Guidance on deemed dividend rules for private companies

The Australian Taxation Office (ATO) has issued the following in relation to the application of the deemed dividend rules (Division 7A), which apply to private companies:

·       Practical Compliance Guideline PCG 2017/13, issued on 19 July 2017, deals with the repayment of Unpaid Present Entitlements (UPEs) owing from a trust to a private company beneficiary, which have been ‘invested’ under an interest only seven-year loan and are due to mature on or before 30 June 2018. The ATO has confirmed that if the principal of the loan is not repaid on or before the date of maturity, a seven-year Division 7A complying loan agreement may be put in place between the trust and the private company beneficiary. For further information, refer to PwC Australia’s TaxTalk Alert.

·       Tax Determination TD 2017/D3, issued on 28 June 2017, indicates the ATO’s preliminary view that the interposed entity rules can apply to a payment or loan made by a private company to another entity where that payment or loan is an ordinary commercial transaction. Comments were due on the draft determination by 26 July 2017.

·       Tax Determination TD 2017/17, issued on 28 June 2017, confirms the Division 7A benchmark interest rate is 5.30 per cent per annum for the income year commencing on 1 July 2017. This benchmark interest rate is relevant to determine if a loan made in the 2016-17 income year is taken to be a dividend, and to calculate the amount of the minimum yearly repayment for the 2017-18 income year on an amalgamated loan taken to have been made prior to 1 July 2017.

The ATO has also identified unpaid present entitlement (UPE) unitisation arrangements as an area which attracts its attention for privately owned and wealthy groups. A ‘UPE unitisation arrangements’ is where a private group seeks to avoid Division 7A obligations by implementing an arrangement where a private company subscribes for units in a unit trust. The unit trust may then provide payments or loans to other entities within the private group.

Confusion over small business company tax cuts

The Minister for Revenue and Financial Services issued a media release in response to media reports that the ATO has broadened the scope of the small business company tax cuts to companies that carry on a passive investment business. The Minister indicated that the policy decision made by the Government to cut the tax rate for small companies was not meant to apply to passive investment companies. Refer to PwC Australia’s TaxTalk Alert for further information.

Guidance on proposed similar business test for accessing losses

The ATO released Draft Law Companion Guideline LCG 2017/D6 on 21 July 2017, which provides guidance on the new similar business test currently proposed by Treasury Laws Amendment (2017 Enterprise Incentives No. 1) Bill 2017. Under this new test, a company will be able to utilise tax losses made from carrying on a business against income derived from carrying on a similar business following a change in ownership or control.

The Draft Guideline provides guidance on what carrying on a similar business means and includes various examples to demonstrate the approach the ATO will take in assessing whether a company satisfies the similar business test and by reference to the four legislative factors to be taken into account. In summary, the Draft Guideline indicates that it will be more difficult to satisfy the similar business test if substantial new business activities and transactions do not evolve from, and complement, the business carried on before the test time. This is contrasted with the case where a company might develop a new product or function from the business activities already carried on, and this development opens up a new business opportunity or allows the company to fill an existing gap in the market.

Comments are due by 21 August 2017.

Taxation of rights and retail premiums under renounceable rights offers

The ATO issued Tax Ruling TR 2017/4 on 5 July 2017, which sets out the Commissioner’s view about the taxation of rights granted and retail premiums paid to retail shareholders in connection with renounceable rights offers where shares are held on capital account. It covers the tax treatment of Australian resident eligible retail shareholders and foreign resident ineligible shareholders.

The difference between a renounceable and a non­renounceable rights offer is that the former allows the eligible shareholder to sell their entitlements. The tax treatment of retail premiums paid in respect of non-renounceable right offers is dealt with in Tax Ruling TR 2012/1.

Shareholders that are covered by TR 2017/4 are not required to include anything in their assessable income upon the grant of the entitlement. Any retail premium received is treated as the realisation of a CGT asset. The Ruling does not cover the application of Australia’s tax treaties. The Ruling applies to years of income both before and after its date of issue.

Accounting for uncertain tax positions

The Australian Accounting Standards Board (AASB) has stated in a media release that more Australian companies could be recognising amounts in dispute with the ATO in financial reports, under new guidance from the International Financial Reporting Standards (IFRS) Interpretations Committee on IFRIC 23. Refer to this Straight Away IFRS Bulletin, which clarifies how the recognition and measurement requirements of IAS 12 Income taxes are applied where there is uncertainty over income tax treatments. Income Tax: Uncertainty over income tax treatments discusses the IFRIC Interpretation of IAS 12 in further detail and sets out a timeline and suggested action plan to consider for a December year end entity.

Director penalty notice had been properly given

The Supreme Court of NSW Court of Appeal in Fitzgerald v Deputy Commissioner of Taxation [2017] has upheld the decision of the primary judge that a director penalty notice had been properly ‘given’ in the manner required by section 269-50 of Schedule 1 to the Taxation Administration Act 1953 (Cth), as the evidence established that it had been posted to the appellant’s address derived from a search of the relevant company in Australian Securities and Investment Commission’s records.