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  • What attracts our attention

    To help you get things right, we regularly review and update what attracts our attention. You should consider the behaviours, characteristics and tax issues that attract our attention. We've published this information below as 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 the transfer or shifting of wealth
    • aggressive tax planning
    • tax outcomes inconsistent with the intent of the tax law
    • choosing not to comply or regularly taking controversial interpretations of the law, without engaging with us
    • lifestyle not supported by after-tax income
    • accessing business assets for tax-free private use
    • poor governance and risk-management systems.

    Find out about:

    There are specific behaviours and characteristics that attract our attention in relation to various issues, including:

    Next steps:

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

    Private company profit extraction

    We focus on arrangements that enable the extraction of profit 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 Income Tax Assessment Act 1936 (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.

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

    What attracts our attention are situations where:

    • 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 on a loan
    • interest income from a loan is not declared on the company tax return
    • a company asset is used for private purposes
    • there are arrangements designed to avoid the application of Division 7A.

    See also:

    Director loans

    We focus on directors that are shareholders of private companies who report low levels of salary and wages along with minimal other sources of income.

    We examine whether shareholders and their associates are extracting wealth and maintaining a lifestyle that cannot be supported by the level of income reported to us.

    See also:

    Transactions through interposed entities

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

    We focus on those arrangements that seem artificial or lack commerciality.

    See also:

    Unpaid trust entitlements

    Division 7A may apply where a private company is a beneficiary of a trust and is presently entitled to an amount of trust income, but does not actually receive payment of that distribution. This amount is known as an unpaid present entitlement (UPE).

    Situations that attract our attention include::

    • private companies that 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 present entitlement arose
    • there is a failure to put the funds retained by the trustee on a sub-trust for the sole benefit of the private company beneficiary
    • there is a failure to pay the UPE at the conclusion of the term specified in an investment agreement
    • there are arrangements releasing the trustee from having to pay the UPE to the private company beneficiary.

    See also:

    Unitisation arrangements

    We currently have concerns with arrangements involving private companies acquiring units in a unit trust.

    Such an arrangement may involve the company making a payment to the unit trust for the units, or the unit trust issuing the units to satisfy a UPE, debt or other obligation owed to the company. The parties assert the transaction is at market value but the trust instrument contains terms which result in the asserted value being greater than the amount the company would pay for the units had the parties been dealing with each other at arm's length.

    These arrangements may involve the application of Division 7A, section 100A or Part IVA of the ITAA 1936.

    See also:

    Dividend access share schemes

    We are concerned about some arrangements that involve the use of 'dividend access shares' to distribute the accumulated profits of a company in a tax-free (or lower tax) form to an associate of the ordinary shareholders of the company.

    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?

    Capital gains tax

    Capital losses

    We focus on capital losses, especially those that appear to be excessive, incorrect or misclassified to ultimately reduce taxable income.

    Situations that attract our attention include:

    • for a company, if, from the time when the capital losses were incurred to the time when they were utilised, other information indicates that there was a change in either:
      • the ownership of the company (which poses a risk of failing the ‘continuity of ownership test’)
      • the nature of the business (which poses a risk of failing the ‘same business test’).
       
    • capital losses artificially generated to offset capital gains. This may include:
      • non-arm’s length transactions used to manipulate elements of the cost base
      • capital losses realised solely to offset capital gains through ‘wash sales’.
       
    • entities that incorrectly apply capital losses
    • entities that reclassify capital losses as revenue losses to offset taxable income.
    • entities that deliberately trigger a capital gains tax (CGT) event to realise a capital loss in a year in which a capital gain is derived
    • there are mismatches between the tax return and the CGT schedule.

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

    Capital gains tax – disposal

    We focus on CGT reporting in relation to the disposal of a CGT asset. We are particularly concerned where the net capital gain reported is less than what it should be, based on our estimates using external data sources.

