The ATO has once again shown Private Groups that it is committed to greater transparency – however only this time, it is the ATO that is being transparent. Late last week, the ATO released a list of behaviours, characteristics and tax issues that will attract its attention in relation to Private Groups. The release can be found here.
The first part of the release is a list of “behaviours and characteristics” that attract the ATO’s attention. The list includes (amongst others):
- Low transparency of a taxpayer’s affairs
- Poor governance and risk-management systems
- Tax or economic performance that is not comparable to similar businesses
- Large, one-off or unusual transactions
- Treating private assets as business assets
All in all, these factors help set the scene for the ATO regarding the tax risk appetite of the relevant Private Group. And whilst we have previously discussed the issues surrounding tax transparency and tax governance frameworks (see our Ripostes: tax transparency and tax governance), it is now clear that these two aspects only help the ATO paint two parts of the bigger picture.
The second part of the release focuses on “specific” behaviours and characteristics that attract the ATO’s attention. Unlike the first part of the release, the second part focuses on behaviours or characteristics that ultimately result in lower taxable income. Whilst there is a laundry list of items, some examples include (but are not limited to):
- Capital gains tax – capital losses, disposals
- Division 7A – director loans, unpaid present entitlement, profit extraction
- Revenue losses – generation of tax losses and utilisation of tax losses
- Trusts – differences between distributable and taxable income, income v capital, corpus distributions
- Other issues such as bad debts and commercial debt forgiveness
The issues touched on by the ATO, whilst unsurprising, are relevant to many Private Groups. In confronting these issues, the ATO is looking for misconduct or error in the application of the tax law – whether it be “exaggerated, fabricated or misclassified” use of capital losses, the “inappropriate characterisation of capital” or the “inflating [of] expenses”. Whatever the error or misconduct might be, the ATO wants Private Groups to “get things right”.
For Private Groups concerned with their tax position in light of the release, the ATO is encouraging them to either engage with the ATO for advice or to correct a mistake via self-amendment or voluntary disclosure. With these options at hand, Private Groups should take the opportunity to review the ATO’s release, and see how the issues identified by the ATO align with their respective tax positions.