• What attracts our attention

    To help you get things right, you should consider the behaviours, characteristics and tax issues that attract our attention. We've published this information below – it's part of our commitment to transparency in working with privately owned and wealthy groups.

    Broadly, the following behaviours and characteristics may attract our attention:

    • tax or economic performance is not comparable to similar businesses
    • low transparency of your tax affairs
    • large, one-off or unusual transactions, including transfer or shifting of wealth
    • a history of aggressive tax planning
    • tax outcomes inconsistent with the intent of tax law
    • choosing not to comply or regularly taking controversial interpretations of the law
    • lifestyle not supported by after-tax income
    • accessing business assets for tax-free private use
    • poor governance and risk-management systems.

    There are specific behaviours and characteristics that attract our attention in relation to:

    Next steps:

    If you're concerned about your tax or super position, you can:

    Capital gains tax

    Capital losses

    We focus on capital losses, particularly losses that appear to be exaggerated, fabricated or misclassified to ultimately reduce taxable income.

    What attracts our attention:

    • For a company, if from the time when the losses were incurred to the time when the losses were utilised, other information indicates that there was a change in        
      • the ownership of the company (which poses a risk that the taxpayer failed the ‘continuity of ownership test’) or
      • the nature of the business (which poses a risk the taxpayer failed the ‘same business test’)
    • Capital losses artificially generated to offset gains (this may include non-arm’s length transactions used to manipulate elements of the cost base; capital losses realised solely to offset gains through ‘wash sales’; and similar)
    • Entities that incorrectly ‘transfer in’ capital losses (and apply those capital losses)
    • Entities that reclassify capital losses as revenue losses in order to offset taxable income
    • Taxpayers who deliberately trigger a capital gains tax (CGT) event in order to bring to account an unrealised loss in a year in which a capital gain is derived – 'Loss washing'
    • Mismatches between the income tax return and the CGT schedule.

    It is important to be able to substantiate the capital loss reported.

    Capital gains tax – disposal

    We focus on CGT reporting and payment obligations resulting from a disposal of a capital asset. We are particularly concerned where the amount of net capital gain reported is less than what it should be, based on our estimates using external data sources.

    What attracts our attention:

    • Entities that fail to meet their schedule lodgment obligations
    • Companies claiming a CGT discount, other than life insurance companies
    • Entities that have received cash (or other ineligible consideration) through a partial scrip for scrip rollover
    • Entities that disposed of high value assets but returned small capital gains or capital losses
    • Entities that inappropriately access the small business CGT concessions.

    It is important to be able to substantiate the amount of the capital gain or loss reported.

    Consolidation

    Consolidation allows wholly-owned corporate groups to operate as a single entity for income tax purposes.

    Available fraction rules

    We focus on incorrect or deliberate miscalculation of the available fraction.

    What attracts our attention:

    • High available fractions which, if incorrect, would allow a consolidated group to utilise transferred losses at a faster rate than appropriate
    • Failure to make adjustments to the available fraction when a loss entity joins the group.

    Cost-setting rules

    We focus on incorrect or deliberate miscalculation of the allocable cost amount.

    What attracts our attention:

    • Incorrect uplifts under the tax cost setting rules regarding amounts of revenue and /or capital gains assets through        
      • high allocable cost amount of the joining entity
      • overstated liabilities of the joining entity
      • overstated market value of the assets of the joining entity
      • allocation of the allocable cost amount to assets on a basis that provides a bias towards assets where the head company of the group may inappropriately increase revenue deductions, or artificially increase the cost base of the joining entity’s CGT assets.

    Consolidation exits

    We focus on the correct reporting of capital gains or capital losses arising from consolidation exits.

    What attracts our attention:

    • Negative allocable cost amount of an existing subsidiary has not been returned as a capital gain by the head company
    • Exiting members of the group who incorrectly applied the ‘exit history rule’
    • Large entities leaving a consolidated group
    • Multiple exits during an income year
    • Movements of entities between consolidated groups controlled by wealthy individuals.

    Consolidation membership rules

    We focus on incorrect application of the consolidation membership rules.

    What attracts our attention:

    • Leaving an entity out of a consolidated group to avoid that entity’s losses being limited by the available fraction rules
    • Incorrect inclusion of an entity as a member of a consolidated group, which may give rise to unintended tax benefits, such as the ability to transfer assets within the group without triggering a capital gain.

    See also:

    Demergers

    A demerger is a restructure of a corporate group, which was previously held by a head entity, to an ungrouped form. This involves a shift in ownership of the subsidiary entities from the head entity to the ultimate shareholders. There is a risk that taxpayers may inappropriately obtain the CGT rollover concession and the dividend exemption that is provided by the demerger provisions.

    The demerger provisions offer CGT and income tax relief at both the entity and shareholder level. This tax relief is intended for genuine demergers that offer business benefits through restructuring and are not being pursued merely to achieve a tax benefit.

    What attracts our attention:

    • Inappropriately obtaining CGT rollover concessions via a corporate restructure that does not satisfy the demerger requirements
    • Obtaining the dividend concession in circumstances where the demerger is undertaken for the purpose of obtaining a tax benefit rather than for the purpose of improving business efficiency
    • Eliminating or significantly reducing otherwise assessable capital gains and/or dividends.

