During November, the ATO have released an interim Decision Impact Statement on the Bendel case and their ongoing application of Division 7A to unpaid present entitlements. On a legislative front, the Senate has passed changes to the Tax Practitioners Board and the Tax Agent Services Act with last minute changes causing industry concern.
LEGISLATION UPDATE
Progress of current measures
The following measures are currently before the Senate:
– Treasury Laws Amendment (Making Multinationals Pay Their Fair Share – Integrity and Transparency) Bill 2023 – contains changes to thin capitalisation rules.
– Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023 – includes the $20,000 instant asset write-off; small business energy incentive and changes to ‘non-arms length income’ rules.
Treasury Laws Amendment (2023 Measures No 1) Bill 2023
This measure has now received royal assent. It contains various changes including:
– Off-market share buy-back rules & treatment of franked distributions funded by capital raisings. Changes were made to the Explanatory Memorandum to confirm that the capital raising measures are not intended to apply to certain family and commercial dealings.
– Implementing recommendations from the review of the Tax Practitioners Board (TPB), which include requiring that tax practitioners not employ or use disqualified entities in the provision of tax agent services without approval from the TPB, and converting the 3-year registration cycle to an annual renewal period.
Further, late changes to the Tax Agent Services Act (TASA) were added to the Bill and were passed without consultation and without an Explanatory Memorandum (refer below).
TASA changes and potential concerns
Changes to the TASA will come into effect from 1 July 2024, which include:
– Alter the appointment process for members of the TPB, and ban current and former partners at large firms (more than 100 employees) from being members of the TPB.
– Require mandatory reporting by tax agents of ‘significant breaches’ of the TASA code of conduct, including breaches by other tax agents.
Several concerns have not been addressed including substantiation requirements by the reporting agent, the adverse impacts for tax agents who are falsely accused of misconduct, and the recourse they may have for the inconvenience and costs in responding to TPB investigations.
RULINGS, COMPLIANCE GUIDELINES & TAXPAYER ALERTS
PCG 2018/9 Foreign-incorporated companies
The ATO has released an update to PCG 2018/9—Central management and control test of residency: identifying where a company’s central management and control is located. A new risk-assessment framework for the ATO treatment of foreign-incorporated companies has been included, comprising of low, moderate and high-risk zones. Relevant risk factors include:
– Where majority of the Directors are located when they make decisions.
– Whether the tax position is substantially similar to what it would be if it was an Australia resident.
Note: The ATO has separately stated that the PCG is aimed principally at public groups, and it expects most foreign-incorporated companies controlled by private groups will be in the medium-high risk categories. However, the ATO will only look at this issue within a group if it is already being reviewed.
CASE LAW UPDATE
Bendel v CofT—Division 7A – Interim Decision Impact Statement (DIS)
The ATO has issued an interim DIS following the AAT decision in Bendel, where it was held that the unpaid present entitlement of a corporate beneficiary of a trust was not a ‘loan’ within the meaning of section 109D of Division 7A. (Refer Tax Bulletin—September 2023). The ATO stated that:
– It will continue to apply its current views relating to private company entitlements to trust income as set out in TD 2022/1, pending the outcome of the appeal process.
– In addition to the application of section 109D of Division 7A, other taxation laws can apply including section 100A. We note that in order to fall within the ATO’s ‘Green Zone’ for section 100A purposes, a UPE owing from a trust to a company would broadly either need to be paid within 2 years or placed on Division 7A terms (refer PCG 2022/2).
– Until the appeal process is finalised, the Commissioner does not propose to finalise objections where the decision turns on whether or not a UPE was a section 109D loan. If a decision is required to be made (for example, a taxpayer gives notice requiring the Commissioner to make a decision), any objection decisions made will be based on the existing ATO view of the law.
Bowerman & FCT—Loss on sale of unit deductible
In the Bowerman case, the taxpayer purchased 2 units off-the-plan (Dune Walk and Foreshore Boulevard) at a building complex with different completion dates. At the time of buying Dune Walk, she knew she would need to sell her current home to fund the purchase, would need to live in it temporarily, and then sell it to fund the completion of Foreshore Boulevard in which she planned to reside. The sales were carried out as planned, but due to the pandemic, Dune Walk was sold at a loss.
The AAT held that the loss was deductible under section 8-1. The taxpayer had the intention to re-sell for a profit at the time of purchase, which was supported by the way she kept up-to-date with the development. The loss was also deductible when the contract was entered into (in April 2020) and not when settled (in June 2020) as the taxpayer was entitled to rely on TR 97/7 which states that a cash taxpayer need not have borne a loss for it to be incurred.
Points to note: The taxpayer was able to evidence profit-making intention at the time of purchase, and the connection with profit-making intention was maintained even though she had resided in the unit.
ATO UPDATES
On Hold Debts
The ATO has been issuing notification of old debts to Tax Agents, being amounts that the ATO have placed ‘on hold’ and have deemed uneconomic to recover. While recovery action will not be taken for these debts, the ATO will offset future refunds against the debts although in many case there are no details on the origin of the debt. The ATO stated that it has no discretion under the law to write these amounts off and must offset any future refund against these amounts no matter how small.
CONTACT US
For further information on any of these updates, or for general assistance, please get in touch.
The information contained in this bulletin is intended to provide general information only and is not intended to serve as tax advice. Specific advice should always be sought regarding a taxpayers’ particular circumstances. Please contact MC Tax Advisors if you would like assistance with the issues identified in this bulletin.
