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The ATO has recently released a significant draft ruling around Div 7A, which operates to ensure that private companies cannot make tax-free distributions of profits to shareholders or their associates in the form of payments, loans or forgiven debts. Generally, a private company is taken to have paid an unfranked dividend in the income year if a loan made to a shareholder/associate is not fully repaid before lodgement day.

Within private groups, a common practice is for trustees to appoint trust income to a related private company (i.e. a private company beneficiary). The appointed trust income is then included in the profits of the corporate beneficiary, and the company is assessed on its share of the trust net income. However, in some cases, while a private company beneficiary is made presently entitled to income of the trust, that entitlement remains unpaid (i.e. unpaid present entitlement – UPE), or the trustee will set aside the entitlement amount into a separate sub-trust for the exclusive benefit of the private beneficiary.

Previous Rulings

In its previous substantive ruling on Div 7A and trust entitlements, the ATO took the position that a loan was taken to have been made on any UPEs not called for by a corporate beneficiary unless the funds were held on sub-trust for the beneficiary’s sole benefit. This, it argued, is because a Div 7A loan includes the provision of credit or any other form of “financial accommodation” which includes the supply or grant of some form of pecuniary assistance or favour.

New Draft

The new draft ruling outlines the circumstances in which “financial accommodation” applies and differs from the views of the ATO in its previous substantive ruling. Specifically, the new ruling states that the phrase “financial accommodation” has a wide meaning and extends to cases where an entity with a trust entitlement has knowledge of an amount that it can demand and does not call for the payment.

For example, “financial accommodation” is said to occur where a private company beneficiary with a UPE, by arrangement, understanding or acquiescence, consents to the trustee retaining an amount to continue using it for trust purposes (i.e. the company has knowledge of the amount that it can demand immediate payment from the trustee and does not demand the payment). In that instance, the private company beneficiary is taken to have made a loan to the trustee under the extended definition of loan in Div 7A.

The new draft ruling also covers instances where a trustee sets aside an amount from the main trust and holds it on sub-trust for the exclusive benefit of the private company beneficiary. When the amount is set aside, the trustee’s obligation in respect of the entitlement to distributed income comes to an end and a new obligation arises for the sub-trustee under a separate trust. In that scenario, a choice by a private company beneficiary not to exercise a right to call for the sub-trust to end does not constitute “financial accommodation” in favour of the trustee.

However, “financial accommodation” is said to have been provided and thus a Div 7A loan occurs when the private company beneficiary has knowledge of the use of an amount of the sub-trust fund and does not call for payment of that part of the sub-trust fund by the private company beneficiary’s shareholder or their associate. Again, if the private company beneficiary and the trustee has the same directing mind and will, the private company beneficiary is taken to have knowledge of the use of the sub-trust fund when the trustee does.

Confused?

Div 7A and the constantly changing views of the ATO is enough to give any private company owner a headache. Fortunately, there are business accounting services in Melbourne available to help you understand and comply with requirements. If you’re not sure whether your private group’s arrangements may be affected, contact our accountants and business advisors in Melbourne for expert help and advice.

Details have been released on the GST Analytical Tool used by the ATO in GST reviews and other assurance matters. Fundamentally, the tool obtains figures from BASs lodged and the financial statement of performance from an entity, and makes various adjustments in order to understand whether the correct amount of GST is being paid relative to the reported economic activity. While this tool is currently only being used for the Top 100 and Top 1000 GST assurance programs, the basic principle could be applied to all GST reviews.

The ATO has recently released details of one of its tools used to obtain assurance that business taxpayers are paying the right amount of GST, called the GST Analytical Tool (GAT). This tool uses a standard method statement applying a top down approach to identify and understand variances between accounting figures reported in financial statements, and GST figures reported in Business Activity Statements (BASs).

The GAT provides the ATO with an understanding of the reasons for the differences between accounting and GST figures as well as verifying them with objective evidence. In essence, it is providing ATO with a holistic view of the business, and assurance that the correct amount of GST is being paid relative to the economic activity reported.

Although at this stage the ATO is only seeking to apply GAT to the Top 100 and Top 1000 GST assurance programs, the general principle of the analytical tool could be applied to any other sized taxpayer to obtain assurance that the correct amount of GST is being paid.

In respect of the Top 1000 GST assurance program, the GAT will be used mostly for taxpayers that predominantly make taxable supplies. Taxpayers in the insurance and property sectors or those with very complex structures will be considered on a case by case basis by the ATO. For the time being, the ATO notes that industries which are predominantly input-taxed will be excluded from applying the current GAT.

According to the ATO, it will seek to apply GAT at an early stage in any GST assurance review to provide an informed basis to drive the program, therefore, the GAT will not be looked at as a standalone measure. It will also seek to obtain assurance over adjustments derived through the GAT.

The process begins with the ATO obtaining figures from both the BASs lodged and the financial statement performance (prior to adjustments). Adjustments are then made consisting of grouping variances, exports, GST-free sales, input-taxed financial supplies, sale of fixed assets, accrued and/or deferred income, and any other adjustments which may affect GST (ie rebates etc).

An effective GST expense rate is then calculated after the adjustments to work out the effective GST sales rate, effective GST expenses rate, and the effective net GST rate, as well as any unexplained dollar value variances. In this process, where all the variances can be explained, a “Stage 3 rating” will be achieved. This is predicated on many factors including the extent which adjustments can be assured directly from audited financial statements or GL codes in trial balances that are mapped to financial statements which could form the basis of sample testing.