    Moreover, the shareholders of the parent of the demerging group should:

    • receive the same proportional interest in the demerged subsidiary
    • acquire as new interests at least 80% of the group’s ownership interests in the demerged entity
    • acquire nothing other than their new interests in the demerged entity
    • hold the same proportion of interest pre and post-demerger
    • ensure the capital and profit elements of the demerger allocation reflect the circumstances of the demerger.

    See also:

    Excise equivalent goods

    We're responsible for administering excise-equivalent goods imported into Australia and stored in licensed warehouses under the Customs Act 1901. We focus on the risks associated with:

    • licence obligations
    • record keeping
    • releasing goods without the proper authority to deal.

    Franking credits

    Incorrect treatment of franking credits

    We focus on taxpayers incorrectly claiming franking credits or not applying appropriate governance to their franking credit balance.

    Because franking credits are refundable to certain taxpayers, there is a significant consequence of incorrect treatment.

    What attracts our attention:

    • Where an increase in franking credits is substantial, this may indicate the taxpayer has entered into an inappropriate arrangement to take advantage of franking credits
    • Arrangements to access franking credits through the use of an entity that has a concessional tax rate, such as a superannuation fund.

    This risk may also involve changes to investments.

    See also:

    Fringe benefits tax

    Fringe benefits tax – motor vehicles

    We focus on situations where an employer-provided motor vehicle is used, or available, for private travel of employees. This constitutes a fringe benefit and needs to be declared in the fringe benefits tax return (if lodgment is required). There are circumstances where this may be exempt, such as where the entity was tax exempt or the private use of the vehicle was exempt.

    Some employers fail to identify or report these fringe benefits or incorrectly apply exemption provisions.

    See also:

    Fringe benefits tax – employee contributions

    We focus on situations where employee contributions that have been paid by an employee to an employer are declared in both the fringe benefits tax return (if lodgment is required) and the employer’s income tax return. This helps to ensure that the employer does not:

    • fail to report these contributions as income in their income tax return
    • incorrectly overstate employee contributions in their fringe benefits tax return to reduce the taxable value of benefits provided.

    See also:

    Fringe benefits tax – employer rebate

    We focus on whether a fringe benefits tax rebate can be claimed. A taxpayer must be a rebatable employer to claim a fringe benefits tax rebate. Some ineligible employers incorrectly claim this rebate.

    Employers should ensure that they are eligible to receive the rebate.

    See also:

    Fringe benefits tax – living-away-from-home allowance (LAFHA)

    For fringe benefits tax purposes, a LAFHA is an allowance you (the employer) pay to your employee to compensate for additional expenses incurred and any disadvantages suffered because the employee's duties of employment require them to live away from their normal residence.

    The taxable value of the LAFHA benefit may be reduced by the exempt accommodation and food components of the allowance.

    Common errors that attract our attention include:

    • claiming reductions for ineligible employees
    • failing to obtain required declarations from employees
    • claiming a reduction in the taxable value of the LAFHA benefit for exempt accommodation and food components in invalid circumstances
    • failing to substantiate expenses relating to accommodation and, where required, food or drink.

    See also:

    Fringe benefits tax – non-lodgment

    We focus on non-lodgment of fringe benefits tax returns.

    If you are an employer who provides fringe benefits, you must lodge a fringe benefits tax return unless the taxable value of all benefits has been reduced to nil.

    Common errors that attract our attention include:

    • failure to identify fringe benefits provided
    • incorrect calculation of benefit values or reduction amounts.

    See also:

    Fringe benefits tax – car parking valuation

    We focus on the validity of valuations provided in relation to car parking fringe benefits.

    Common errors that attract our attention include:

    • market valuations that are significantly less than the fees charged for parking within a one kilometre radius of the premises on which the car is parked
    • the use of rates paid where the parking facility is not readily identifiable as a commercial parking station
    • rates charged for monthly parking on properties purchased for future development that do not have any car park infrastructure
    • insufficient evidence to support the rates used as the lowest fee charged for all day parking by a commercial parking station.

    International

    Foreign equity distributions on participation interests

    We focus on activities of Australian corporate tax entities (defined as companies, corporate limited partnerships and public trading trusts) where they are transferred offshore and income earned is not reported as attributed foreign income but repatriated as a foreign equity distribution which is non-assessable, non-exempt income (NANE) under s768-5 of the Income Tax Assessment Act 1997 (ITAA 1997) – this section replaces former s23AJ of the Income Tax Assessment Act 1936 (ITAA 1936).

    What attracts our attention:

    • Uplift in this NANE income from previous year. Increase in such income but no attributable foreign income reported for the current and prior years.
    • Entities with large deductions under s25-90 of the ITAA 1997 for outgoings incurred in deriving s768-5 of the ATAA 1997 income.

    See also:

    S23AH Non-assessable Non-exempt income

    We focus on arrangements where income of an Australian company’s overseas branch/permanent establishment is not returned as attributed foreign income but repatriated as an exempt branch profit under s23AH of the ITAA 1936.