    Situations that attract our attention include:

    • entities that fail to meet their CGT schedule lodgment obligations
    • companies claiming a CGT discount, other than life insurance companies
    • entities that 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 claimed unsubstantiated 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 capital loss reported.

    See also:

    Consolidation

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

    Losses

    We focus on whether the available fraction has been correctly calculated and losses correctly utilised.

    Situations that attract our attention include:

    • incorrectly including or excluding an entity as a member of a consolidated group which may give rise to unintended tax benefits
    • incorrectly transferring and utilising losses
    • 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 as required.

    Cost-setting rules

    We focus on the allocable cost amount (ACA) calculation and allocation on joining or leaving a consolidated group.

    Situations that attract our attention include:

    • restructuring prior to joining, forming or leaving a consolidated group that may affect the ACA calculation
    • on joining:  
      • miscalculating or overstating the ACA, for example, in relation to costs of membership interests or accounting liabilities of the joining entity
      • including or excluding assets inappropriately prior to allocating the ACA to assets
      • incorrectly allocating the ACA to assets resulting in increased revenue deductions or cost bases of CGT assets, for example, using inappropriate market values or incorrectly making relevant adjustments.
       
    • on leaving:
      • incorrectly calculating the ACA, for example, excluding or understating liabilities
      • incorrectly allocating the ACA to the membership interests and treatment of pre-CGT shares (if any).
       

    CGT consequences

    We focus on the reporting of capital gains or capital losses relating to consolidation.

    Situations that attract our attention include:

    • corporate groups that restructure and have one or more consolidated groups
    • incorrectly reporting capital gains or capital losses arising from the ACA calculation and allocation on joining
    • on leaving:
      • the head company has not notified us of a leaving entity or has not returned a capital gain in situations where there is negative ACA
      • a leaving entity has incorrectly applied the ‘exit history rule’
      • there are multiple entities leaving the consolidated group.
       

    See also:

    Demergers

    A demerger involves the restructuring of a corporate group by splitting its operations into two or more entities or groups. Under a demerger, the shareholders of the head entity of the group acquire a direct interest in an entity (demerged entity) that was formerly part of the group.

    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.

    Situations that attract our attention include:

    • disposing of the demerged entity or business after the demerger event
    • shareholders acquiring or receiving more than the new interests in the demerged entity
    • schemes to inappropriately obtain 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 or dividends.

    See also:

    Excise equivalent goods

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

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

    See also:

    Franking credits

    Incorrect treatment of franking credits

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

    Because franking credits are refundable to certain entities, there is a significant consequence if they are incorrectly treated.

    Situations that attract our attention include:

    • there is a substantial increase in franking credits which may indicate the entity 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.

    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 on the fringe benefits tax return (if lodgment is required). There are circumstances where this benefit 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 mismatches between employee contributions (relating to benefits) declared on the fringe benefits tax return (if lodgment is required) and the employer’s income tax return. This may indicate that the employer has:

    • failed to report these contributions as income on their income tax return
    • overstated employee contributions on their fringe benefits tax return to reduce the taxable value of benefits provided.

    See also:

    Fringe benefits tax – employer rebate

    We focus on employers incorrectly claiming the fringe benefits tax rebate. An entity must be a rebatable employer to claim a fringe benefits tax rebate.

    Employers should ensure they are eligible to receive the rebate before claiming it.

    See also:

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

    For fringe benefits tax purposes, a LAFHA is an allowance an employer pays to their 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.

    Situations 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.

    An employer who provides fringe benefits must lodge a fringe benefits tax return unless the taxable value of all benefits has been reduced to nil.

    Situations that attract our attention include:

    • failing to identify fringe benefits provided
    • miscalculating 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.

    Situations that attract our attention include:

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

    See also:

    International

    Significant global entities

    Several recently enacted measures only apply to entities that meet the definition of a significant global entity (SGE). The SGE concept is not limited to entities that are members of a multinational group. An SGE can be an entity in a group that only has operations in Australia, including those that are privately owned. When an entity meets the SGE definition they may become subject to new obligations, increased penalties and compliance measures including:

    We focus on entities that:

    • meet the SGE definition but do not identify as one on their tax returns
    • fail to lodge relevant and complete documentation when necessary under the law.

