Purported alienation of income through discretionary trust partners

An individual causes transactions to occur which purport to make the trustee of a discretionary trust (trustee) a partner in a professional firm. The trustee may be the individual acting in their capacity as trustee or another entity. The beneficiaries of the trust include the individual or their associates. 2. The individual purports to assign their existing interest in the partnership to the trustee. In such a case the individual may not report any capital gain associated with the assignment in their tax return, or report an understated capital gain. 3. Alternatively, the individual may not have had an existing interest in the partnership, but transactions occur which purport to provide the trustee with a new partnership interest. 4. The arrangement has some or all of the following features: a. the trustee does not actively engage in the conduct of the firm's practice and may not hold professional qualifications, b. the practice is carried on in much the same way as it had been before the trustee purported to become a partner, or would have been if the trustee had not purported to become a partner; specifically: (i) the individual renders substantial personal services to clients of the firm, the value of which cannot be attributed solely to the efforts of employees or income producing assets, (ii) the individual has the same or similar roles, responsibilities and obligations as they had before the trustee purported to become a partner, or would have had if the trustee had not purported to become a partner, (iii) no advice of the trustee arrangement is given to clients of the firm or other third parties, (iv) the trustee arrangement does not result in any limitation of liability for the individual, or the individual is exposed to substantially the same level of business risk they were exposed to as a partner, or would have been exposed to, if they had been a partner, (v) the trustee arrangement does not assist in the provision of professional services by the individual. c. the amount of salary or other remuneration payable to the individual is considerably lower than the income which they formerly derived from the practice, or would have derived if they had been a partner, d. the individual has the ability to remove the trustee, revoke or alter the trust arrangement, or otherwise control the trustee's interest in the partnership. 5. In addition, or in the alternative, the arrangement may have some or all of the following features: a. inconsistencies in the documentation that make it unclear whether the individual or the trustee is a partner in the firm, b. the individual contracts with clients or other third parties on the basis that the individual is a partner, c. the firm or the individual represents to the public that the individual is a partner, d. there is no employment or other contractual relationship between the trustee and the individual, e. the documentation purports to provide corporate trustees with entitlements (eg leave) which can only be enjoyed by a natural person, f. the trustee does not have any employees (whether in its capacity as partner or otherwise), g. the trustee does not hold any significant assets (whether in its capacity as partner or otherwise), h. the trustee does not contribute any capital to the partnership, i. the individual purports to make drawings from partnership equity for their personal use. 6. In each financial year: a. the firm directs distributions of net profits of the firm to the trustee as partner of the firm. This distribution may correspond to the amount the individual could reasonably be expected to have received if they had not entered into the arrangement. b. the trustee resolves to distribute most or all of the income to lower taxed beneficiaries of the trust. 7. The individual does not report any income from the professional firm in their tax return, except to the extent (if any) that such income is part of their entitlement as a beneficiary of the trust. 8. The arrangements described above may alternatively be implemented using a unit trust, units in which are held by lower taxed beneficiaries.