    What attracts our attention:

    • There is no permanent establishment, but s23AH of the ITAA 1936 income is declared
    • A permanent establishment may not have passed the active income test and the income is both adjusted tainted income and eligible designated concession income (the latter applies to permanent establishments in listed countries only)

    See also:

    Foreign resident capital gains withholding

    From 1 July 2016, vendors entering contracts for the disposal of certain taxable Australian property may be subject to a new withholding tax. Purchasers are to withhold 10% of the purchase price unless the vendor can show they’re an Australian tax resident, or the asset is covered by an exclusion. All vendors subject to this withholding tax must lodge a tax return at the end of the financial year, declaring their Australian assessable income, including any capital gain from the disposal of the asset.

    What attracts our attention:

    • Disposals of real property for more than $2 million where there has not been a clearance certificate or variation applied for, nor any payment of this withholding.
    • Disposals of membership interests in Australian entities where the vendor held a material level.

    See also:

    Profit shifting – related party dealings

    We focus on activities where income and profits sourced in Australia are not being subjected to domestic tax; and where related party dealings provide opportunities to enter into non-economic/commercial arrangements to facilitate profit-shifting arrangements.

    What attracts our attention:

    • Paying a non-arm’s length amount for goods and services, or the transfer or use of property (tangible and intangible, such as intellectual property).
    • Paying non-arm’s length prices to generate excessive losses or expenses domestically while shifting gains or revenue outside the jurisdiction.
    • Relying on financial instruments and accounting techniques to artificially create, assign or transfer rights and obligations in order to manipulate financial dealings between related parties.
    • Tax planning that structures business operations for shifting assets, risks and functions to low tax jurisdictions.
    • Tax planning that seeks to shift assessable income into loss making entities outside of a consolidated group.
    • Non-disclosure of offshore asset disposals or restructures.
    • Businesses employing strategies that may lead to an erosion of the corporate tax base.

    See also:

    Profit shifting – non-monetary or nil consideration

    We focus on activities when there are international related party dealings occurring for non-monetary or nil consideration.

    What attracts our attention:

    • An entity has provided services, transferred property (tangible or intangible), processes, rights or obligations to an international related party with nil or non-monetary non-arm’s length consideration.
    • A CGT event has occurred with respect to a related party overseas, but no consideration was paid or received.

    See also:

    Foreign ships with dealings in Australian waters that are liable to tax under Division 12 of the ITAA 1936

    We focus on:

    • the non-lodgment of voyage returns
    • shipping agents not withholding and/or remitting the freight tax on behalf of the foreign ships.

    What attracts our attention:

    • Where voyage returns do not reconcile with shipping information, such as harbour authorities and/or customs.

    See also:

    International dealings schedule – non-lodgment

    We focus on income tax returns and other information indicating that lodgment of an international dealings schedule may be required but one has not been lodged.

    What attracts our attention:

    • The tax return contains responses to certain labels that trigger a requirement to lodge an international dealings schedule but no schedule is lodged.

    See also:

    International – Non-resident withholding tax – interest/royalty (payment)

    We focus on:

    • interest/royalty withholding tax not being withheld and/or remitted or incorrectly remitted
    • deductions for interest/royalty expenses overseas being incorrectly claimed and/or misclassified in income tax returns.

    What attracts our attention:

    • Entities that disclose the payment of overseas interest/royalty expenses in their income tax returns but reflect a proportionally lower amount of tax withheld (activity statement and/or annual report).

    See also:

    International – Non-resident withholding tax – interest/royalty (reporting)

    We focus on situations where a taxpayer pays interests/royalty to a foreign resident and:

    • fails to lodge the PAYG withholding from interest, dividend and royalty payments paid to non-residents – annual report to reflect withholding events
    • amounts reported on the annual report do not reconcile with deductions claimed.

    What attracts our attention:

    • Inconsistency between annual report data and interest or royalty payments to foreign resident payees or offshore permanent establishments of Australian payees
    • Discrepancies between amounts claimed as deductions for such interest or royalty payments (income tax return) and the amounts reported as paid and withheld (annual report).

    See also:

    International – controlled foreign company (CFC) or Transferor Trusts (TT) – non/under-reporting attributable foreign income

    We focus on attributable foreign income not reported correctly by Australian companies.

    What attracts our attention:

    • Country in which a CFC or TT is located is unlisted
    • Type of income being generated through a CFC is tainted income
    • Fund movements contrary to where the CFC or TT is located
    • Sudden drop in attributable foreign income without changes in the numbers of CFCs or TTs.

    See also:

    International – thin capitalisation

    We focus on Australian and foreign entities that have multinational investments and their debts exceed 60% of the net value of their Australian investments.

    What attracts our attention:

    • Non-lodgment of international dealings schedule or lodgment of an international dealings schedule without completion of thin capitalisation section and a large amount of overseas interest expense on the tax return
    • Failed safe harbour debt test or arm’s-length debt test or worldwide gearing test (based on international dealings schedule data) and not declaring debt deduction disallowed.

    See also:

    International – dealings with secrecy and low-tax jurisdictions

    We will focus on Australian entities that have dealings or relationships with secrecy and low-tax jurisdictions and poor tax performance.

