ATO warning: access company profits tax-free scheme

Grahame Allen • Feb 17, 2023

The ATO has recently issued a Taxpayer Alert warning that it is reviewing arrangements where an individual taxpayer accesses the profits of a private company in tax-free form through the use of an interposed holding company. It notes that the Alert will apply to all arrangements when, viewed objectively, there is an indication that the dominant purpose of the arrangements is for the individual to avoid tax. According to the ATO, these arrangements generally have the following features but may also include variations where the shares in the first company are pre-CGT shares or a holding company is interposed between a trustee shareholder and a company: A private company (company A) has retained profits on which it may have paid tax at the corporate rate. Shares in company A are held by an individual who may also be a director of company A. The individual disposes of their shares in company A to another private company (interposed company), receiving shares in the interposed company in return. The shares in the interposed company are issued at a paid-up amount being the same as, or similar to, the net assets of company A which includes the retained profits of the first company. The individual applies a CGT roll-over, to disregard for tax purposes any capital gain on the disposal of those shares in company A. Company A declares a franked dividend to the interposed company and discharges its liability to pay the dividend by way of cash, cheque or promissory note. The interposed company then provides a loan to the individual, sourced from the dividend received. The loan may be interest-free and repayable at call. Neither the interposed company nor company A have sufficient distributable surplus for Income Tax Assessment Act 1936 (Cth) (ITAA 1936) Div 7A to treat the loan made to the individual as a deemed dividend (whether directly from the interposed company or indirectly from company A). In some cases, company A could be wound up after the payment of the dividend to the interposed entity with the loan remaining uncalled and outstanding. The individual will have then obtained an amount tax-free in the form of a loan as opposed to without the interposed entity. As outlined in the above scenario, company A could have provided its accumulated profits to the individual by simpler means, such as paying a dividend or providing an interest-free, unsecured loan (assessable as a deemed dividend under ITAA 1936 Div 7A), both of which attract tax consequences for the individual. Hence, when viewed objectively, the purpose of the interposed entity appear to have a dominant purpose of avoiding tax. Besides the general anti-avoidance provisions in ITAA 1936 Pt IVA, the ATO will be actively reviewing these and similar arrangements to look for intention to repay the loan to decide whether the amount may be assessable under Div 7A. In addition, if the arrangements are found to be a “dividend stripping” scheme or operation, various legislation could apply to include the amount of the loan in the individual’s assessable income, and cancel the franking credit on the dividend paid to the interposed company.

Navigating complexities of crypto investments: SMSFs

By Grahame Allen • 03 May, 2024
The digital currency landscape continues to be treacherous terrain for Self-Managed Super Fund (SMSF) trustees, with a growing number of reports indicating significant losses due to a variety of factors, including scams, theft, and collapsed trading platforms. As the allure of high returns from crypto investments tempts many, the ATO is emphasizing the need for increased vigilance and education to safeguard superannuation benefits. The ATO has identified several causes of crypto investment losses: Trustees are being duped by fraudulent crypto exchanges, which promise high returns but are designed to siphon off investors' funds. Cybercriminals are increasingly targeting crypto accounts, hacking into them to steal valuable cryptocurrencies. A number of crypto trading platforms, particularly those based overseas, have collapsed, leaving investors with significant losses. Some trustees find themselves permanently locked out of their crypto accounts due to forgotten passwords, losing access to their investments. Scammers impersonating ATO officials are tricking individuals into revealing wallet details under the guise of investigating tax evasion, leading to losses. The ATO is urging trustees to educate themselves on the potential pitfalls of crypto investing. Resources such as the ACCC's Scamwatch and ASIC's MoneySmart provide valuable information on recognising and avoiding scams. Moreover, the ATO highlights that many crypto assets are not classified as financial products, meaning that the platforms facilitating their trade often lack regulation. This increases the risk of loss without recourse. For those SMSF trustees faced with the loss of a digital wallet, the first step is to determine whether the loss is simply one of lost access or if there is loss of evidence of ownership. In either case, meticulous record-keeping is the key to navigating the situation. The ATO allows for the claim of a capital loss if trustees lose their crypto private key or if their cryptocurrency is stolen. However, to substantiate such a claim, trustees must provide comprehensive evidence, including the date of acquisition and loss of the private key, the associated wallet address, the cost to acquire the lost or stolen cryptocurrency, and the amount present in the wallet at the time of loss. Additionally, proof that the wallet was under the trustee’s control, such as transactions linked to their identity or hardware that stores the wallet, is essential. It is important to note that while some may still consider cryptocurrency to be private and anonymous, and may baulk at reporting gains made, the reality is much different. The ATO has the ability to track cryptocurrency transactions through electronic trails, in particular where it intersects with the real word. In addition, through data matching protocols, the ATO requires cryptocurrency exchanges to furnish them with information on transactions, making it possible to trace and tax crypto trades. Trustees are therefore encouraged to report all transactions. For SMSFs that run businesses and accept cryptocurrency as payment, the approach to accounting is akin to dealing with any other asset, the value of the cryptocurrency needs to be recorded in Australian dollars as a part of the business’ ordinary income. In addition, where business items are purchased using crypto, including trading stock, a deduction is allowed based on the market value of the item acquired. SMSFs that run businesses should also be aware that there may be GST issues with transacting in crypto.