    Diverted profits tax

    The diverted profits tax (DPT) aims to ensure that the tax paid by SGEs properly reflects the economic substance of their activities in Australia and aims to prevent the diversion of profits offshore through arrangements involving related parties. 

    What attracts our attention are entities entering into cross-border transactions with related parties where:

    • the profit made by each entity does not reflect the economic substance of the entity’s activities in connection with the scheme
    • one or more of the entities entered into or carried out the scheme for a principal purpose of obtaining an Australian tax benefit, or obtaining both an Australian and foreign tax benefit.

    See also:

    International – non or under-reporting attributable foreign income

    We focus on Australian entities that have incorrectly reported attributable foreign income. This includes Australian corporate tax entities (defined as companies, corporate limited partnerships and public trading trusts) with activities offshore that have not reported their income as attributable foreign income, but have repatriated it as a foreign equity distribution that is non-assessable non-exempt income (NANE) under section 768-5 of the Income Tax Assessment Act 1997 (ITAA 1997) – this section replaces former section 23AJ of the ITAA 1936.

    Situations that attract our attention include:

    • the country in which a controlled foreign company (CFC) or transferor trust (TT) is located is unlisted
    • the type of income being generated through a CFC is tainted income
    • fund movements are contrary to where the CFC or TT is located
    • there is a sudden drop in attributable foreign income without a change in the number of CFCs or TTs
    • the amount of NANE income reported has increased from the previous year but no attributable foreign income has been reported for the current and prior years
    • entities that have large claims for deductions under section 25-90 of the ITAA 1997 for outgoings incurred in deriving NANE income.

    See also:

    Section 23AH non-assessable non-exempt income

    We focus on an Australian company’s overseas branch or permanent establishment income that has been incorrectly recognised as non-assessable non-exempt (NANE) branch income under section 23AH of the ITAA 1936. We also focus on the deductions being claimed by the Australian company but which are incurred in deriving NANE branch income under section 23AH and therefore not deductible.

    Situations that attract our attention include:

    • there is no permanent establishment but section 23AH NANE 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)
    • there are low non-deductible expenses but section 23AH NANE income is declared.

    See also:

    Capital gains withholding

    Foreign resident capital gains withholding applies to disposals of certain taxable property under contracts entered into from 1 July 2016.

    What attracts our attention are situations where there is a disposal of:

    • real property with a market value of at least $750,000 and the foreign resident vendor did not apply for a clearance certificate or a withholding variation and the purchaser has not paid a withholding amount
    • membership interests in an Australian entity that owns substantial real property assets and the foreign resident vendor held a material ownership interest in the entity.

    See also:

    Transfer pricing – related party dealings

    We focus on income or profits generated in Australia that are not being subjected to domestic tax due to non-arm's length conditions of international related party dealings.

    Situations that attract our attention include:

    • paying or receiving a non-arm’s length amount for goods and services, including intellectual property
    • paying non-arm’s length prices to generate excessive losses or expenses domestically while shifting gains or revenue outside the jurisdiction
    • related party debt with interest rates or features that differ from what would be expected between independent parties
    • offshore hubs that derive high profits from marketing or procuring goods or services in respect of Australian operations
    • intellectual property arrangements involving inadequate reward for value contributed from Australia or non-arm's length migration of rights in Australian-created property
    • business restructures that shift Australian assets or operations offshore without arm's length compensation for their value or any associated benefit.

    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 or remitting the freight tax on behalf of the foreign ships.

    What attracts our attention are voyage returns that do not reconcile with shipping information, such as information from harbour authorities or customs.

