The minutes and action items of the previous meeting held on 27 November 2009 were confirmed and accepted by the members.
Dominic Belvedere from the Small and Medium Enterprises (SM&E) business line presented a technical update on Division 7A.
Dominic spoke about the status of the draft TR 2009/D8. Following a view put forward in 2009 as to whether Division 7A can apply to distributions made from a trust to a related private company when the distribution remains unpaid the ATO issued draft Ruling TR 2009/D8 on 16 December 2009. The ruling addressed the ATO's view as to when an actual loan exists and when an unpaid present entitlement (UPE) may itself be a loan under Division 7A.
It is expected that the final ruling will be issued before 30 June 2010.
It's the ATO view that a UPE itself may be subject to Division 7A as it may fall within the extended definition of a loan in subsection 109(D) (3) and the UPE may be a Division 7A loan because it is:
- a provision of credit or any other form of accommodation, or
- a transaction which in substance affects a loan.
The ruling considers that a UPE will be a Division 7A loan where:
- a private company has (or had) a present entitlement to an amount from a trust that is part of the same family group as the company; and
- funds representing the present entitlement remain intermingled with other funds of the trust estate or are otherwise able to be used for the general purposes of the trust.
There two sections in the ruling:
- section 2 deals with actual loans
- section 3 deals with UPEs not converted to a loan.
Section 2 of the draft ruling applies retrospectively as well as prospectively. It also applies to UPEs that have been extinguished and replaced by an actual loan.
The ATO will consider that this type of loan can arise in the following situations:
- there is a document evidencing a loan agreement between the company and trust
- the company and trust both record the amount as a loan rather than a UPE
- the trustee exercises a power to apply funds for the benefit of the corporate beneficiary and this is evidenced and it is recorded as a loan.
Such loans have always been subject to Division 7A, there is nothing new here.
With respect to section 3, the ruling puts forward a view that a UPE can itself be a Division 7A loan under the extended definition of a loan but this only applies to UPEs created from 16 December 2009. This part of the ruling will have a prospective application and only apply to UPEs created from 16 December 2009.
The ATO accepts that there will be limited application for Subdivision EA under the ruling. The ruling clearly states that where Division 7A applies to a UPE then subdivision EA will have no application in respect of that UPE. However subdivision EA could still apply in certain situations. For example, in relation to UPEs created prior to 16 December 2009 and where the UPE is not considered to be a Division 7A loan as for example it is held on sub-trust or intermingled with trust funds and the benefits flow to the beneficiary private company.
Working group members were advised that the Public Rulings Panel met on 5 May to deliberate the ruling. Also the Public Rulings branch took the unusual step of accepting a request by the professional bodies to present the views of their members directly before the panel.
Some members expressed concern about the 30 June issue date for the final ruling feeling they will not have enough time to advise clients.
The ATO replied that it's mindful of this and assured members the product should be available earlier than the 30 June.
The practice statement currently under development will provide guidance on the application of the ruling and addresses a number of the administrative concerns raised in the feedback received with respect to draft TR 2009/D8. Some of the issues that will be addressed are:
- Guidance on the identification of a section 2 and section 3 loan. A flow chart will be included to assist with the commentary provided.
- What evidence is required to establish that the UPE is used for the absolute benefit of the private company.
- Evidence required to substantiate the existence of a sub trust.
- Does the sub trust need to lodge a tax return.
- Importantly when does a post 16 December 2009 UPE convert into a loan?
Working group members were advised that the practice statement will issue as a draft on the same date the taxation ruling will issue as a final. Tax practitioners and the professional bodies will have the opportunity to provide feedback before a final practice statement is issued.
The ATO will continue to consult with tax practitioners and the professional bodies with respect to these products.
Members were advised that a draft ruling on the requirements of section 109RB as it applies to the Commissioner's discretion, including the technical interpretation of phrases 'honest mistake' and 'inadvertent omission' will also be addressed in a public ruling. A draft ruling is expected to issue before the 30 June 2010. In addition to the draft ruling, a practice statement will be developed that will address the practical application of the Commissioner's discretion, which will include how an 'inadvertent omission' or 'honest mistake' is to be established. The practice statement will also address contributing factors that the Commissioner must have regard to in making a decision.
