Or is he?

We all know that there is nothing like fear to scare people into action.

And legal firms and accountants appear to have become experts at it. Especially when it comes to medical professionals.

‘If you don’t take advice from us (and pay us serious $$$) we guarantee the taxman will hang you and sell your family into slavery’. Ok, they are not quite saying that, but it does feel that way looking at some of the emails I have seen.

In the last two weeks, my inbox has exploded from contacts and clients sending me emails from legal and professional firms scaring the crap out of them about payroll taxes and something called S100A.

Now I know S100A does not really mean much to you. Nor does TR2022/D1 or PCG2022/D1 but they are touted in all the emails as if it is of massive importance and to show you that somehow by using section numbers and abbreviations the emails show superiority and knowledge.

And in many cases, a lot of what the taxman is doing is because there are a lot of accountants and legal firms who advised their clients, especially medical professionals who earn a lot of money, to undertake activities which were not quite kosher and now that taxman is knocking on doors those same accountancy and legal practices are running around with their arms in the air wailing its all unfair for the taxman to ask questions and that ‘it is not in the spirit of the law.’

Payroll tax is a real problem for some medical practices. But I will cover this another time. So, let’s look at the attack on family trusts.

Many medical professionals will have a family trust somewhere in their structure. They are used because they are flexible. They also have the added benefit of potential tax savings by distributing to family members on lower tax brackets. For example, a medical professional may distribute to their mum and dad who have no other income or to their adult children at university who are too busy getting drunk and having sex to earn any other income.

The problem? Well, the business’s tax return would be lodged to tell the ATO that Mum, Dad and Adult Children got $X of the profit. But in reality, that profit or cash was never given to Mum, Dad or Adult Children. It is taken out by the medical professional. And in some cases, Mum, Dad and Adult Children don’t really know or understand that they have received and are entitled to $X of income. This would happen based on the advice of the accountants and legal firm.

For the ATO that is a problem. I don’t often agree with the ATO, but I think they have a point and I am one of the few accountants who do.

Think about it for a second. You tell the ATO you have going to give $50,000 to your children as a profit distribution. By doing so you save about $23,000 in taxes. But then you don’t give the money to your children but keep it instead. From the ATO point of view and under trust law if you have entitled your children to $50,000 then they should get it. And if they don’t it is logical to ask why they have not been given it. And it most cases it has not been given because the medical professional wants to pay less taxes.

Now many will say that they pay for keeping their children. For example, it is common for medical professionals to pay for a child’s upkeep while they are at say university. So, there is an argument that a trust distributes to the child but the parents take that money and use it to pay for the upkeep of the child. And let’s be honest this is not unusual.

The ATO has advised that in principle they do not have an issue with that if you can show that you have paid for the upkeep of the child and that the child is aware that their distribution is being used that way. In other words, some documentation needs to be put in place. And remember if you are suggesting that you are assisting in say tuition fees the ATO expect payment by you of tuition fees and not an increase in HELP loans.

I also say if you push the boundaries of the taxman and think they are stupid they will bite back. In fact, the ATO has gone so far to say that these arrangements are a ‘sham.’ This has upset both the legal and accounting forms even more because they were the ones pushing this and now the ATO is suggesting this may now be illegal. It’s hard to explain that to clients.

At WOW! Advisors & Medisucess whenever we have clients who distribute to family members, we always advise them to make sure those family members are paid. If you are doing that then the ATO does not give to hoots what you do and have no interest in your affairs. I can guarantee you will not be hung to dry and your family will be safe from being sold into slavery.

But the new rules will impact family trusts because profits are not always available as cash to give to family members and one of the guidelines means we have to do a few calculations to make sure you are in a ‘zone the ATO’ does not consider ‘a risk.’

We will have to look at each family trust to see how they are impacted for 2021/22 and beyond. But I doubt I will be telling my clients they have to pay me a massive fee for a ‘total review’ or they have to see us ‘RIGHT NOW.’ And I won’t be telling them they will be sold into slavery either.

So do not let fear guide you. Speak to professional advisors your trust and talk your language.

If you have in the past distributed to other people but not given them the money and what to have a plain English discussion that does not cost an arm and a leg, call us on 07 3161 9548.