ATO identifies common mistakes with division 7A
Where a private company makes a loan to a shareholder/associate of the company during an income year, Division 7A will deem the loan to be an unfranked dividend paid to the shareholder/associate for that income year unless:
- the loan is fully repaid before the company’s lodgement day for the income year in which the loan was made (‘lodgement day’ is the earlier of the due date for lodgement of the company’s tax return for the income year in which the loan was made and the date of lodgement of the company’s tax return for that income year); or
- the loan is placed on complying loan terms.
‘Complying loan terms’ means that the loan must be:
- made under a written agreement;
- subject to interest charged at a rate that equals or exceeds the Division 7A benchmark interest rate (8.27% for the 2023–24 income year); and
- fully repaid within seven years, or 25 years if secured by a mortgage over real property (conditions apply).
During the recent launch of a year-long education campaign, the ATO identified that tax agents continue to make the same mistakes with Division 7A including:
- repaying a loan before year’s end and re-borrowing that amount shortly thereafter;
- not entering into a complying loan agreement within the relevant time;
- choosing an interest rate outside the ATO benchmark interest rate (currently 8.27% p.a.);
- a private company making a loan to a trust ‘for investment purposes’ on non-complying terms; and
- 30 June ‘repayments’ done solely by way of journal entry without other appropriate documentation.
The ATO has a discretion under section 109RB to disregard the operation of Division 7A, or allow a deemed dividend to be franked for an ‘honest mistake or inadvertent omission’. The ATO is unlikely to apply the discretion where a private company changes tax agents and the new agent discovers that the previous agent failed to apply Division 7A.
The new tax agent has an obligation to ensure that Division 7A and other tax laws are complied with at all times and therefore cannot simply ignore the company’s previous non-compliance with Division 7A.
ATO taking a tough stance on payment plans & GIC remissions
The ATO’s debt book has now reached $52 billion with small businesses making up around 90% of this amount.
According to the ATO, too many tax agents are seeking payment plans and interest remissions for clients when they are not in genuine need. Payment plans will only be granted where the taxpayer doesn’t have the capacity to pay on time.
The ATO will be more stringent in asking questions about capacity to pay and also more stringent in looking at general interest charge (GIC) remissions. By allowing GIC remissions for taxpayers who chose not to pay on time is creating an uneven playing field said the ATO.
Note the ATO will only consider a payment plan or GIC remission where the taxpayer’s income tax and BAS lodgements are up-to-date.
Increase in the instant asset write-off threshold to $30,000
The Senate recently increased the small business instant asset write-off threshold from the current cap of $20,000 $30,000 for businesses with an aggregated turnover of less than $50 million (up from $10 million).
The increase has not been passed by parliament, but it’s likely to be in the near future.
This means that ‘businesses” with an aggregated turnover of less than $50 million will be able to write off eligible depreciating assets costing less than $30,000 that are first used or installed ready for use by 30 June 2024.
Self-education expenses not tax deductible
The Administrative Appeals Tribunal (AAT) has sided with the ATO and ruled that expenses incurred as part of completing examinations and practical assessments by a dental technician to become a qualified dentist in Australia were not deductible - Ionita and Commissioner of Taxation (Taxation) [2024] AATA 808.
Interestingly in the case the taxpayer was a qualified dentist in Romania and was undertaking these studies to be qualified in Australia.
The ATO submitted that the taxpayer’s employer didn’t require her to undertake the assessment or examinations as part of her dental technician role nor was there any regulatory requirement that she do so for her role as a dental technician.
The ATO also noted that there was no such requirement in her employment contract or job description to become a qualified dentist and she obtained her employment prior to undertaking the initial assessment and remained employed in the absence of completing all the assessments and examinations.
The AAT agreed with the ATO’s submission that it was not clear how the assessment, written examinations, or practical examinations had the effect of maintaining or improving the applicant’s skills as a dental technician. While the taxpayer received pay rises, she had not provided sufficient evidence to show the increase in salary was as a result of sitting the assessment or the examinations.
Accordingly, the expenses were found to exclusively relate to the taxpayer becoming eligible for registration as a dentist in Australia and therefore were incurred ‘at a point too soon’ to be regarded as incurred in gaining or producing the taxpayer’s assessable income.
This case is another example of how narrow the window is when it comes to claiming self-education expenses.
First ASIC prosecution for failing to have a director ID
Director ID’s were introduced to help prevent the use of fake director identifies and make it easier for regulators to associate directors with companies. The system is also designed to mitigate illegal phoenixing.
ASIC recently commenced the first prosecution action against a director for failing to comply with the obligation to have a director identification number (director ID).
On 19 March 2024, a director appeared in the Downing Centre Local Court and was formally charged with one count of contravening section 1272C(1) of the Corporations Act 2001 by failing to have a director ID. The maximum penalty for an offence against section 1272C(1) of the Act is 60 penalty units. The director is facing a maximum penalty of $13,320.
Any director that does not have a Director ID should apply for one as soon as they can to minimise (but not eliminate) the risk of ASIC taking prosecution action against the director.
Small business skills and training boost ends on 30 June 2024
Small businesses with an aggregated turnover of less than $50 million are entitled to an additional 20% deduction for eligible expenditure on training new and existing employees. The expenditure must be:
- for the provision of training to employees of the business, either in-person in Australia, or online;
- charged, directly or indirectly, by a registered external training provider that is not an associate of the business;
- already a deductible business expense; and
- incurred by 30 June 2024.
Note the training boost doesn’t apply to eligible expenditure incurred in respect of a sole trader or a partner in a partnership. For example, if a gardener operating as a sole trader and their employee undertake eligible turf management training, the bonus deduction can be claimed for the employee, but not for the sole trader.