The ATO referred to ATO ID 2010/82 issued for guidance on the minimum yearly repayments required in the first year after a Division 7A loan is made.
Finally a member commented that in spite of the budget and the Henry review small business still has concerns around Division 7A it's more than just an issue for agents but one for small business as well.
The chair thanked Dominic for his presentation.
Vicki Squires from S&ME presented a consultative discussion on Division 7A amendments - legislative amendments to tighten Division 7A and ensure it operates as intended.
The Tax Laws Amendment (2010 Measures No.2) Bill 2010 was introduced into parliament on 17 March 2010 with Schedule 1 addressing distributions to entities connected with a private company. The legislation has been referred to the Senate Standing Committee on Economics. This committee reported on 11 May 2010. Royal assent to the legislation is not anticipated until June 2010 but the proposed amendments apply from 1 July 2009.
Vicki explained that although consultation doesn't usually happen prior to the enactment of legislation because of the retrospectivity of this legislation there is limited time to advise stakeholders of the new requirements so consultation is happening now. With respect to UPEs the recommendation to the Commissioner regarding interactions with 109D and subdivision EA will be reviewed by the ATO and the draft ruling and practice statement will reflect these.
Vicki detailed the 12 amendments to Division 7A.
One member commented that there is a lack of sympathy for taxpayers who have acquired assets in the past through a company structure who did it for other reason than to avoid Division 7A.
Another member commented that taxpayers don't understand Division 7A and it is the tax practitioner who deals with it.
The components of the communications strategy were explained and the components discussed.
Vicki then asked members if there are any particular aspects of the law that should be included or emphasised in the communication products.
- There is a need for clear guidelines on valuation methods.
- What does available for use to the exclusion of the company mean?
- Need examples of interposed trust arrangements that will satisfy the tests and what does 'interposed' mean.
- A need for a comprehensive tax ruling to explain interposed arrangements under section 109T.
- There is a lack of commerciality on the part of the ATO because it doesn't understand the tax planning that practitioners do with their clients.
- Fact sheets are not much use unless there is information about how it applies so there is a need for interpretative products.
With the changes regarding usage, taxpayers may not realise that they have to make a payment by 30 June or put a loan in place and pay interest.
For information products, advice concerning valuation such as the market valuation guide would be useful.
Need to have communication products clearly marked as to the date applicable.
Member commented that smaller accounting firms are struggling this is a 2009 budget measure but there is still no law or certainty.
Members try to keep clients informed with bulletins and fact sheet but the real issue is raising levels of understanding so a double pronged approach is needed to raise awareness and promote greater understanding.
The chair told Vicki the working group members are able to review fact sheets and other products out of session and Vicki invited members to contact her either directly or through the secretariat.
The chair thanked Vicki for her presentations and expressed the ATO's appreciation to the members for their input and suggestions.
Chris Martin from S&ME presented a discussion on the SME Asset Betterment pilot.
Chris advised members that he wanted to share with them plans to commence a pilot program on asset betterment reviews in the SME market. He also wanted to provide a broad outline and background to the pilot including details around the proposed asset betterment approach. Members were told that the ATO would be seeking their feedback on this approach.
The ATO commented that its client identification work has developed an automated system to identify the high wealth individual (HWI) population (net assets greater than $30 million). This same system was also used to define our wealthy Australian population (net assets between $5 million and $30 million).
There are three major steps in the client identification process:
- Calculate the net wealth of individual entities.
- Link the relationships between entities within economic groups including individuals, trusts, partnerships and beneficiaries.
- Attribute an estimate of net wealth to individual(s) controlling an economic group.
Members were told that the automated system draws on both internal (ITR) and external information to develop an estimate of net wealth. Within the automated system there are assumptions made regarding value of assets and liabilities. Once the wealth of the group has been determined the ATO is better able to understand the HWI and wealthy Australian populations.