In the course of a review, where there are adjustments that are difficult to support with objective evidence, the ATO notes it will seek to understand how the figure is derived and expect to see the calculations behind it. In cases where that approach is not possible, it will work with the taxpayer to agree on the most appropriate approach, as according to the ATO, the GAT process is collaborative.

Need assurance?

If you’re not sure whether your business GST processes are robust, we can help you to ensure that all transactions are recorded correctly. If you need help with your BAS or to get through a GST-review process, we have the expertise to make it easy. Contact us today.

Tax time 2022 is fast approaching, and this financial year, the ATO will again be focusing on a few key areas to ensure that individuals are doing the right thing and paying the right amount of tax. These key areas are considered by the ATO to be problem areas where individuals make the most mistakes.

Wait Until the End of July

Like last year, the ATO recommends that people wait until the end of July to lodge their tax returns and not rush to lodge at the beginning of July, as much of the prefill information has not yet been bedded down. In the past, it has been noted that individuals who lodge early forget to include interest from banks, dividend income, and payments from government agencies and private health insurers.

The ATO also reminds taxpayers that while it receives and matches information on rental income, foreign sourced income and capital gains, not all of that information will be prefilled for individuals. Taxpayers will therefore need to ensure that all that information is included to avoid being caught up in ATO data-matching programs later on.

Some of the traditional areas that the ATO will be focusing on this year include record-keeping, work-related expenses, and rental property income and deductions, as well as capital gains from property and shares. In addition, this year the ATO will also focus on capital gains from cryptocurrency assets. It should be noted, however, that with the recent crashing of cryptocurrency prices, individuals are more likely to have a capital loss.

Reminder on Deductions Claim

The ATO reminds taxpayers that any deductions that are claimed require substantiation, and those individuals who deliberately attempt to increase their refunds by falsifying records or who are unable to provide records to substantiate those claims will be subject to “firm action”. For those taxpayers working from home or in hybrid working arrangements who claim expenses related to that, the ATO has said it will be expecting a corresponding reduction in other expenses claimed such as car, clothing, parking, tolls, etc.

Working From Home Expenses

Currently, there are still three methods available to taxpayers to deduct working from home expenses. These are actual cost, fixed rate, and the short-cut method. Taxpayers should check their eligibility and work out the one that suits their situation the best.

With the intense flooding experienced earlier this year, the ATO notes that some rental property owners may have insurance payouts related to their property. Any insurance payouts, along with other income received such as retained bond or short-term rental arrangements, need to be reported as income.

Lastly, the ATO will be keeping a close eye on those individuals disposing of property, shares and cryptocurrency, including non-fungible tokens (NFTs). Those with a capital gain need to include the gain in their tax return and pay tax on the gain at their marginal tax rates. Individuals who have recently sold out of cryptocurrency assets may have experienced a capital loss, which the ATO warns cannot be offset against other income such as salary and wages, but only against other capital gains.

Need Help this Tax Time?

If you need help this tax time to maximize your deductions and lower your taxes. If you’re not sure what you can claim on your income tax returns, or whether you’ve made capital gains or losses from selling assets, we have the expertise to help you. Contact us today.

Businesses will have another year to utilise the temporary full expensing of depreciating assets measure after it was extended to 30 June 2023.

The measure was originally introduced to encourage business investment in the backdrop of the COVID-19 pandemic and allowed eligible businesses to deduct the full cost of eligible depreciating assets of any value. Building and other capital works, as well as software development pools, do not generally qualify for full expensing. Neither do second-hand goods for certain entities. Special rules also apply to cars.

Read on to learn important details regarding eligibility.

Eligibility to Qualify

Businesses with an aggregated turnover below $5bn or those that meet an alternative eligibility test can deduct the full cost of eligible depreciating assets of any value that are first held and first used or installed ready for use for a taxable purpose from 6 October 2020 until 30 June 2023.

For small business entities with an aggregated turnover of less than $10m, the temporary full expensing of depreciating asset rules has been effectively replaced with simplified depreciation rules for any assets first held and used or installed ready for use for a taxable purpose between 6 October 2020 and 30 June 2023. This means that the full cost of eligible depreciating assets as well as costs of improvements to existing eligible depreciating assets can be fully deducted.

While businesses that are not classified as small business entities have the option of choosing to apply the temporary full expensing rules on an asset-by-asset basis, small business entities that use the simplified depreciation rules do not have that choice and are required to deduct the balance of its general small business pool in full. If a small business entity does not use the simplified depreciation rules, they have the choice to opt-out of temporary full expensing rules on an asset-by-asset basis.

What Doesn’t Qualify

Not all costs relating to assets qualify for temporary full expensing. For example, building and other capital works, as well as software development pools, do not generally qualify. Second-hand assets that would otherwise meet the eligibility conditions also do not qualify for temporary full expensing if the entity that holds them has an aggregated turnover of $50m or more.

Special rules also apply to cars, where the temporary full expensing is limited to the business portion of the car limit. For example, if a business entity purchases a car that costs $70,000 in 2021-22 that is used for both business (60% of the time) and personal purposes (40% of the time). The car limit for the 2021-22 year is $60,733. The temporary full expensing amount allowed would be $36,439 (60% of $60,733).

After the End Date

After 30 June 2023, temporary full expensing will cease to apply (unless there is another extension by the government). Any depreciating assets purchased after that date will have their decline in value worked out in accordance with either the uniform capital allowance rules or the simplified depreciation rules, depending on whether or not the business qualifies as a small business entity.

Need Help?

If you want to take advantage of temporary full expensing, first make sure the assets your business is planning to purchase will meet the eligibility requirements. We can also help you work out the temporary full expensing amount for any cars you are planning to purchase, as well as assisting you with other accounting services for your small business.