Happy 20th Birthday Division 7A

The private company deemed dividend rules contained in Division 7A of the Income Tax Assessment 1936 turn 20 this month! Division 7A contains integrity provisions designed to prevent shareholders (or their associates) of private companies from inappropriately accessing the profits of those companies in the form of payments, loans or debt forgiveness transactions. There have been a number of amendments to Division 7A since it first applied from December 1997, and further legislative amendments are in the pipeline.

The Government announced in the Federal Budget 2016-17 that, from 1 July 2018, it will make much needed amendments to improve the operation and administration of Division 7A based on the Board of Taxation’s 2015 Post-implementation Review into Division 7A. These changes, which are intended to provide clearer rules for taxpayers and assist in easing their compliance burden while maintaining the overall integrity and policy intent of Division 7A, include: 

·       A self-correction mechanism for inadvertent breaches of Division 7A.

·       Appropriate safe-harbour rules to provide certainty.

·       Simplified loan arrangements and a number of technical adjustments to improve its operation and provide increased certainty for taxpayers.

With the start date for these proposed changes looming, we are looking forward to the release of further details. The next twelve months is shaping up as an interesting time for those that are subject to these rules.

ATO guidance on the Petroleum Resource Rent Tax

The Australian Taxation Office (ATO) has updated Practical Compliance Guideline , which explains how the ATO will allocate compliance according to the assessment of risk in relation to deductibility of general project expenditure under section 38 of the Petroleum Resource Rent Tax Assessment Act 1987 (Cth). The guideline has been updated to include social infrastructure expenditure costs arising from a statutory requirement or an entity’s social license.

In addition, the ATO has issued which provides guidance to ATO staff on the period within which a Petroleum Resource Rent Tax assessment can be amended to correct an error in a transfer of exploration expenditure.

Proposed amendments to Early Stage Investors, VCLP and ESVCLP regimes

Treasury has exposure draft legislation and explanatory material for public consultation regarding proposed amendments to the Tax Incentive for Early Stage (angel) Investors and the Venture Capital Limited Partnership (VCLP) and Early Stage Venture Capital Limited Partnership (ESVCLP) regimes. The amendments are proposed to ensure that investments in FinTech businesses can access support under each program, and to also rectify a number of minor technical issues.

Draft law on new measures to tackle black economy

The Minister for Revenue and Financial Services, Hon Kelly O’Dwyer MP, has released for public consultation draft legislation and explanatory materials on measures announced in the 2017-18 Federal Budget to address the black economy. This package of measures includes amendments to the law to:

  • ban the manufacture, distribution, possession, use or sale of sales suppression technology, and

·       extend the Taxable Payment Reporting system to two high-risk industries – cleaning and couriers – to ensure payments made to contractors in these sectors are reported to the Australian Taxation Office (ATO).

Labor proposes reforms to target tax evasion and aggressive tax planning

In a at the Australian Petroleum Production & Exploration Association’s Biennial Taxation and Commercial Conference, the Shadow Assistant Treasurer discussed the Australian Labor Party’s proposed reforms to target tax evasion and aggressive tax planning which includes:

·       Public reporting of country-by-country reports.

·       Whistleblower protection and incentive/rewards.

·       Implementing a publicly accessible registry of the beneficial ownership of Australian legal entities, including trusts.

·       Amending Australian Government procurement processes.

·       Requiring mandatory reporting of a specific ‘material tax risk’ - tax haven exposure - to shareholders. The proposal would amend the Corporations Act 2001 (Cth) to require disclosure of dealings in ‘international material tax risk jurisdictions’ to shareholders.

Board of Taxation’s report on definitions in State and Federal tax law

The Board of Taxation has published its recent report on the . Broadly, the common areas of ‘inconsistencies in core definitions and concepts’ emerging from consultations were (in order of priority):

·       Payroll tax concepts.

·       Definition of employee.

·        ‘Indirect interests in land’ (commonly referred to as ‘land rich rules’).

·       The meaning of ‘employee’ for the purposes of the PAYG withholding and superannuation guarantee.

ATO’s annual report for 2016-17

The ATO has released its . Some of the key highlights include:

  • The Tax Avoidance Taskforce (established on 1 July 2016) raised AUD4 billion of additional liabilities against a handful of large businesses and multinationals. Since 1 July 2016, ATO action has resulted in AUD1.5 billion collected from large multinationals.
  • Early engagement and alternative dispute resolution has resulted in a 61 per cent reduction in the number of appeals to the Administrative Appeals Tribunal since 2013-14.
  • Since the introduction of the independent review process for the large market in July 2013, 41 reviews of significant disputes over large corporate audit positions have been conducted. Of those, only one matter proceeded to litigation.
  • ATO litigation results show success in more than 80 per cent of cases.

