Edited version of private advice

Authorisation Number: 1051777512329

Date of advice: 12 November 2020

Ruling

Subject: Amendments

Question 1

Does Item 2 of the table in section 170(3) of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the Amended Assessments and Further Amended Assessments?

Answer

Yes.

Question 2

Subject to the Commissioner's power to amend the Further Amended Assessments under item 5 or 6 of the table in section 170(1) of the ITAA 1936, does section 170(3) of ITAA 1936 operate so that the Commissioner cannot amend the Further Amended Assessments except in a way that reduces the Applicants' liabilities because:

a.    the Amended Assessment for each Applicant is the 'earlier assessment' (defined in section 170(3));

b.    the Further Amended Assessment for each Applicant is the 'later assessment' (defined in section 170(3));

c.     when the Commissioner issued the Further Amended Assessments, he amended the Amended Assessments about a particular (whether the proceeds each Applicant received from the sale of their business to Dental Corporation Limited was a revenue receipt and therefore ordinary income) in a way that reduced each Applicant's liability;

d.    as a result of the above, the Commissioner can only amend the Further Amended Assessments about that particular (whether the proceeds each Applicant received from the sale of their business to Dental Corporation was a revenue receipt and therefore ordinary income), in a way that reduces each Applicant's liability.

Answer

Yes, to the extent that no fraud or evasion has occurred.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The applicants are all dentists

In XXXX each applicant sold their businesses.

The applicants each declared the proceeds from the sales in their income tax returns (ITR) as a capital gain event choosing to make use of the 50% discount method and relevant small business concessions (SBC).

In XXXX the Australian Taxation Office (ATO) audited the applicants XXXX ITRs.

During the audit it was found that the proceeds from the sales was considered revenue not capital therefore removing the applicants right to access the 50% discount method and relevant SBCs.

On the XXXX the applicants were issued with amended notices of assessment (NOA) increasing their assessable incomes.

The applicants objected to the amended NOAs.

The objection was placed on hold while the audit was investigated.

On the XXXX the applicants received a letter from the ATO offering the reverse the amended assessments.

On the XXXX the applicant's representative advised the ATO that the applicants accepted the offer.

A comfort letter was issued to the applicants.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 170

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or DPT tax benefit in connection with an arrangement.

If Part IVA applies the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

The standard period for the ATO to amend an assessment (either to increase or reduce a taxpayer's liability) is four years. For certain individuals with very simple tax affairs, the period is two years. Within these time limits, the ATO effectively has an unlimited power of amendment.

Section 170 of ITAA 1936 provides that the Commissioner can amend an earlier assessment.

Note 1 of section 170(3) of ITAA 1936 advises an earlier assessment may be an original or amended assessment.

If the underpayment of tax was due to fraud or evasion, the ATO can amend the assessment at any time as per section 170(3) of ITAA 1936:

If the Commissioner amends an assessment (the earlier assessment ) as set out in column 2 of the following table, he or she may, under this subsection, amend the assessment (the later assessment ) that results from that amendment in the way set out in column 3 within:

(a) If item 1, 2 or 3 of the table in subsection (1) applies to the original assessment concerned (which may or may not be the earlier assessment) - 2 years after the day on which he or she gives notice of the later assessment to the taxpayer, or

(b) otherwise - 4 years after that day.

The Commissioner can amend the later assessment at any time under item 5 or 6 of the table in subsection 170(1) of ITAA 1936.

Additionally, there is also a special period for amendment where Part IVA (the general anti-avoidance provision) is invoked. As before self-assessment, the ATO has up to six years (from the date on which tax became due and payable under an assessment) to amend an assessment to cancel a tax benefit under this Part.

Section 170(4) of ITAA 1936 will apply to the applicants where:

The Commissioner cannot amend an assessment under item 2 of the table in subsection (3) about a particular if he or she has previously amended an assessment under item 1 of that table about that particular.

In your circumstances, you were audited by the ATO for payments received by all applicants for the sale of their businesses in XXXX and amended assessments were subsequently issued. After an investigation into the audit, the Commissioner reversed the amended assessments reinstating your original position.

As the amended assessments were issued for the tax period ending XXXX, that is now outside the 4 year period therefore, the Commissioner may only amend this assessment if it finds any fraud or evasion.