The financial responsibility of being a trustee
Written by Professor Robert Anthony, Anthony & Cie
GGI Insider (#50), November 2010
When using an offshore company, one needs to be careful not to be requalified for tax purposes elsewhere. An example is Australia where a tax payer (the trustee) was share trading in Australia using trading accounts on behalf of non-resident corporations. The trustee, Leighton, based in Monaco was assessed by the Australian tax authorities. The tax payer was a non-resident who lived and conducted business in Monaco. The beneficial owners were unidentified third parties. The corporations engaged in share trading with moneys funnelled through a custodian arrangement with an Australian bank in the taxpayer’s own name. The profits were remitted to a custodian account in Monaco and there was no tax paid on the profits. The tax payer contended that article 98.3 could not apply if the trading was undertaken by the corporations and not him. The court held the taxpayer was a trustee and therefore liable for tax. He controlled what was bought and sold. Some EUR 25 million in taxation is now due.
The moral of this story is to know where you put your feet when advising clients and the responsibility taken. The idea of substance over form and the use of treaty protection are essential in today’s fiscal environment. The setting up of holding companies requires a real purpose and not just a letter box. Pure agency companies with no real activity can result, even where this is normally a treaty protection a real liability to the director. In certain instances the loss of the treaty protection due to an anti-treaty shopping clause in the treaty can create the same problem as in the above case. Where the fiscal net is tightening worldwide, my strong advice is to review files to ensure that one is not exposed to the same fate as poor Norman Leighton. I know Norman and this shows how the evolution of tax inspector’s offices is following the trends of legislation. In addition with the choice of jurisdictions, why do what he did anyway? It makes no sense. Cyprus doesn’t tax financial transactions in a Cyprus resident company so why choose Australia?
For those who wish to review the case it is Leighton v FCT (2010) FCA 1086 (Federal Court, Gordon J. 6 October 2010).
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