The ATO also said it will be developing an asset betterment methodology. The feedback and lessons from the initial cases will be fed back to improve the system. Members were told the ATO is exploring other opportunities for using the data as part of its broader compliance strategies.
Members asked if the wealth estimate is based on balance sheet items. Greg Williams said no. The ATO explained wealth is drawn on ABS information on property data and transactional data. The ATO is also moving to examining holdings.
One member commented that his clients' asset values may have gone up but they haven't sold the property and rents continue to rise. The ATO acknowledged this was a transactional tool and would detect inflationary increase in values.
Chris discussed that the asset betterment tool will measure wealth at two points in time to determine the increase in wealth and then compare that increase with income disclosed in the ITR. A pilot of 10 cases will start in Melbourne. The cases will be selected to test ATO data and to examine some of the bigger discrepancies.
The asset methodology is to be developed but initial contact will be in a review giving the taxpayers the chance to review their records. Given this new approach we will speak with the tax agent very soon after sending out the letter.
Members were then referred to the template which is the output of the asset betterment tool. The template was a 'live' case which showed the increase in wealth over the past five years.
The ATO emphasised to members that the importance of this session was for the ATO to demonstrate to them where it is going and how it uses data. This is an automated tool and in terms of obtaining data it is evolving daily.
The ATO said they were trialling the tool, if it is successful then the ATO may communicate this more broadly to the whole community.
Some members commented on a lack of understanding on why it takes the ATO so long to develop systems.
Member suggested that the ATO exercise discretion in accessing this data.
The chair thanked Chris for his presentation and urged members to pass on any feedback to the secretariat.
Annamaria Carey, Assistant Commissioner, Tax Practitioner Lodgment and Strategic Support provided an update on the current status of the change program (CP).
Annamaria began the discussion by inviting members to raise any concerns or issues they might be having in relation to the current status of the CP.
The ATO explained that the processing of returns and the issuing of refunds has been the most significant aspect of what has been occurring in the last couple of months. There have been two significant issues so far:
- Early March - the notice of assessment was a big issue and caused delays.
- April - experienced issues with cheques not printing or not being issued.
The ATO said that now processes are in place to expedite notice of assessments (NOAs) and statement of accounts (SOAs) through the queues as quickly as possible.
One member described the mood in his practice vis a vis the CP as one of bemusement but not one of 'great pain'.
Members commented that the general tone of messages from the ATO is that everything is going to be okay with no issues and when there are issues then there is silence from the ATO.
Members said that on the whole the level of communication from the ATO was very good - almost too much in fact. However at times the communication was not accurate. The information sent out needs to be more realistic.
ATO advised that the member's comments and concerns were noted and explained that sometimes anticipated time frames blow out or events occur subsequent to messages issuing. However, when the communication was originally issued it was based on facts known at the time.
ATO referred to the review by the Inspector General of Taxation into the implementation of the CP and said the accuracy and timeliness of the ATO messages to agents was one area being examined.
Another member stated he had no great angst in relation to the delays but had an issue with the refund cheques dated the same day as the assessments as it could have been embarrassing.
A member asked if the ATO going to go back to one page for electronic lodgement declaration (ELD) and one page for assessments.
The ATO responded that it is aware of the concerns/views on the new look NOAs and SOAs and currently has a design team looking at the issue. It has had workshops with a range of externals including software developers, tax agents and small business representatives in mid March to discuss the issue. The biggest issue was around size, clarity and the language used on the new forms. People generally found the new look confusing. The design team from that workshop is now working on ways to improve the forms.
The ATO also informed members that it will use the working group more often in the future to consult on change program design issues.
The chair thanked Annamaria for her presentation.
Greg Divall, Program Manager, Standard Business Reporting (SBR) program from Treasury provided a briefing on SBR.
Greg referred members to the SBR website for the latest information.
The SBR program is led by The Treasury, in collaboration with:
- Australian Securities and Investments Commission
- Australian Prudential Regulation Authority
- Australian Bureau of Statistics (taxonomy only)
- All state and territory revenue offices
- Business and industry associations
- Software developers.