·       The implementation of SuperStream has realised significant efficiencies - about AUD400 million per year for funds, AUD400 million per year for employers and generated savings for members at an estimated AUD2.4 billion per year.

Challenges which the ATO has indicated it faces include influencing community perceptions and attitudes about tax, and minimising the various tax gaps. Its reported continued focus will be on delivering under the Tax Avoidance Taskforce. In the coming year, the ATO will increase its attention on small businesses, the black economy, phoenix operators and the individuals market.

Government response to review of prior ATO annual reports

The Government has responded to the House of Representatives Standing Committee on Tax and Revenue Committee reports on the and . The Government has agreed, or partially agreed, to most recommendations of the Committee in relation to the ATO including:

  • The ATO is to publish on its website a timetable for transition to the new tax agent platform.
  • The ATO is to consult on whether draft public rulings should cease on a certain date or when they are made redundant by legislation.
  • The ATO is to report on additional information on staff deployment in person to person advice, compared with online delivery and maintenance; staff training; and the use of contract staff and volunteers.
  • The ATO is to report progress on its digital strategy, and the security and functionality of online systems in its annual report.
  • Further investment is required by the ATO in data analytics and auditing to promote integrity of the tax system.
  • The ATO is to continue to publish information on system availability on the Tax Agents Dashboard, soon to be supplemented by a Practitioner Lodgment Service Dashboard with similar features.
  • The ATO is to report on the number and timeliness of public rulings issued and finalised in its annual report.
  • The ATO is to refresh published tax gap estimates, and release these as part of its annual report.

·       The ATO is to report in its 2017-18 Annual Report, debts written off as unrecoverable at law and those which are uneconomic to pursue.

IGT’s Annual Report for 2016‑17

The Inspector General of Taxation (IGT) has released his . Some of the key points include:

  • For the 2016-17 financial year, the IGT received 2251 complaints - an approximate five per cent increase compared to the number received in the previous financial year. The most common complaints related to the ATO’s debt collection action, delays in processing activity statements and tax returns, the ATO’s audit and internal review activities, Superannuation Guarantee investigations and the handling of complaints.
  • The IGT has also begun to leverage the insights from complaints data to improve the tax system on a more real time basis by conducting targeted or specific investigations promptly. The first such investigation examined the ATO’s handling of allegations of tax evasion received from the community.

·       As at 30 June 2017, two reviews were finalised - a review into the Taxpayers’ Charter and taxpayer protections, and the review into the ATO’s employer obligations compliance activities. Reviews into aspects of the PAYG instalments system, GST refund verification, future of the tax profession and the ATO’s fraud control management are currently in progress.

Productivity Commission Report

The Productivity Commission has a report on its five-year productivity review. The report evaluates the factors and influences that may affect Australia’s economic performance over the medium term, in order to offer advice on Government priorities (see also the Government’s ). The Commission has made a number of tax-related recommendations, including:

  • Removing the tax rebate for private health insurance ancillaries.
  • Removing the current concessional treatment of high-alcohol, low-value products, primarily cheap cask and fortified wines.
  • Removing stamp duties and transition to a broad-based land tax.

·       A commitment to tax reform as an integral part of the reform agenda.

High Court to consider matter regarding distribution of franking credits to trust beneficiary

The Commissioner of Taxation has been granted to the High Court against the Full Federal Court’s decision in . The Full Federal Court had allowed the taxpayer’s appeal, finding that the beneficiary of the trust was entitled to the benefit of the franking credits for the relevant years, notwithstanding that the allocation of franking credits was disproportionate to the distribution of the franked dividends. The Supreme Court of Queensland, in the first instance, held that trustee resolutions were effective in distributing franking credits to the beneficiaries of the trust.

AAT affirms defaults assessments relating to sale of website domain name to foreign buyer

The Administrative Appeals Tribunal (AAT) in has affirmed default assessments and penalties issued to a taxpayer for failing to lodge tax returns and disclose payments received in relation to the sale of a website domain name to a foreign buyer.

In this case, the taxpayer had received payment for the sale that was structured by an initial payment, followed by earn-out payments contingent upon the purchaser ‘monitoring’ the asset. A final payment was to be made contingent on a set revenue target being exceeded. The Commissioner identified the foreign sourced payments utilising Australian Transaction Reports and Analysis Centre (AUSTRAC) data. As the taxpayer had not filed any tax return for the relevant financial years, the Commissioner issued default assessments on the basis that the payments were revenue in nature.

As the taxpayer failed to provide documentation to verify the arrangements for the sale, he was not able to establish that the issued assessments were excessive or incorrect.

Peru-Australia FTA

Australia and Peru have finalised a comprehensive free trade agreement (PAFTA). The PAFTA will eliminate 99 per cent of tariffs that Australian exporters face into Peru. There will be immediate duty free access for Australian sheep meat, most wine, and most horticulture products including almonds, kangaroo meat and wheat.