    See also:

    International dealings schedule – non-lodgment

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

    See also:

    International – non-resident withholding tax – interest or royalty (payment)

    We focus on:

    • interest or royalty withholding tax that has not been withheld or paid, or an incorrect amount of withholding tax is paid
    • deductions for interest or royalty expenses overseas being incorrectly claimed or misclassified on tax returns.

    What attracts our attention are entities that disclose overseas interest or royalty expenses on their tax returns but reflect a proportionally lower amount of tax withheld (activity statement or annual report).

    See also:

    International – non-resident withholding tax – interest or royalty (reporting)

    We focus on situations where an entity pays interest or a royalty to a foreign resident and:

    Situations that attract our attention include:

    • there is an inconsistency between the annual report and interest or royalty payments to foreign residents or offshore permanent establishments
    • there are discrepancies between amounts claimed as deductions for such interest or royalty payments (tax return) and the amounts reported as withheld and paid (annual report).

    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 is an entity that has:

    • failed to lodge the international dealings schedule when required
    • reported a large amount of overseas interest expense on the tax return and has not completed the thin capitalisation section
    • failed the safe harbour debt test or arm’s length debt test or worldwide gearing test (based on the international dealings schedule) and has not declared the debt deduction disallowed.

    See also:

    International – dealings with secrecy and low-tax jurisdictions

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

    What attracts our attention are entities that have:

    • related entities in secrecy and low tax jurisdictions (based on the international dealings schedule and third party data)
    • dealings in secrecy and low tax jurisdictions (based on AUSTRAC data).

    See also:

    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. We also look at assets or pursuits which are not accounted for in terms of Division 7A or fringe benefits tax.

    What attracts our attention:

    • private aircraft ownership or activities
    • art ownership and dealings
    • car or motor bike racing activities (refer to ATO ID 2005/284)
    • luxury and charter boat activities (refer to TR 2003/4)
    • enthusiast or luxury motor vehicles
    • grape growing and other farming pursuits (refer to TR 97/11)
    • horse breeding, racing and training activities (refer to TR 2008/2)
    • holiday homes and luxury accommodation provision (refer to Holiday homes and IT 2167)
    • sporting clubs and other activities involving participation of the principals or associates of principals of private groups.

    We address the following tax risks:

    • Income tax:
      • an entity that has claimed deductions for owning lifestyle assets or in respect of private pursuits (and is not carrying on a business relating to those assets or pursuits) against other income derived
      • incorrectly apportioning deductions where the assets have been used for income producing and private purposes or where the assets are not available for rent or hire
      • entities that have disposed of assets but have not reported revenue income or capital gains.
       
    • fringe benefits tax: Entities that have purchased assets through their businesses but have applied them to the personal enjoyment of an employee or associate
    • GST: Entities that have claimed input tax credits for expenditures concerning private pursuits
    • superannuation: Self-managed super funds (SMSFs) that have acquired assets and applied them to the benefit of the fund's trustees or beneficiaries.

    Non-lodgment of returns and activity statements

    We focus on occasions where the payment of tax has been avoided or delayed by failing to lodge a tax return or activity statement when required.

    Situations that attract our attention include:

    • an entity has not lodged and has a high amount of incoming and outgoing cash amounts
    • 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 a 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:

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

    Illegal phoenix activity

    Illegal phoenix activity is when a new company is created to continue the business of a company that has been deliberately liquidated to avoid paying its debts, including taxes, creditors and employee entitlements. Illegal phoenix activity adversely impacts the business community, employees, contractors and the government.

    Phoenix Taskforce

    We target illegal phoenix activity as part of the Phoenix Taskforce that comprises over 20 Federal, State and Territory government agencies, including Australian Securities & Investments Commission, the Department of Employment and the Fair Work Ombudsman. The Phoenix Taskforce provides a whole-of-government approach to combatting illegal phoenix activity.

    We have developed sophisticated data matching tools to identify, manage and monitor suspected illegal phoenix operators. We support businesses who want to do the right thing and will deal firmly with those who choose to engage in illegal phoenix behaviour.