    What attracts our attention:

    • Entities having related entities in secrecy and low-tax jurisdictions (based on international dealings schedule data and 3rd party data)
    • Entities having dealings in secrecy and low tax jurisdictions (based on AUSTRAC data).

    Lifestyle assets and private pursuits

    We focus on assets and private pursuits that generate deductions or are mischaracterised as business activities. These deductions reduce profits from other enterprises or income within the same private group structure. In addition we are looking at those assets or pursuits which are not accounted for correctly in terms of Division 7A or Fringe Benefits Tax.

    What activities attract our attention:

    • Private Aircraft ownership or activities
    • Art ownership and dealings
    • Car or Motor Bike Racing activities (see ATO ID 2005/284)
    • Luxury and Charter boat Activities (see TR 2003/4)
    • Enthusiast or luxury motor vehicles
    • Grape growing and other farming pursuits (see TR 97/11)
    • Horse breeding, racing and training activities (see TR 2008/2)
    • Holiday homes and luxury accommodation provision (see Holiday homes and IT 2167)
    • Sporting clubs and other activities involving active participation of the principals of entities for private pursuits.

    Addressing tax risks:

    • Income tax: entities claiming deductions from ownership or private pursuits against other income derived by the entity but not carrying on a business
    • Income tax: entities incorrectly apportioning deductions where assets have been used for private purposes or periods not available for rent or hire
    • Income tax and capital gains: taxpayers disposing of assets and not declaring the revenue and/or capital gains on those disposals
    • Income tax: Division 7A – taxpayers may be purchasing assets through their business entities, but apply those assets to the personal enjoyment of a shareholder or associate of a private company giving rise to a deemed dividend
    • Fringe benefits tax: taxpayers may be purchasing assets through their business entities, but apply those assets to the personal enjoyment of an employee or associate giving rise to a fringe benefits tax liability
    • GST: the purchasing of assets or expenditures concerning private pursuits for personal use through their business or related entities and claiming input tax credits they are not entitled to claim
    • Superannuation: Self-managed super funds (SMSF) may be acquiring assets but applying them to the benefit of the fund's trustee or beneficiaries.

    Non-lodgment of returns and activity statements

    We focus on occasions where payment of tax has been avoided or delayed by failing to lodge an income tax return and/or activity statements when required.

    What attracts our attention:

    • An entity has not lodged and has a high amount of incoming and outgoing cash amounts
    • Situations where an entity has failed to lodge a return when returns for previous and subsequent years had been lodged
    • An entity lodges business activity statements in an income year but does not lodge an income tax return.

    We also look at:

    • details of business activity statements currently outstanding
    • entities that have not lodged a return in the year under review and instalments are low in comparison to the previous year
    • directors with a number of outstanding lodgments
    • directors that lodge a ‘Return Not Necessary’.

    See also:

    • For more information on key lodgment dates, deferral requests and other related information, see Prepare and lodge.

    Private company profit extraction

    We focus on arrangements designed to extract profits from private companies while avoiding tax on the amounts being distributed. This may include excessive or non-arm's length payments, the application of Division 7A of Part III of the ITAA 1936 deemed dividend rules or the potential application of anti-avoidance rules.

    Division 7A – deemed dividend

    The use of company funds or assets for private use by shareholders or their associates may result in a deemed dividend under Division 7A for the shareholder or their associate.

    A deemed dividend may occur when a company pays, lends or forgives a debt to a shareholder or associate. These amounts should be included in the assessable income of the shareholder or their associate.

    What attracts our attention:

    • Amounts are taken from a company and are not repaid
    • A complying loan agreement has not been put in place
    • Minimum yearly repayments are not made
    • Interest income is not declared in the company income tax return
    • Private use of a company asset
    • Attempts to avoid application of Division 7A to transactions between a private company and a shareholder or their associate.

    See also:

    Director loans

    We focus on profits extracted from a private company by shareholders or their associates and whether they are taxed correctly.

    We examine the directors and shareholders of private companies who report low levels of salary and wages and no other sources of income. This examination looks to identify shareholders extracting wealth and maintaining a lifestyle that cannot be supported by the level of income reported in their income tax return – and are not paying tax on the amount extracted.

    What attracts our attention:

    • Companies that do not disclose any shareholder loans in their tax return
    • Directors do not report taxable remuneration such as salary and wages or directors fees in their income tax returns.

    See also:

    Transactions through interposed entities

    Division 7A may apply to payments and loans by a private company that are made through one or more interposed entities to a target entity.

    Specifically, Division 7A will apply if a reasonable person would conclude that the private company made the payment or loan to the interposed entity, as part of an arrangement involving one or other of the interposed entities making a payment or loan to the target entity.

    What attracts our attention are arrangements where the payments or loans made through one or more interposed entities are reasonably part of the same arrangement toward providing a payment or loan to a target entity.

    See also:

    Unpaid present entitlement

    Division 7A may apply where an unpaid present entitlement exists. We focus on situations where Division 7A may operate – for example, where a private company is a corporate beneficiary of a trust and is made presently entitled to income of the trust, but does not receive payment of the distribution. This amount is known as an unpaid present entitlement (UPE).