SBR's aim is to reduce the business to government reporting burden by building specifications and government reports into the available software.
Features of SBR:
- Sign-on is simple and safe via a quick and easy registration processes.
- Enables business to report via its own accounting software, by using AUSkey the single, secure sign-on to SBR.
- AUSkey means businesses have a single credential for interacting electronically with government rather than maintaining separate credentials for each agency interaction.
- Businesses will also be able to use AUSkey to access the ATO's on-line services.
Members asked if they could apply for an AUSkey if they did not have a current ATO credential. The ATO replied that you don't have to have an existing ATO digital certificate to register for AUSkey. You can register on the ABR website to get an AUSkey but to get an Administrator AUSkey you need to be listed on the Australian Business Register as a Director.
Once you have an Administrator AUSkey you can grant permissions to others. If you have a current ATO digital certificate you can continue to use it until it expires or is cancelled.
Members asked what would happen if a tax practitioner made a mistake on a form that is sent to multiple agencies?
Greg explained that the information provided only goes to one agency at a time. If a mistake is made it needs to be corrected with each agency. In some circumstances this is possible through SBR and in others you will need to contact the agency involved.
A member wanted to know why SBR isn't compulsory.
Greg replied that the government appreciates that not everyone uses electronic channels and for some firm's paper will always be the preferred channel. SBR encourages firms to explore the opportunities the SBR channel will present to save time and money in reporting to government.
Greg explained how SBR works for recurring reports like business activity statements (BAS), tax file number (TFN) declarations, pay as you go (PAYG), for these the business software will:
- Provide pre-filling of reporting information.
- Allow editing and further data entry to complete the form.
- Let businesses send the report directly from their accounting software to the relevant agency.
- Provide a receipt, confirming the report was delivered.
However, forms such as company tax returns will have some pre-filling from the ATO and the accounting software, but will rely on completion of the remaining labels by accountants and tax professionals.
Greg provided a summary of benefits for tax practitioners:
- Save time and reduce errors.
- Certainty that reporting obligations have been met.
- An easier way to share information between tax professional and client.
- Access to more sophisticated reports.
- Real time financial performance information will be useful in guiding and advising clients when it matters not after the close of the income year.
The chair thanked Greg for the briefing on SBR and encouraged members to visit the website for more information on AUSkey and SBR.
Members have received an electronic version of Greg Divall's presentation in the meeting summary document.
Martina Maxwell from personal services income (PSI) and losses in the Micro Enterprises and Individuals (MEI) business line provided members with the current status of the personal services income and the alienation project PSI/personal services business (PSB) and an update on PSB. Martina also spoke briefly about Part IVA and PSB.
The ATO had input into the Board of Taxation review of alienation of personal services income which was subsequently referred to the Henry review for consideration.
This year the ATO is identifying higher risk cases where there is evidence of taxpayers inappropriately splitting income and claiming expenses. This is done via data matching.
The ATO is also directing resources to a variety of education activities including currently 'tidying' up the relevant information on the website, putting together a webcast and organising sessions specifically targeting PSI.
A member commented that there isn't much case law out there about PSI.
The ATO referred the member to the range of PSB booklets available on the website.
The ATO is currently undertaking the review phase of a possible test case program which will test the application of Part IVA to personal services. All of the facts are needed before a decision is made as to whether the test cases program will proceed. The ATO doesn't want to release anything that is misleading so can't comment on the application of Part IVA to particular circumstances and while there are a reasonable number of cases the ATO can't be sure that they can identify suitable cases which will address every aspect of the application of Part IVA where there is a PSI.
Member said that tax practitioners we struggle a bit with PSI/PSB. There are not many cases to follow and it's the cases in the middle that are of concern. Tax practitioners also question where the ATO is going with its education activities.
The chair agreed there is an opportunity for the ATO to communicate its position and that people want direction and guidance. The ATO needs to gauge how far it can go with examples and provide more guidance. The ATO also needs to put together some frequently asked questions (FAQ) or basic guidance to give people more certainty.
Member commented that all the information is about whether the PSI rules apply in the PSB world.