    See also:

    Professional firms

    When we published the Assessing the risk: allocation of profits within professional firms guidelines and Everett Assignment web material in 2015 we stated they would be reviewed in 2017.

    In reviewing the guidelines we have become aware they are being misinterpreted in relation to arrangements that go beyond the scope of the guidelines.

    We have observed a variety of arrangements exhibiting high risk factors not specifically addressed within the guidelines, including the use of related party financing and SMSFs.

    In light of these concerns, we suspended the application of the guidelines and Everett Assignment web material as of 14 December 2017. Individual professional practitioners contemplating entering into new arrangements from 14 December 2017 are encouraged to engage with us through Early engagement or via Professionalpdts@ato.gov.au.

    Those who have entered into arrangements before 14 December 2017 that comply with the guidelines and do not exhibit high risk factors can rely on those guidelines. Arrangements entered into before 14 December 2017 exhibiting any of the high risk factors may be subject to review. We encourage those who are uncertain about how the law applies to their existing circumstances to engage with us as soon as possible.

    We are consulting with interested stakeholders on replacement guidance and the application of any required transitional arrangements, noting new guidance will apply prospectively.

    If you have any questions regarding the above, please contact ProfessionalPDTS@ato.gov.au

    See also:

    • TA 2013/3 Purported alienation of income through discretionary trust partners

    Property and construction

    We focus on how entities that have conducted a property development include the profit or income from the property development activities on their tax returns. A particular focus is whether the income should be returned as ordinary income as the development was part of a business of property development or was undertaken for a profit making purpose.

    Situations that attract our attention include:

    • income tax and superannuation: An entity that undertakes a development and uses an SMSF to undertake or fund the development and subdivision of properties leading to sale
    • income tax:
      • property has been disposed of shortly after the completion of subdivision and the amount is returned as a capital gain (refer to TD 92/124)
      • there is a history in the entity’s wider economic group of property development or renovation sales but a current sale is returned as a capital gain
      • an entity that is a land owner and has related entities that undertake a property development (refer to TR 2018/3)
      • claiming inflated deductions in relation to property developments that are not in accordance with the trading stock provisions, or spreading headworks and other costs over the inventory in line with the decision in Kurts Developments
      • an entity that undertakes multi-purpose developments that have both a revenue and a capital purpose needs to ensure that its costs are appropriately applied to the properties developed. For example, an entity that retains some units for rent in a multi-unit development.
       

    Research and development tax incentive

    The ATO and AusIndustry (on behalf of Innovation and Science Australia) jointly administer the Research and Development (R&D) tax incentive which aims to give effect to the Australian Government objective to support companies that undertake eligible R & D activities. AusIndustry administers the registration and compliance of the R&D activities. We are responsible for the expenditure claimed on the tax return for eligible R&D activities.

    We focus on claims made by entities in particular industries and claims related to particular behaviours that are not restricted to particular industries.

    Four industries of concern have been identified:

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

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

    • claiming R&D tax offset on business as usual expenses that are not covered by eligible R&D activities
    • how entities apportion overheads between eligible R&D activities and other non-R&D activities
    • payments to associates
    • whether or not expenses have been incurred
    • approaches taken by R&D consultants
    • fraudulent claims
    • 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 entities that 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 a tax loss is legitimate.

    Potential compliance risks are:

    • inflating expenses and creating artificial losses
    • understating, mischaracterising or omitting income
    • misclassifying capital losses as revenue losses.

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

    What attracts our attention are entities with one or more of the following factors arising from their tax returns:

    • high operating loss in a single year
    • significant revenue loss 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?
    • Losses

    Revenue losses utilised

    We focus on entities that are using or carrying forward tax losses incorrectly.

    What attracts our attention are tax losses:

    • being used where companies don’t satisfy either the ‘continuity of ownership’ or ‘same business’ tests
    • deducted in the current year that exceed the previous year’s carried forward tax losses
    • that 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 - principally, the interaction between section 165-210 and section 701-1 of the Income Tax Assessment Act 1997
    • 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 self-managed super funds (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
    • personal services income diverted to SMSFs
    • incorrect treatment of non-arm’s length income.