    What attracts our attention:

    • Private companies include assessable trust distributions, but do not receive payment of the distribution from the trust before the earlier of either the due date for lodgment, or the date of lodgment of the trust’s tax return for the year in which the loan was made
    • A complying loan agreement has not been put in place
    • Failure to put the funds on a sub-trust for the sole benefit of the private company beneficiary
    • Failure to repay loans or sub-trust investments at the conclusion of the term specified in the original agreement
    • Arrangements purporting to extinguish the UPE of the private company beneficiary.

    See also:

    Unpaid present entitlement (UPE) unitisation arrangements

    We've identified cases where a private group seeks to extinguish unpaid present entitlements (UPEs) and/or avoid obligations under Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936) 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.  

    These arrangements have attracted our attention and we are concerned that they may give rise to various income tax consequences, such as the application of:

    • Division 7A ITAA 1936
    • Section 100A of the ITAA 1936
    • Part IVA of the ITAA 1936.  

    If you have entered into, or are considering implementing, such an arrangement we recommend that you phone the ATO Aggressive Tax Planning hotlineon 1800 060 062 to discuss your arrangement.

    Dividend access share schemes

    We are concerned about some arrangements that involve the use of 'dividend access shares' to shift entitlement to distributions of previously taxed private company profits to lower taxed or non-taxable associates.

    Some of these arrangements have been found to be dividend stripping schemes and we encourage taxpayers to review their affairs if they have entered into such arrangements.

    These arrangements attract our attention and continue to be an area where we are looking to take firm action where appropriate.

    See also:

    • TA 2012/4 Accessing private company profits through a dividend access share arrangement attempting to circumvent taxation laws
    • Taxation Determination TD 2014/1 Income tax: is the 'dividend access share' arrangement of the type described in this Taxation Determination a scheme 'by way of or in the nature of dividend stripping' within the meaning of section 177E of Part IVA of the Income Tax Assessment Act 1936?

    Professional firms

    Professional firms structures

    Recent regulatory and other changes relating to professional firms have resulted in a variety of alternative structures becoming more common, such as partnerships of discretionary trusts.

    We focus on individual professional practitioners where:

    • they receive less than 50% of the distribution of income from the professional practice
    • they have an effective tax rate for either the individual professional practitioner or averaged across their associates on the share of partnership income of less than 30%
    • they do not appear to be appropriately renumerated for their services in comparison to those employed by the firm or its related service entity.

    Through initial risk assessment of these structures, we may identify other compliance risks, such as Division 7A, legal effectiveness of arrangements, and restructuring arrangements that may trigger CGT consequences. These will continue to be considered as part of our broader compliance strategies.

    See also:

    Property and construction

    The focus is on how taxpayers who have conducted a property development include the profit and/or income from the property development activities in their tax returns. A particular focus is whether the income should be returned as ordinary income as the development was part of business of property development or was undertaken for a profit making purpose, or whether alternatively, it should be returned as a capital gain.

    What activities attract our attention:

    • Income tax and superannuation: You undertake a development and use your SMSF to undertake or fund the development and subdivision of properties leading to sale.
    • Income tax: Where there has been sale or disposal of property shortly after the completion of subdivision and the amount is returned as a capital gain. (see TD 92/124).
    • Income tax: Where there is a history in the wider economic group of property development or renovation sales, yet a current sale is returned as a capital gain.
    • Income tax: Where related entities undertake a development for which you are a land owner we will look to when profit should be recognised. (see IT 2450).
    • Income tax: Inflated deduction being claimed in regards to property developments, not in accordance with the trading stock provisions, or spreading headwork’s and other costs in line with Kurts Developments.
    • Income tax: We will look at multi-purpose developments that have both a revenue and capital purpose, such as retaining some units for rent in a multi- unit apartment that you have developed, to ensure that the costs are appropriately applied to the properties produced.

    Research and development tax incentive

    The ATO and AusIndustry (on behalf of Innovation Australia) jointly administer the Research and Development (R&D) tax incentive. AusIndustry administers the registration and compliance of the R&D activities. The ATO is responsible for the expenditure claimed in the tax return for eligible R&D activities.

    The areas of concern are claims made by entities, in particular industries and related to particular behaviours that are not restricted to particular industries.

    Four industries of concern that have been identified are:

    • agriculture
    • building and construction
    • mining, and
    • software development.

    Areas of concern related to behaviours that are not restricted to particular industries are:

    • business as usual vs eligible R&D activities
    • apportionment of overheads
    • payments to associates
    • expenses not incurred
    • R&D consultants
    • fraud
    • failure to keep records.

    See also:

    • Research and development tax incentive
    • TA 2015/3 Accessing the R&D tax incentive for ineligible broadacre farming activities.
    • TA 2017/2 Claiming the Research and Development tax incentive for construction activities
    • TA 2017/3 Claiming the Research and Development tax incentive for the ordinary business activities
    • TA 2017/4 Claiming the Research and Development tax incentive for agricultural activities
    • TA 2017/5 Claiming the Research and Development tax incentive for software development activities

    Revenue losses

    Revenue losses incurred

    We focus on taxpayers who inappropriately generate tax losses by over claiming expenses and reconciliation items in a given year.

    We will examine the expenses and reconciliation items to determine if the tax loss is legitimate.