The ATO replied that members should consult the ATO publication NAT 3421 Personal services income schedule for 2009.
Members again said that there is really nothing to help them directly with PSI/PSB. Also sighted cases where people with PSI income, like doctors, were treated as PSB cases.
The chair acknowledged that there are two members of the working group with vast experience with PSB/PSI and he undertook to talk to presenter directly to organise a hook up with the two members for whom PSB/PSI are ongoing issues to discuss their specific questions.
The chair thanked Martina for her presentation.
Maree, from the S&ME gave members an update on a workshop held in Moonee Ponds on 16 April for the 'Information Collection for wealthy Australian clients' working group. The members of the working group are drawn largely from the ATPF SME Working Group.
There are estimated to be about 76,000 wealthy Australians. A wealthy Australian is identified as an Australian resident with a net wealth of between $5 million to $30 million.
The purpose of the 16 April workshop was to discuss and workshop the three key areas of the ATO's information collection process for wealthy Australians:
- the type of information collected
- the way the ATO collects the information
- the source of the information the ATO uses.
During the workshop five key focus areas emerged:
- format of the questionnaire
- technology/information requirements
- administration - ATO procedures
- information currently available.
The format of the workshop consisted of:
- An update on the demographics for wealthy Australians.
- Information of the ATO's use of a risk engine automated software program which risk rank the wealthy Australian population.
- An update on the wealthy Australian strategy.
- Update on initiatives to improve voluntary compliance such as the ATO's collaboration with KPMG (Sydney) on two pilot projects for the $100 million - $250 million segment. These include the risk assessment information sharing project and Annual Compliance Arrangement 'Lite' project.
- James Blackburn discussed the process from a tax professional and tax agent perspective when they receive a Private Group Structure questionnaire (entity letter) from the ATO.
- The ATO also reported back to the working group that it sent out 2,800 entity questionnaires for its private group structure study and the response rate was approximately 94%. The ATO went through case scenarios and some of the concerns raised by tax agents, such as the cost of filling in the form.
The working group also looked at the ways the ATO might ask for information in the future including using more targeted questionnaires and utilising the portal for the collection of information.
The ATO also reported that it is reviewing the content of the questionnaire and asked members to note that this exercise is only being undertaken in respect of the wealthy Australian population and not the high wealth individual population.
Member commented that a think tank group process would be beneficial in questionnaire design.
The chair noted that there are times when the ATO needs to look critically at its timing and the turnaround period it imposes when sending out questionnaires.
The chair thanked Maree for her presentation.
Nick Botfield Director pre-filling of tax returns and George Holton, Assistant Commissioner in S&ME gave members a description of the ATO's pre-filling for business taxpayer's feasibility study. The study has been commissioned by the ATO executive with its findings to be available before 30 June 2010.
A pre-filling service for businesses will help both businesses and tax agents prepare tax returns and they will have the added assurance of knowing that they are getting it 'right'.
The study will assess the feasibility of a pre-filling service to assist in completing:
- company returns
- trust returns
- partnership returns
- self managed super fund returns, and
- business and professional items schedules for sole traders.
Consultation with the community so far has seen tax agents express an interest in the pre-filling service and industry representatives indicating that businesses are not likely to use such a service if they have a tax agent. But they did see value in providing the service to businesses who self prepare and a good way to do this would be providing pre-filling data directly to their accounting software.
Findings to date indicate that a business pre-filling service can be extended to businesses in the SME segment ($2 million to $250 million turnover).
A member commented that the pre-filling of individual tax returns which has been in full deployment since 2008 is working quite well but that this is the first time he has seen pre-filling of business tax returns.
Another member commented that in Scandinavia pre-filling for individuals is well advanced but he is not aware of a pre-filling service for businesses.
Another member commented further that pre-filing for business is harder to do than for individuals. But he acknowledged that while it's a good tool it would be more useful for reconciliation than anything else.
One member further commented that if the ATO is providing data as a checklist that is a good idea but he couldn't see himself using pre-filling.
However another member pointed out that with business pre-filling there is a risk that information may be duplicated at more than one label.