    Currently we are seeing a number of schemes targeting Australians planning for their retirement. These schemes encourage individuals to channel money inappropriately through their SMSF.

    We have launched Super Scheme Smart to educate individuals and their advisers about these types of schemes.

    These schemes have some common features, they:

    • are artificially contrived with complex structures usually connecting with an existing or newly created SMSF
    • involve a significant amount of paper shuffling
    • are designed to give the individual minimal or zero tax, or a tax refund
    • aim to give a present day tax benefit by adopting the arrangement
    • invariably sound ‘too good to be true’, and as such they generally are.

    See also:

    Taxation of financial arrangements

    The taxation of financial arrangements (TOFA) rules in Division 230 of the ITAA 1997 provide the tax treatment of gains and losses from financial arrangements. The application of the TOFA rules is complex and errors can arise.

    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 entities that do not exceed the TOFA thresholds, applying the TOFA rules without a valid election to adopt the TOFA rules.
    • Excluding financial benefits that play an integral role in the calculation of the gain or loss on a financial arrangement.
    • Entities that have 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 activities involving refund fraud, 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.

    We are part of the Serious Financial Crime TaskforceExternal Link (SFCT), a multi-agency taskforce targeting serious financial crime in Australia.

    See also:

    Trusts

    Distributions to complying superannuation funds

    We focus on distributions from trusts to complying superannuation funds (including SMSFs) to ensure any non-arm’s length income is taxed in the superannuation fund at the top marginal tax rate.

    What attracts our attention is a complying superannuation fund (generally an SMSF) that receives income distributions from a trust where the distributions result from:

    • the exercise of a discretion of the trustee; or
    • a fixed entitlement but one or more of the following features exist:
      • the fixed entitlement was not acquired on arm's length terms
      • the fixed entitlement was acquired using a loan from a related lender and is not on arm's length terms
      • there are loans between related parties which are not on arm's length terms which have facilitated the acquisition of assets within the trust
      • the rate of return received by the superannuation fund from its investment is not consistent with an arm's length return.
       

    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
    • TD 2016/16 Income tax: will the ordinary or statutory income of a self-managed superannuation fund be non-arm's length income under subsection 295-550(1) of the Income Tax Assessment Act 1997 (ITAA 1997) when the parties to a scheme have entered into a limited recourse borrowing arrangement on terms which are not at arm's length?
    • Self-managed super fund limited recourse borrowing arrangements interest rates

    Distributions to tax-preferred beneficiaries

    We focus on distributions to tax-preferred beneficiaries that may be utilised by trustees to attempt to reduce the final amount of tax paid on the trust's net income ('net income' is used to refer to the net income of a trust calculated under section 95 of the ITAA 1936).

    Tax-preferred beneficiaries include:

    • tax-exempt entities
    • entities that deduct excess deductions and tax losses against their share of the trust's net income
    • entities that apply capital losses or carried forward net capital losses against their share of the trust's capital gains
    • non-resident beneficiaries that are entitled to trust amounts that are subject to withholding tax
    • non-resident beneficiaries where the assessable income of the resident trust includes amounts from sources outside of Australia
    • entities that pay lower or nil rates of tax
    • entities that lack the financial means to pay tax.

    Situations that attract our attention include:

    • a tax-preferred beneficiary is made presently entitled to an amount that is favourably taxed due to the tax-preferred characteristics of that beneficiary
    • the entitlement of the tax-preferred beneficiary remains unpaid or is applied in a manner that sees someone else have use and enjoyment of the entitlement
    • the tax-preferred beneficiary has been recently introduced or has a weak social or economic connection with the persons controlling the closely held trust
    • steps were taken to change the character of the trust income in order to have that income favourably taxed in the hands of the tax-preferred beneficiary
    • the tax-preferred beneficiary is unable to pay the tax that is assessed as a result of the trust entitlement
    • where the tax-preferred beneficiary is tax-exempt, whether the requirements in sections 100AA and 100AB have been met.

