Amendments To The Tax Law To Reduce Compliance Costs For Small Business
The Minister for Revenue and Assistant Treasurer, Peter Dutton MP, has announced amendments to the integrity rules concerning distributions by private companies (Division 7A of the Income Tax Assessment Act 1936).
The purpose of Division 7A is to prevent private companies from making tax-free distributions of profits to shareholders (or their associates). Unless they come within specified exclusions, advances, loans and other credits to shareholders (or their associates) are treated as assessable dividends to the extent that there are realised or unrealised profits in the company.
When a deemed dividend arises under Division 7A, the private company’s franking account is debited and the deemed dividend is taxable in the hands of the shareholder or associate, but without access to a franking credit to offset the tax paid by the company.
The Government will reduce the double-penalty nature of Division 7A by removing the automatic debiting of the company’s franking account when a deemed dividend arises.
This double penalty is not in proportion to the potential tax mischief involved. However, deemed dividends will continue to be treated as assessable income in the hands of shareholders or their associates.
The Commissioner of Taxation will also be provided with a discretion to disregard a deemed dividend where there is evidence that a taxpayer has attempted to comply with Division 7A but they have made an honest mistake and efforts have been made to rectify the mistake.
This new discretion will allow the Commissioner to appropriately handle taxpayers that have unintentionally breached Division 7A, but where there was no tax mischief involved.
A range of other technical amendments will also be made to the rules to provide more flexibility for taxpayers, including changes to the fringe benefits tax (FBT) laws to simplify their interaction with Division 7A. These changes will reduce the extent to which taxpayers can be inadvertently caught by Division 7A in the first place.
The changes generally have effect from 1 July 2006. However, the discretion will apply from 1 July 2002 and the FBT amendments from 1 April 2007.
The purpose of Division 7A is to prevent private companies from making tax-free distributions of profits to shareholders (or their associates). Unless they come within specified exclusions, advances, loans and other credits to shareholders (or their associates) are treated as assessable dividends to the extent that there are realised or unrealised profits in the company.
When a deemed dividend arises under Division 7A, the private company’s franking account is debited and the deemed dividend is taxable in the hands of the shareholder or associate, but without access to a franking credit to offset the tax paid by the company.
The Government will reduce the double-penalty nature of Division 7A by removing the automatic debiting of the company’s franking account when a deemed dividend arises.
This double penalty is not in proportion to the potential tax mischief involved. However, deemed dividends will continue to be treated as assessable income in the hands of shareholders or their associates.
The Commissioner of Taxation will also be provided with a discretion to disregard a deemed dividend where there is evidence that a taxpayer has attempted to comply with Division 7A but they have made an honest mistake and efforts have been made to rectify the mistake.
This new discretion will allow the Commissioner to appropriately handle taxpayers that have unintentionally breached Division 7A, but where there was no tax mischief involved.
A range of other technical amendments will also be made to the rules to provide more flexibility for taxpayers, including changes to the fringe benefits tax (FBT) laws to simplify their interaction with Division 7A. These changes will reduce the extent to which taxpayers can be inadvertently caught by Division 7A in the first place.
The changes generally have effect from 1 July 2006. However, the discretion will apply from 1 July 2002 and the FBT amendments from 1 April 2007.