The Australian Taxation Office (ATO) has outlined the behaviours of privately-owned groups that attract its attention in relation to a wide range of tax issues, including Capital Gains Tax (CGT), private company profit extraction (including Division 7A), consolidation, and Fringe Benefits Tax (FBT). The ATO will focus on a number of tax aspects of entities within this sector such as exaggerated capital losses, incorrect use of carried forward tax losses and a failure to have complying Div 7A loans in place.
The ATO has broadly stated that the following characteristics and behaviours may attract their attention:
– economic or tax performance that is not comparable to businesses that are similar
– low transparency relating to your tax affairs
– unusual, one-off or large transactions, including shifting or transfer of wealth
– historical aggressive tax planning
– tax outcomes that are inconsistent with the tax law intent
– taking controversial interpretations or choosing non-complicance of tax law
– if your after-tax income does not support your personal lifestyle
– treatment of private assets as business assets
– accessing business assets for private tax-free use
– poor risk-management and governance systems
In addition to the above, the ATO has stated that there are specific characteristics and behaviours in relation to the following tax issues that can attract their attention:
Capital Gains Tax
The ATO will focus on capital losses, particularly where those losses appear to be exaggerated, fabricated or misclassified to ultimately reduce taxable income. In particular, large capital losses attract the attention of the ATO, so it is important to be able to substantiate the capital loss reported. The ATO will also focus on CGT reporting and payment obligations resulting from a disposal of a capital asset. They are particularly concerned where the amount of net capital gain reported is less than what it should be based on their estimates using external data matching sources.
Private company profit extraction (including Division 7A)
The ATO will focus on arrangements designed to extract profits from private companies while avoiding tax on the amounts being distributed. This may include the application of Division 7A deemed dividend rules or the potential application of anti-avoidance rules. In particular, the following behaviours and characteristics may attract the ATO’s attention:
– amounts are not repaid after being taken from a company
– no complying loan agreement has been put in place
– yearly minimum repayments not made on a loan
– the company income tax return does not declare interest income
– a company asset for private use
– attempts to avoid application of Division 7A to transactions between a private company and a shareholder or their associate
Consolidation allows wholly-owned corporate groups to operate as a single entity for income tax purposes.
The ATO will focus on the correct implementation of the following consolidation tax rules:
– available fraction rules
– cost-setting rules
– consolidation exits
– consolidation membership rules
Fringe Benefits Tax
The ATO has stated that it will focus on the correct application of the following FBT rules:
– FBT motor vehicle rules, particularly where an employer-provided motor vehicle is used or available for use for the private travel of employees
– FBT employee contribution rules, particularly where employee contributions that have been paid by an employee to an employer are declared in both the FBT return and the employer’s income tax return.
– FBT employer rebate rules, particularly focusing on the eligibility of the employer to claim a FBT rebate
– FBT living-away-from-home allowance rules, particularly focusing on employers applying the new tax laws correctly.
Source: Australian Taxation Office