    See also:

    Differences between distributable and net income

    We focus on tax-preferred beneficiaries, including private companies, being made entitled to distributable income that is significantly less than the net income included in the assessable income of those tax-preferred beneficiaries.

    Whether or not this behaviour is associated with tax avoidance turns on the facts of each case. Where tax has been avoided, it is often because of the understatement of distributable income, distributions being purportedly made to entities that are not beneficiaries, or arrangements designed to obtain a tax benefit. For example, loss integrity rules may limit the losses that beneficiaries can deduct, Division 7A may apply where the differences have been exploited in extracting profits from a private company, and Part IVA may apply to more contrived differences.

    Situations that attract our attention include:

    • a trust that has:
      • a small amount of distributable income and a large amount of net income
      • purportedly made a tax-preferred beneficiary entitled to that distributable income
      • the difference between distributable income and net income (the difference) is retained in the trust or has been extracted from the trust in a tax-concessional form in a prior year, the current year or a subsequent year.
       
    • steps have been taken to create or exacerbate the difference, or to include the tax-preferred entity as a beneficiary
    • the trust deed has not been followed in calculating distributable income or in appointing distributable income to beneficiaries
    • the income of the trust includes franked dividends from a private company.

    See also:

    • TA 2013/1 Arrangements to exploit mismatches between trust and taxable income
    • TA 2016/12 Trust income reduction arrangements
    • TD 2017/D3 Income tax: Division 7A: can section 109T of the Income Tax Assessment Act 1936 apply to a payment or loan made by a private company to another entity (the 'first interposed entity') where that payment or loan is an ordinary commercial transaction?
    • Tax issues for trusts – tips and traps

    Income versus capital

    We focus on trusts that are carrying on a business of selling an asset, or that are selling an asset as part of a profit-making undertaking, to ensure they are not claiming the 50% CGT discount in relation to profits made from those sales.

    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 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 business or a profit-making undertaking.

    What attracts our attention is a trust that is carrying on a business with a significant net capital gain that is greater than the business income of the trust.

    See also:

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

    Value extraction – luxury assets

    We focus on trusts holding luxury assets (such as luxury boats) for personal use by the beneficiaries to ensure they are not claiming deductions for the operating expenses of these assets. Such claims are often used to reduce the net income of the trust by offsetting them against income from business activities carried on by the trust.

    Situations that attract our attention include:

    • the funds used to acquire a luxury asset held in a trust are traced to a private company, superannuation fund, unpaid income entitlements of low tax beneficiaries, or unexplained wealth
    • losses or outgoings have been incurred in relation to a luxury asset where either:
      • the trustee is claiming deductions and the deductions do not appear to be connected with assessable income
      • the outgoings purportedly reduce distributable income in causing mismatches between distributable income and net income of a trust.
       

    See also:

    Value extraction and corpus distributions

    Capital distributions, or entitlement to corpus, may involve extracting value from a trust in a non-assessable form (subject to the CGT events, section 99B and the specific entitlement rules in Subdivision 115-C of the ITAA1997).

    Situations that attract our attention include:

    • the entitlement to corpus relates to an unrealised capital gain and that entitlement has been satisfied
    • the corpus entitlement is satisfied through the use of an unpaid income entitlement of a tax-preferred beneficiary
    • the corpus entitlement is satisfied through accessing value in another entity, such as a company or a superannuation entity
    • the capital distribution is funded from, or causes, the difference between distributable income and net income of the trust
    • the transfer of assets to another trustee that purports to hold the transferred assets as a separate trustee on the same trust under a ‘trust splitting arrangement’ which purports to not trigger CGT events E1 and E2
    • the trustee has borrowed money to satisfy the entitlement to corpus and the trustee is claiming interest deductions on the amounts borrowed.