Members said that they would be more likely to use banks as an information source.
The ATO asked if an ATO pre-filling advisory service would be of value and assured members there would be no compulsion to provide data.
The chair thanked George and Nick for their attendance and presentation.
Nick Botfield to provide questions for secretariat to circulate to members for their responses.
Secretariat to circulate to members
Comments were due by 22 June
Brett Sydney and Andrea Ross from S&ME provided members with the current status of the new measure to extend TFN withholding arrangements to closely held trusts and the progress of the legislation. They also sought to consult with members on proposed transitional arrangements and the communication of the changes to agents.
The legislation was introduced into parliament on 17 March and has been referred to the Senate Standing Committee on Economics.
Royal assent is anticipated in June 2010 and the date of effect is 1 July 2010 and applies to the first income year that starts on or after that date.
Overview of the changes:
- Applies to closely held trust including family trusts.
- All beneficiary entity types.
- Income years that start or after 1 July 2009.
- Beneficiaries may quote TFN to avoid withholding and can claim a credit for amounts withheld.
- Interaction with other trust laws.
- Trustee reporting obligations - TFN reporting, withholding and remittance, annual reporting.
The ATO acknowledges that there will be a compliance cost with the implementation of this measure.
One member suggested getting the TFN from clients before any money owed was paid.
Another member pointed out that an agent can ask for a TFN but it doesn't mean it will be provided and added that a trustee return can currently choose to use either an address or a TFN and a lot of distributions don't have TFNs.
Members also commented that while they had been completing the TB statement in the past there seemed to be no further action on the part of the ATO. But the form still had to be completed accurately and lodged on time. Also in the past there have been instances where the commercial software used by agents defaulted to the wrong answer.
Members queried the purpose of this new measure - was it the result of revenue not being collected or is it designed as a deterrent to 'schemes'?
The ATO responded that this measure is designed to improve the data the ATO can get from returns. Currently the ATO is able to undertake some income matching from looking at distribution statements and trust returns.
The ATO put the following question to members - the ATO will need help with the administrative design around the transitional TFN reporting. Quarterly TFN reporting, withholding and remittance and annual reporting and how many members would be interested in being part of a series of targeted consultations with key interested parties?
The ATO is keen to work with agents as this is in both of their interests. Members who are interested in being a part of this process should confirm with the secretariat.
Three members put forward their names at the meeting to be directly contacted by the project team for an interview as part of the consultation process.
The chair thanked Brett and Andrea and urged members to come forward and share with the ATO their solutions to the issues around the new measure and to help test communication products.
Members to contact the Secretariat if they have comments on the new measure or are interested in being contacted as a part of the consultation around the new measure.
Contact details for three members who put their names forward for consultation on communication products passed to the project team.
George Roumeliotis from the capital gains tax (CGT) Centre of Expertise provided members with an update on the status of the draft CGT earnouts draft ruling.
Members were advised that in view of the new earn out measure announced as part of the 2010-11 Federal budget, the draft TR remains as a draft and will not progress towards final status pending the enactment of the new measure. Until royal assent is given, the ATO view outlined in the draft TR will continue to apply.
Further, the ATO does not propose to undertake specific compliance activity pending the enactment of the law change.
Members were made aware of the Treasury discussion paper on this matter and were provided the relevant link to the document on the Treasury website.
The chair thanked George for his update.
Institute of Chartered Accountants Australia (ICAA) request
One of the members agreed to report back to the ICAA on any matters arising out of the working group meetings that impacted on the ICAA - Brian Lane will report back on issues of concern for ICAA.
Internationals sub group
Members were advised that a meeting of the sub group would be organised for August 2010.
Those who have previously expressed interests in being a part of this sub group will be contacted by the secretariat.
Members commented favourably on the March webinar.
Some members remarked that they had brought the OVDI project to the attention of their clients.
The chair thanked members for their input and discussion on the agenda items. The meeting closed at 4.30pm.
The next meeting is set for Friday 22 October 2010.
Last Modified: Wednesday, 19 January 2011