    Potential compliance risks include:

    • inflating expenses and creating artificial losses
    • understating, mischaracterising or omitting income
    • misclassifying capital losses as revenue losses
    • incorrectly transferring losses to the head company of a consolidated group
    • engaging in transfer pricing/shifting profit offshore.

    It is important to be able to substantiate the tax losses reported.

    What attracts our attention:

    • Entities where one or more of the following factors arise from their tax returns        
      • high operating loss in a single year
      • significant revenue losses in a single year
      • high negative reconciliation items resulting in low or no taxable income
      • poor profitability over a sustained period.

    See also:

    • TD 2007/2 Income tax: should a taxpayer who has incurred a tax loss or made a net capital loss for an income year retain records relevant to the ascertainment of that loss only for the record retention period prescribed under income tax law?

    Revenue losses utilised

    We focus on compliance risks linked to entities that are using and/or carrying forward tax losses incorrectly.

    What attracts our attention:

    • Tax losses being used where companies don’t satisfy either the ‘continuity of ownership’ or ‘same business’ tests.
    • Tax losses deducted in the current year exceed the previous year’s carried forward tax losses.
    • Tax losses cannot be reconciled with relevant labels on the tax return.

    See also:

    • TR 1999/9 Income tax: the operation of section 165–13 and 165–210, paragraph 165–35(b), section 165–126 and section 165–132 (same business test)
    • TR 2007/2 Income tax: application of the same business test to consolidated and MEC groups
    • TD 2007/2 Income tax: should a taxpayer who has incurred a tax loss or made a net capital loss for an income year retain records relevant to the ascertainment of that loss only for the record retention period prescribed under income tax law?

    Self-managed super funds

    We focus on SMSFs, namely the incorrect treatment of transactions that will be subjected to a concessional rate of tax.

    What attracts our attention:

    • Significant management and administration expenses.
    • Incorrect calculation of exempt current pension income.
    • Incorrect treatment of related party transactions.
    • Incorrect treatment of non-arm’s length income.

    We are also concerned about certain non-arm's length transactions involving companies associated with members and SMSFs that may be intended to improperly redirect dividends to the SMSF.

    Since early 2014, we have issued a number of private rulings indicating that anti-avoidance rules may apply to such arrangements.

    See also:

    Taxation of financial arrangements

    Taxation of financial arrangements application

    We focus on the taxation of financial arrangements (TOFA) rules in Division 230 of the ITAA 1997 which provide the tax treatment of gains and losses from financial arrangements. The application of the TOFA rules is complex and can lead to errors in their application.

    What attracts our attention:

    • Exceeding a TOFA threshold, but not applying the TOFA rules to calculate gains and losses from financial arrangements.
    • Not reporting TOFA gains and losses correctly on the tax return, which may lead to an incorrect PAYG instalment rate being issued.
    • For taxpayers who do not exceed the TOFA thresholds, applying the TOFA rules without a valid election to adopt the TOFA rules.
    • Non-inclusion of financial benefits that play an integral role in the calculation of the gain or loss on a financial arrangement.
    • Incorrect or incomplete hedging documentation.
    • Improper characterisation of a financial benefit as sufficiently certain for the purposes of the TOFA accruals method.
    • Applying TOFA elective tax-timing methods when not eligible to do so.

    See also:

    Tax crime

    We take all forms of tax crime seriously and we are constantly increasing our ability to tackle it.

    We focus on key areas where there are higher risks, including offshore secrecy arrangements, refund fraud, 'phoenix' behaviour, identity crime and organised crime.

    To detect, deter and deal with these crimes, we use sophisticated intelligence activities and undertake civil and criminal investigations and prosecutions where necessary.

    See also:

    Trusts

    Discretionary trusts – distributions to complying superannuation funds

    We focus on distributions from trusts to complying superannuation funds that do not arise because of a fixed entitlement to income of the trust to ensure they are treated as non-arm’s length income and taxed in the superannuation fund at the top marginal tax rate.

    We also focus on distribution of income by trustees of discretionary trusts to SMSFs, because these distributions are subject to the non-arm’s length income rules and the amount is treated as non-arm’s length income and taxed at the highest tax rate of 45%.

    What attracts our attention:

    • Complying superannuation fund (generally SMSF) is a beneficiary of a trust.
    • Trust is not a fixed trust (or one with fixed entitlements to income) and is not widely held.
    • Distribution by trust to complying superannuation fund.
    • Superannuation fund does not report amount as non-arm’s length income.

    Generally, distributions from discretionary trusts to complying SMSFs are automatically non-arm’s length income, so it would be difficult for a taxpayer to mitigate this risk if they were looking to engage in this behaviour.

    See also:

    • TR 2006/7 Income tax: special income derived by a complying superannuation fund, a complying approved deposit fund or a pooled superannuation trust in relation to the year of income
    • Non-arm’s length income

    Trusts – differences between distributable and taxable Income

    We focus on differences between distributable income of a trust and its net [taxable] income which provides opportunities for those receiving the economic benefit of trust distributions to avoid paying tax on them.

    The arrangements involve:

    • the trustee determines a significantly reduced trust distributable income as compared to the trust taxable income
    • the insertion of a tax concessional beneficiary to accept entitlement to the small trust distributable income together with the large liability to tax arising from the trust taxable income.