    See also:

    Potential reimbursement agreements

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

    We are concerned that some arrangements may not have been entered into in the course of ordinary family or commercial dealings, and have instead been entered into in order to avoid tax.

    See also:

    Capital loss trust moved into group

    We focus on trusts with capital losses (capital loss trusts) because they may be moved into a new corporate group so that the new group can take advantage of those trust capital losses.

    For example, a capital loss trust may be moved into a new group so that the losses can subsequently be used within the group by other entities in the group distributing capital gains to the capital loss trust. The distributions of these capital gains into the capital loss trust must be accounted for correctly and comply with the tax laws.

    What attracts our attention are trusts with significant capital losses recently moved into a group.

    See also:

    • TD 2001/27 Income tax: capital gains: how do Part 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997) treat:  
      • (a) a final liquidation distribution, including where all or part of it is deemed by subsection 47(1) of the Income Tax Assessment Act 1936 ('ITAA 1936') to be a dividend, and
      • (b) an interim liquidation distribution to the extent it is not deemed to be a dividend by subsection 47(1)?
       
    • Division 6 – Trust income
    • Division 6E – Adjustment of Division 6 assessable amount in relation to capital gains, franked distributions and franking credits
    • Subdivision 115-C of the ITAA 1997 – Rules about trusts with net capital gains
    • Capital gains

    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 moved into a new corporate group by entities 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 are trusts with significant revenue losses that have recently been moved into a group.

    See also:

    Family trust distributions tax

    We focus on:

    • a trust that has a family trust election in place (family trust) distributing outside their family group
    • 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
    • instances where an individual beneficiary incorrectly returned an amount on which family trust distributions tax (FTDT) has been paid.

    Generally a liability to 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.

    See also:

    Circular trust distributions

    A circular trust distribution exists where a trust (the first trust) makes a distribution to a second trust and all or part of that distribution finds its way back to the first trust as a distribution from the second trust or another trust.

    We focus on those circular trust distributions where no tax has been paid on some or all of the distribution. This arises where one or more beneficiaries understate the trust amounts included in the beneficiary’s assessable income or where there is an unbroken circular distribution between two or more trusts.

    In focusing on these distributions, we seek to ensure that the trustees have complied with their tax obligations, including their obligations with regard to trustee beneficiary non-disclosure tax.

    Situations that attract our attention include:

    • one trust makes another trust presently entitled to income of the first trust and the assessable income of that first trust includes distributions from other trusts that can be traced to that first trust.
    • trusts omit distributions from other trusts from their assessable income in trust tax returns.

    See also:

    Other issues

    Bad debts

    We focus on deductions claimed for bad debts, in particular:

    • the genuine nature of bad debts
    • the correct treatment of the debt as 'bad'
    • arm's length treatment of debts within closely held groups
    • the treatment by related entities of income reflecting the debt
    • the documentation and evidence supporting the claims.

    Additionally, we look at the correct application of the deduction rules and what attracts our attention are:

    • the period when the debts were written off
    • the amount being claimed
    • there being a lending business or the debt being included in income
    • the rules being used for individuals, companies and trusts.

    See also:

    Commercial debt forgiveness

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

    The net amount of commercial debts forgiven must be applied in the order set out below to reduce the company’s deductible (refer also to the Company tax return instructions):

    • revenue losses
    • net capital losses
    • certain deductible expenditure (section 245-145 of the ITAA 1997)
    • the cost base of certain CGT assets.

    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 are entities that have:

    • had a debt forgiven (whether formally or informally)
    • entered into a debt for equity swap and failed 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 may result from:

    • failing to add back non-deductible expenses in the reconciliation statement
    • inappropriately valuing closing stock at below cost or replacement value to generate greater deductions.

    Situations that attract our attention include:

    • a large proportion of total expenses comprises undefined expenses
    • using the trading stock election rules to lower the valuations of closing stock.

    See also:

    Last modified: 10 May 2018QC 44834