ATO ramping up debt collection measures
The ATO is set to take a stronger recovery stance when it comes to debt collection. Since COVID, the ATO has been lenient on businesses who fail to pay their tax debts, or don’t engage with the ATO at all regarding these debts.
The ATO will use budget funding of $82 million to crack down on thousands of businesses with debts of $100,000 and above or older than two years.
The following measures have recently been announced:
- Remissions on interest charges and penalties would become the exception rather than the rule
- Payment plans will be limited, and those that are accepted will need to be completed within shorter periods and align with reporting cycles
- There will be little sympathy for businesses with unpaid superannuation and employers taking advantage of employees
- A range of firmer actions will continue to be applied including garnishees, directions to pay, director penalty notices, disclosure of business tax debt and prosecution actions, to ensure payment
- Where businesses continue to trade without addressing their super guarantee charge debts, The ATO will escalate their actions towards wind-up and bankruptcy where appropriate.
Expect to see a sharp rise in ATO liquidations and insolvent trading claims brought against company directors.
Expanding client-to-agent linking to more businesses
From 13 November 2023, client-to-agent linking will apply to all types of businesses with an ABN excluding sole traders. This includes entity types such as companies, trusts, partnerships, superannuation funds and not-for-profits. These businesses will need to nominate a tax or BAS agent in online services for business before their agent can link to their account when they:
- Engage a new tax or BAS agent, or payroll service provider to represent them
- Provide extra authorisation to their existing agent.
If a business is already represented by an agent and no changes are made, they won’t need to do anything.
Interestingly, tax and BAS agents won’t be receiving an automated notification advising them that the client has completed the notification. Agents will only have 7 calendar days to add the client to their list. If the agent does not add the client on time, then the client will presumably have to make another application.
The ATO is consulting with a working group consisting of tax professionals, business and association representatives to ensure they have the right support and information available as they progressively roll out client-to-agent linking (including information for those who cannot access online services).
Planning for increase in the division 7A benchmark interest rate for 2023/24
Division 7A of the Tax Act treats loans from private companies to shareholders and associates as deemed dividends without the benefit of any franking credits. This can lead to substantial tax disadvantages for business owners.
To prevent Division 7A from applying, either the loan to the shareholder has to be repaid by the lodgement day of the company’s tax return for that year, or when this doesn’t occur, the shareholder and the company need to enter into a complying loan agreement by this date. This involves setting a complying maximum loan term (usually seven years for unsecured loans) and using an interest rate based on the Australian Taxation Office’s (ATO) benchmark rate for the year.
With the rises in interest rates over the past 18 months or so, there has also been a significant rise in the ATO benchmark Division 7A interest rate for the 2023/24 financial year. The rate for the 2023/24 year is 8.27% compared to 4.77% just a year ago (an increase of 73%). This increase in the benchmark interest rate has implications for loans used for private purposes. In such cases, the interest expense on the loan will not be tax-deductible for the shareholder, but is assessable income of the company.
For example, if a shareholder of a private company borrows $1 million for personal use, the interest accrued on the loan would amount to $82,700. The interest will not be tax-deductible to the shareholder, but the company will pay tax on the interest at a rate of either 25% or 30%.
This increase in interest costs may have significant other implications for the shareholder including their ability to fund other business or external debt requirements. This also arises because Division 7A does not provide for an ‘interest only’ loan option and all interest must be paid by the end of the financial year to avoid the loan triggering Division 7A.
Given the escalating benchmark interest rate, careful planning is essential when shareholders (or associates) of companies want to extract cash from their businesses beyond dividends, loan repayments, or capital returns. Some examples of planning include changing the complying loan to a 25-year term if can be secured against real property owned by the shareholder, or making significant capital repayments on the loan to reduce the interest charges. Such repayments could be in the form of properly documented franked or unfranked dividends depending on the balance of the company’s franking account return.
Importance of timing with derivation of income
A recent Administrative Appeals Tribunal (AAT) case (Tawfik and Commissioner of Taxation [2023] AATA 25410) involved a taxpayer who was working in Kuwait. He became entitled to a bonus in early February 2017, at which time, he was not an Australian resident for tax purposes. However, his employer was unable to pay the bonus at that time.
Instead, the bonus was received in the taxpayer’s Australian bank account in three separate instalments on 23 January 2018, 2 July 2018 and 3 July 2018. By that time, the taxpayer was an Australian resident.
The key issue was the timing of WHEN the taxpayer ‘derived’ the bonus payments.
If the bonus was derived when the taxpayer completed his work for the employer or when he became entitled to receive it (i.e. on an accruals basis) then no Australian income tax would be payable on the bonus as the taxpayer was not an Australian resident at the time. In contrast, if it was derived when the amounts were paid to the taxpayer’s bank account (i.e. on a receipts basis) then it would be subject to tax in Australia as he was a resident at the time of receipt.
The AAT held that, in accordance with long-standing principles established by case law, the bonus had not ‘come home’ to the taxpayer when he completed the work or when the bonus was due for payment. Rather, the bonus payments were derived upon receipt when the taxpayer was an Australian resident and were taxable in Australia.
Taxpayer unable to claim GST credits as BAS’s lodged outside of 4 year limit
In another recent AAT case (Semmens and Commissioner of Taxation (Taxation) [2023] AATA 2060 ), the taxpayer carried on business and was registered for GST. In May 2021, he lodged BAS’s for the quarterly tax periods between 1 July 2004 and 30 June 2008.
The ATO determined that the taxpayer was not entitled to claim the credits on the BAS’s as he did not notify the ATO of his entitlement to these credits within 4 years, which resulted in a net adjustment of $31,062.
The taxpayer said that he had notified the ATO of his entitlement to the input tax credits in a number of phone calls made between March 2006 and December 2014, arguing that these calls constituted valid oral notifications of an entitlement to input tax credits.
However, the AAT found in favour of the ATO on the basis that the taxpayer was unable to prove that any form of relevant notifications was made. As the notification requirements to preserve his entitlement to input tax credits for that period were not met, the taxpayer was found not to have any entitlement to claim the input tax credits.
This case serves as a timely reminder that an entity will lose its entitlement to an input tax credit if it has not been taken into account in an assessment within a limited period (generally, 4 years).