Trust reporting changes from 1 July 2024

By Grahame Allen • 26 Apr, 2024
Changes to simplify reporting for trustees and beneficiaries are commencing from 1 July 2024 as a part of the Modernisation of Trust Administration Systems (MTAS) project. From that date, labels in the statement of distribution, which is a part of the trust tax return, will be modified, a new schedule will be introduced for all trust beneficiary types, and new data validations will be added. Looking at each of these changes in depth, from the 2023-24 income year and onward, four new capital gains tax (CGT) labels have been added into the trust tax return statement of distribution. These changes will enhance the ability of trustees to appropriately notify beneficiaries of their entitlement to income and support the calculation of the CGT amount in individual tax returns. The ATO recommends that all beneficiaries obtain copies of the trust statement of distribution as it relates to their individual entitlements. This will allow beneficiaries to include the correct information in the new trust income schedule. The trust income schedule instructions will demonstrate how the information on the tax statement provided should be reported on the trust income schedule. This also includes trust income from a managed fund. It should be noted that beneficiaries will still need to complete existing trust income labels in beneficiary income tax returns as this new trust income schedule will not replace any existing trust income labels. Individual beneficiaries who lodge via MyTax will receive prompts about the additional reporting of trust income. In addition to these reporting changes, the ATO has reminded trustees that where beneficiaries’ entitlements reflected in trust resolutions are subsequently changed by either arguing the resolution as invalid, defective or made at a different time, it should be notified as an affected party where the change triggers tax consequences. For context, to ensure that beneficiaries are presently entitled to trust income, discretionary trusts are usually required to make a resolution by 30 June of any specific income year. For those specifically entitled to a capital gain, trustees of discretionary trusts must make a resolution in respect of that capital gain by 31 August following the income year in which the capital gain is made. According to the ATO, high-risk behaviours by trustees can include altering trust resolutions after tax returns are lodged, failing to inform the ATO of errors in trust deeds or their administration, and making decisions that affect the tax liabilities of a trust, such as early vesting, without notifying the ATO. These actions can lead to disputes over entitlements, amended assessments, and the potential for tax fraud or evasion charges if the issues are not promptly and transparently addressed with the ATO. The ATO notes that it is critical for trustees of trusts to maintain open and honest communication with the ATO, as failure to do so may lead to serious consequences, including the possibility of amended tax assessments for fraud or evasion (which are not limited by the standard four-year review period) and the imposition of significant penalties. The need for trustees to promptly advise the ATO of any mistakes in the trust deed or in the administration of the trust to prevent legal and financial complications cannot be overstated.

Old ATO debts: IGTO weighs in

By Grahame Allen • 19 Apr, 2024
In response to the ATO's recent actions on re-activating or off-setting old debts, the Commonwealth Ombudsman/ACT Ombudsman, and the Inspector-General of Taxation and Taxation Ombudsman (IGTO) have jointly issued new guidelines aimed at improving how Australians are notified about government debts. The publication outlines principles designed to ensure that the process of debt notification is handled with transparency, clarity and sensitivity towards impacted individuals. Mr Iain Anderson, serving as both Commonwealth Ombudsman and ACT Ombudsman, together with Ms. Karen Payne, Inspector-General of Taxation and Taxation Ombudsman, emphasized the importance of government agencies adopting a compassionate and principled approach when dealing with debt notification. "While the law may require agencies to take certain actions, it is crucial that these actions are taken in a manner that minimizes distress," they stated. The guidelines propose five key principles for the ATO and other government departments to consider when conducting programs: Transparency and Accountability - agencies should communicate clearly why the debt has arisen, fostering trust and confidence in the process. Clarity on the Debt's Origin - individuals should understand the source and nature of the debt, tailored to the recipient's circumstances. Clear Pathways for Review - information on how to request a review of the debt, apply for waivers, and arrange repayments should be readily accessible, ensuring individuals understand their rights and options. Accessible Support - contacts for further assistance must be provided, acknowledging that people may have additional questions or need personalized support. Commitment to Improvement - the process of debt recovery should be viewed as an opportunity to learn and enhance future practices based on oversight recommendations and past experiences. Also noted was the significance of reflecting on past interactions and the recommendations from oversight bodies to continually elevate how agencies engage with the community regarding sensitive matters such as debt recovery. Taxpayers who have an unresolved complaint or dispute with the ATO are able to lodge a dispute with the IGTO to receive independent assurance. IGTO will conduct an independent investigation of the actions and decisions that are subject of the dispute and can help taxpayers better understand the actions taken by the ATO and/or independently verify whether shortcomings exist in ATO’s action or decision which should be rectified, as well as identifying other options taxpayers may have to resolve their concerns. For example, in one case study, the IGTO assisted a taxpayer to verify whether the full amount of general interest charge had been remitted on their tax debts. In another, after a taxpayer’s original request for the Commissioner to exercise his discretion to advance their refund instead of offsetting against their tax debt due to imminent risk of homelessness was denied, the taxpayer lodged a dispute with the IGTO. Following urgent discussions between the IGTO and senior ATO officers, the ATO reversed their decision, and the taxpayer received his refund. The IGTO can also intervene in cases where the ATO has used family assistance payments to offset tax debts. According to another one of IGTO’s case studies, the ATO used a Centrelink Family Assistance (CFA) payment to offset a tax debt that a taxpayer had. At the time, the taxpayer was unemployed and supported two minors along with an ageing parent and relied on the payment. After IGTO intervention, the ATO agreed to refund the offset recognising it was not appropriate to pursue debt collection given the circumstances. Taxpayers interested in lodging a dispute with the IGTO should note that they must have first attempted to resolve the complaint directly with the ATO unless special circumstances exist. Those that remain unsatisfied with the ATO response should then lodge a formal complaint with the ATO for review. If taxpayers are still unsatisfied with the outcome of the ATO review, they can then lodge a dispute with the IGTO for an independent investigation either online or via post or phone.
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