    A tax concessional beneficiary may:

    • have substantial prior-year losses
    • have minimal resources that fall short of the tax liability arising from the distribution, resulting in a lack of capacity to pay the tax
    • be taxed at a considerably lower rate (or not at all) than those ultimately receiving the economic benefits through this arrangement
    • while these circumstances may normally be acceptable, they are not acceptable where the trustee manipulates the trust’s distributable income to this end.

    What attracts our attention:

    • A trust that has a small amount of distributable income and large amount of net [taxable] income.
    • A beneficiary who has recently been included as an object of the discretionary trust.
    • A beneficiary who has a minimal net asset position or one that is insufficient to meet the tax liability arising from the distribution.

    Risk may be mitigated to the extent that a tax concessional beneficiary has not been inserted as part of an arrangement as described above, and the difference between distributable income and taxable income can be easily explained – for example, the inclusion of franking credits in the calculation of net income.

    See also:

    Trusts – distributions to tax-preferred entities

    We focus on distributions to tax-preferred entities that may be utilised by trustees to attempt to reduce the amount of tax ultimately payable on the trust’s taxable income.

    Trustees can reduce the amount of tax payable on the trust’s taxable income by making trust income distributions to tax preferred beneficiaries, such as:

    • tax-exempt entities
    • loss entities, especially loss entities new to the group
    • arrangements to exploit mismatches between trust and taxable income.

    What attracts our attention:

    • Where a beneficiary who is a tax-preferred entity is made presently entitled to a distribution of a trust.
    • Where a beneficiary is in a loss position, or is a newly created company, or is exempt from paying income tax.

    Risk may be mitigated to the extent that a tax concessional beneficiary has not been inserted as part of an arrangement as described above, and the difference between distributable income and taxable income can be easily explained – for example, the inclusion of franking credits in the calculation of net income.

    In terms of tax-exempt entities, the risk may be mitigated by paying or notifying the beneficiary of the distribution within two months of the end of the relevant income year.

    See also:

    Trusts – income versus capital

    We focus on trusts that are carrying on a business of selling an asset as part of a profit-making undertaking to ensure they are not claiming the 50% CGT discount in relation to profits from the sale of assets acquired or developing this as part of the business or undertaking.

    Inappropriate characterisation as capital can occur where property developers set up special purpose trusts and report any profits from the ultimate sale of the property on capital account in order to claim the 50% CGT discount. These profits should be on revenue account for tax purposes because the property is sold as part of a profit-making undertaking.

    What attracts our attention:

    • A trust that is carrying on a business.
    • Significant net capital gains that are greater than business income of the trust.

    This risk can be mitigated by returning profits derived in the circumstances outlined above on revenue account and not claiming the 50% CGT discount.

    See also:

    • TA 2014/1 Trusts mischaracterising property development receipts as capital gains

    Trusts – value extraction – luxury assets

    We focus on trusts holding luxury assets for personal use by the beneficiaries to ensure they are not claiming deductions for the operating expenses of these assets.

    Trusts may be holding luxury assets for use by beneficiaries and claiming deductions for costs associated with the upkeep or maintenance of the luxury asset. These deductions are often used to reduce the net income of the trust by offsetting them against income from business activities carried on by the trust.

    What attracts our attention:

    • Information from other government agencies or the community that indicates that the trust is holding a luxury asset
    • A trust that is not in the business of operating or selling these types of assets.

    See also:

    Trusts – value extraction – corpus distributions

    We focus on capital distributions from trusts that may be used to extract value from the trust without attracting tax.

    Capital distributions, depending on how they are funded, could be an indicator of a reimbursement agreement (s100A of the ITAA 1936), an arrangement to which Division 7A applies (unpaid present entitlement to companies), or schemes where a beneficiary’s trust estate income entitlement is significantly less than their share of the taxable income and the actual accretion to the trust.

    What attracts our attention:

    • Significant reduction in a trust’s net asset position that has not been reflected in distributions to beneficiaries or disposals of assets for arm’s length consideration.

    See also:

    Trusts – potential reimbursement agreements

    We focus on arrangements that may constitute reimbursement agreements which involve distributions to lower taxed associates, while the economic benefit is directed to another entity – usually a controller of a privately owned group or an operating entity within such a group.

    We are concerned about whether such arrangements are ordinary family or commercial dealings, or appear to be entered into with a tax avoidance purpose.

    See also:

    Non-discretionary trusts – distributions to complying superannuation funds

    We focus on distributions from trusts to complying superannuation funds that arise because of a fixed entitlement to income to ensure they are taxed in the super fund at the top marginal tax rate if the distribution arose as part of a non-arm’s length arrangement.

    If trustees of non-discretionary trusts stream income to SMSFs, these distributions may be subject to the non-arm’s length income rules and the amount is treated as non-arm’s length income and taxed at the highest tax rate of 45%.

    What attracts our attention:

    • Complying superannuation fund (generally SMSF) is a beneficiary of a trust.
    • Trust is not a discretionary trust (or one with no fixed entitlement to income).
    • Distribution by trust to complying superannuation fund.
    • Superannuation fund does not report amount as non-arm’s length income.

