to two years after the date of the notice of assessment. However, one qualification provided which causes this rule not to apply is:

 if the individual is a beneficiary of a trust estate at any time in that year unless the trust is a small business entity for that year or the trustee of the trust (in that capacity) is a full self-assessment taxpayer for that year.

The AAT held that the term beneficiary in no way implied that the object had to actually receive a distribution and consequently the four year amendment period applied. The Federal Court, on hearing the appeal, found in favour of the Commissioner on 31 January 2013.
Overall, while the Yazbek case did not establish any new definition of the word beneficiary, it serves as a wakeup call to reinforce concepts in previous case law that state that to be regarded as a beneficiary of a trust estate, the taxpayer does not necessarily have to receive any distributions.

What’s the impact?

The decision in the Yazbek case is not necessarily new, but affirms the previous view of the ATO regarding  the operation of amendment windows and therefore, as stated in their decision impact statement, they believed that this decision would have a limited practical impact.

On a practical basis, this decision would significantly impact many taxpayers. Many family trust deeds have large classes of beneficiaries incorporating large family groups and in many cases multiple generations of beneficiaries. For example many deeds allow for the children of siblings to be within the class of eligible beneficiaries even though they may never receive a distribution. Therefore, there could be a potential risk of a taxpayer finding themselves as an eligible beneficiary of a trust they may not even know existed. Consequently, if you are establishing a new trust, it may be wise to notify any potential beneficiaries (even if you don’t plan to make distributions to them). These individuals will then have the option to renounce any interest in the trust. This allows the trust deed to include a broad class of beneficiaries while protecting members of your extended family. Similarly, that person may choose to narrow the class of beneficiaries within the trust deed.

While naturally it may be difficult for the ATO to determine who may or may not be a beneficiary of a trust, if that person does not receive any distributions, it may pay to be better safe than sorry. The last thing you want is an angry phone call from your third cousin, once removed, saying that the ATO was amending their tax return because you had made them an eligible beneficiary in your discretionary family trust. Equally, you do not wish to receive a letter from the Commissioner letting you know that they are amending your personal tax return after three years because you are an eligible beneficiary of your great uncle’s trust.

On the bright side it may not be all doom and gloom for taxpayers as the result of the Yazbek case. Individual taxpayers who previously thought they were outside the two year amendment window could potentially have a further two years to amend their returns if they fall into one of the other categories which have a four year amendment window. For example if an individual taxpayer can demonstrate they are a beneficiary of a trust (that is not a small business entity) they will likely fall under the four year window.

If you happen to find yourself in either of the above situations where the Commissioner has amended your notice of assessment or you wish to see if you might eligible for the four year amendment window, it may be helpful to consult your local Deloitte Private tax advisor, who is there to help.

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