Tax time 2017: ATO vague on small business tax cuts

ATO taxation tax cuts reform reforms system scissors generic photo illustrationTax Office Cutiing Cash . Illustration Karl Hilzinger . 16th February 2011 . For AFR Special Reports .(NO CAPTION INFORMATION PROVIDED)Accountants want the tax office to clearly define which businesses will be eligible for company tax cuts under the Turnbull government’s signature tax policy, but to avoid potential hot water, the tax man is remaining ambiguous.

The n Taxation Office (ATO) has started processing small business company tax returns at the 27.5 per cent tax rate, but warns that businesses who are still using the higher 30 per cent rate need to seek an amendment themselves as the agency will not automatically do it.

This is because there’s still uncertainty about who is “carrying on a business”.

In July, Revenue and Financial Services Minister Kelly O’Dwyer promptly issued a media release that indicated the government may change the law to deny tax cuts to companies making money from passive investments, after media headlines that discretionary trusts may be eligible. Ruling interpretation ‘premature’

This came after an earlier ATO ruling expanded the range of companies eligible for tax cuts under the the Turnbull government’s Enterprise Tax Plan, which aims to over time reduce the corporate tax rate for all companies from 30 per cent to 25 per cent.

Ms O’Dwyer said the ATO ruling was in draft form and it was “premature” to suggest eligibility for lower rates had been broadened.

She said the government’s policy intent in relation to the reduction was to ease the burden on small and medium businesses, and “was not meant to apply to passive investment companies”.

She added that: “If any further direction is required on the government’s policy intention by the ATO it will be provided by the government.”

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For the 2016-17 tax year the company tax rate is being reduced from 28.5 per cent to 27.5 per cent for small business entities with turnover of less than $10 million (which is an increase from the $2 million threshold in previous years). This will also impact franking credits.

The problem is, the onus is on businesses (or their tax advisers) to know whether they are eligible for a tax cut. The ATO says on its website that where a company has lodged their 2016-17 tax return using the 30 per cent tax rate, and believe they are entitled to the 27.5 per cent tax rate, “they should seek an amendment as we are unable to accurately identify these taxpayers”.

It says this is because “it is not possible to definitively state whether a particular company is carrying on a business”.

“This is always question of fact,” the ATO states. “While most companies will carry on a business in a general sense, this does not mean that every gain made by a company will be ordinary income and assessable.” Accountants worried

But Chartered Accountants tax leader Michael Croker said that since the ATO had not yet stated what criteria they will be using to judge whether a business is eligible, it would create a compliance nightmare.

“It can create churn … if an agent’s professional judgment proves incorrect,” he said.

“The lack of clarity is around passive investment companies – where there’s no shopfront or employees, no registered business name; it’s just a mum and dad company with investments in listed shares, a rental property and bonds.

“There’s potential for the ATO to adopt a different position to the taxpayer and/or for the government, if they disagree with the ATO, to come up with a legislative solution.” Small business tax debts

The tax man is also disclosing small business tax debt information to credit reporting agencies. The ATO has a debt book of about $20 billion, the majority of which is made up of small and medium business debts.

In a recent speech to the Queensland Tax Forum ATO Second Commissioner Andrew Mills said the ATO will have discretion to disclose tax debt information to credit reference agencies.

“The measure does not oblige us to disclose this information,” he said.

“The ATO understands that from time to time taxpayers have cash flow issues and works with them to repay debts, for example, by using payment arrangements.” ATO to work with credit agencies

Debts will only be reported in cases where the tax debt is over $10,000 and has remained unpaid for over 90 days, and the debt is not in dispute.

That is, if “a taxpayer remains disengaged after the ATO has pursued normal debt collection procedures to collect an overdue debt,” Commissioner Mills said.

“Debts that are genuinely in dispute will not be reported nor will debts under payment arrangements,” he said. “Taxpayers who are working with us to resolve their debt will not have it reported.”

The ATO will also notify a business in writing that it intends to refer its tax debt to a credit bureau before that information is passed on, he said. It will also establish agreements with credit reporting bureaus to manage the reporting and administration of tax debt information.

A number of overseas jurisdictions such as New Zealand, Britain, Ireland, Norway and Finland are publishing tax debt information on a public register or sharing it with credit bureaus, he said.

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