    This risk may be mitigated if the distribution from the trust was part of an arm’s length arrangement.

    See also:

    • TR 2006/7 Income tax: special income derived by a complying superannuation fund, a complying approved deposit fund or a pooled superannuation trust in relation to the year of income
    • Non-arm’s length income

    Capital loss trust moved into group

    We focus on trusts with a capital loss because they may be moved into a new group so that the new group can take advantage of those trust capital losses. Distributions of capital gains into these trusts should be accounted for in accordance with the tax laws.

    The capital loss trust may be transferred to the new group and the losses subsequently used within the group – for example, by other entities in the group distributing capital gains to the capital loss trust.

    However, the distributions of these capital gains into the capital loss trust must be accounted for correctly, and comply with the tax laws. Failure to comply with legislative changes enacted in 2011 relating to the distribution of capital gains may result in the incorrect reporting of these distributions for tax purposes. These changes set out how capital gains of a trust are allocated to beneficiaries and the trustee in accordance with the rules in Subdivision 115-C of the ITAA 1997, which apply from the 2010–11.

    What attracts our attention:

    • Trusts with significant capital losses recently joining a group.

    See also:

    Revenue loss trust moved into group

    We focus on the carrying forward and use of revenue losses by a trust to ensure the trust loss measures restrictions are applied.

    A trust with significant revenue losses may be transferred to a new group by the parties that previously controlled the revenue loss trust. However, the carrying forward and use of these revenue losses is restricted by the trust loss measures.

    What attracts our attention:

    • Trusts with significant revenue losses that have recently joined a group.

    See also:

    Family Trust Distributions Tax – distributions to entities outside the family group

    We will focus on distributions by family trusts to entities outside their family group.

    A trust is a family trust where it has a Family Trust Election (FTE) in force.

    We will also focus on distributions to entities outside the family group by a trust, partnership or company which has made an Interposed Entity Election (IEE) to be included in the 'family group' of a family trust.

    What attracts our attention:

    • Distributions made by a trust, which has elected to be a family trust, to an entity that is outside the family group, for example where the entity hasn’t made an IEE;
    • Distributions made by beneficiaries of a family trust who have made an IEE to entities who are outside the family group;
    • Dividends paid by companies who have made an IEE to entities outside the family group;
    • Distributions to non-resident entities outside the family group.

    Generally a liability to family trust distributions tax (FTDT) arises when income or capital is distributed, or benefits are otherwise provided to, individuals or entities outside the family group by either a family trust or an entity that has made an IEE in relation to a family trust. The FTDT rates are 49%, the top marginal rate plus relevant levies.

    See also:

    Other issues

    Bad debts

    We focus on deductions claimed for bad debts. We may look at whether the bad debts are genuine. We may also look at genuine bad debts which are also subject to a number of rules about when a debt can be treated as ‘bad’ and the rate and timing at which they can be deducted. These rules differ, depending on whether you are an individual, company, or trust.

    Issues that may arise when claiming deductions for bad debts include:

    • bad debts being erroneously written off/expensed when the conditions are not met, which resulted in incorrect deductions
    • related party debt, where corresponding income received by a related entity is not first included in assessable income
    • timing issues where amounts that had been claimed as ‘bad’ have not been written off in the correct period.

    What attracts our attention:

    • Where you have, or are party to, a closely-held group where bad debt claims may not be at arm’s length.
    • Where you have not kept corresponding documentary and accounting evidence as required to treat a debt as ‘bad’.
    • Where other conditions required to be met to deduct a bad debt were not satisfied.

    See also:

    Commercial debt forgiveness

    We focus on loss utilisation and accounting where a commercial debt has been forgiven but the loss it represents has not been accounted for correctly in the tax return.

    For example, as per the Company Tax Return Instructions, the net amount of commercial debts forgiven must be applied to reduce the company’s deductible:

    • revenue losses
    • net capital losses
    • certain deductible expenditure (s245–145 of the ITAA 1997)
    • the cost base of certain CGT assets, in that order.

    Under s245-40 of the ITAA 1997, the commercial debt forgiveness rules do not apply to debts forgiven:

    • as a result of an action under bankruptcy law
    • in a deceased person's will
    • for reasons of natural love and affection.

    What attracts our attention:

    • Taxpayers who have had a debt forgiven (whether formally or informally) or who have entered into a debt for equity swap and fail to adjust their loss claims.

    See also:

    Deductions

    We focus on the incorrect claiming of deductions that decrease taxable income, leading to less tax payable or a greater tax loss to be carried forward. This includes failing to add back non-deductible expenses in the reconciliation statement and inappropriately valuing closing stock at below cost/replacement value in order to generate greater deductions.

    What attracts our attention:

    • Indicators that a high amount of deductions may be unreasonably claimed include        
      • a large proportion of undefined expenses to total expenses
      • lower valuations of closing stock by use of the trading stock election rules
    • Indicators this risk may be mitigated include        
      • if large amounts of undefined expenses can be accounted for as salary and wages
      • if the trading stock election is warranted because of obsolescence or other special circumstances and the value used is reasonable.

    See also:

    Last modified: 03 Aug 2017QC 44834