Business Finances - Tax Audits and Reviews

Increased spending and focus on tax integrity measures

The 2022 budget evidences the government's continued focus on business tax compliance, trust income splitting and high net wealth individuals.  In isolation, the announced measures may not seem significant.  However, this is not the case when considered in light of the approach adopted by the ATO over the last 2 months on certain targeted compliance measures:  

ATO cracking down on trust income splitting arrangements

Section 100A targets situations where income flows to someone other than the beneficiary named in the distribution.  In the past, this would commonly occur by parents making a distribution to their adult children but retaining the funds in the trust, or making the money available to themselves.  Such arrangements are referred to as 'reimbursement agreements' and can be struck down by Section 100A.    

The ATO's intention to focus on trust income splitting arrangements is highlighted by the recent release of the following ATO guidance:

• Taxpayer Alert 2022/1 - this alert confirms that Section 100A will apply to arrangements where parents benefit from distributions made to children.
• Draft Taxation Ruling 2022/D1 - which discusses the application of 100A
• Draft Practical Compliance Guideline 2022/D1 - which discusses the ATO's approach to audits of trust income splitting arrangements

Where section 100A applies:

• The trustee is taxed at 47%
• the CGT 50% Discount is disallowed, and
• No time limits apply to prevent income tax returns from being reviewed and amended, i.e. the ATO is not limited to reviewing the last four years.

ATO cracking down on the allocation of profits within professional firms

The ATO has recently released Practical Compliance Guideline PCG 2021/4, which sets out the ATO's compliance approach for assessing risk related to the allocation of professional services income to the principal and their related entities.

PCG 2021/4 is about arrangements where:

• Taxpayers redirect their professional services income from a business to an associated entity such as a trust, and
• The outcome is that there is a significant reduction in tax.

The PCG will come into effect from 1 July 2022.  It is therefore important to be considering how these new guidelines may affect your current arrangements, the tax you are paying and your risk of audit.   

Digitalising trust income and reporting and increased tax compliance expenditure

From these measures, it is not surprising that the government has in this budget announced further measures related to the digitalisation of trust data and further resources being allocated to tax integrity and compliance measures. Specifically:

• The government will digitalise trust and beneficiary reporting and processing.  The stated objective is to increase pre-filling and automating ATO assurance processes.
• The government will provide an additional $650 million to the ATO to extend the operation of the Tax Avoidance Taskforce by two years to 30 June 2025.

Click HERE to download the report as a PDF or search links below to read on...

Personal Finances

• Cost of living relief: fuel excise cut and tax offset  
• Increasing the Medicare low-income thresholds

Business Finances

• COVID-19 tax concessions
• Boost to small businesses
• Expanded Patent Box Scheme
• Australia-UK Free Trade Agreement
• Tax audits and reviews
• Expanded Employee Share Schemes

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Disclaimer: This newsletter contains general information only. No responsibility can be accepted for errors, omissions or possible misleading statements. No responsibility can be accepted for any action taken as a result of any information contained in these articles. It is not designed to be a substitute for professional advice and does not take into account your personal circumstances.