Thinking Tax Edition 5

22 September 2020

Thinking Tax is an initiative from Findex to provide you with a short overview of specific tax issues that may affect you or your business, with a focus on practical issues you may face on a day to day basis.

1. Residential rental properties and COVID-19

The COVID-19 pandemic has caused financial hardship and uncertainty for both tenants and landlords.

Regardless of all these changes, it is important to note:

  • Landlords will still be able to claim normal rental property deductions even if tenants are not paying their full rent or have temporarily stopped paying rent because of financial hardship caused by COVID-19.
  • Landlords that receive back payments of rent or an amount of insurance for lost rent will have to declare these amounts as income in the year they receive these amounts.
  • Landlords that have deferred their loan repayments for a period because of COVID-19 can still claim interest deductions on these deferred loans provided the interest continues to accumulate.

2. ATO private groups tax compliance program expanded

The ATO has expanded its Tax Avoidance Taskforce to help ensure private groups and high wealth individuals pay the right amount of tax. COVID-19 caused some compliance and audit activities to be deferred but over the next few months, the ATO is due to start engaging with taxpayers again.

Taxpayers that fall into either the Top 500 program (Australia’s 500 largest private groups) or Next 5,000 program (the next largest 5,000 private groups controlled by high wealth individuals who control wealth of more than $50 million) can expect specifically tailored contact from the ATO, such as a one-to-one engagement strategy. This compliance activity is expected to follow the Top 1000 engagement approach (which applied to public and multinational companies).

When performing reviews, the ATO will seek to apply their 'justified trust' methodology to obtain assurance the group has paid the right amount of tax. To date, the ATO has been generally pleased with the progress of the Justified Trust Program and reiterates that communication is key to their approach to taxpayers. Cases that have gone well are those where there have been open and transparent communications.

Specific risk factors that may attract the ATO’s attention include:

  • Tax or economic performance not comparable to similar businesses.
  • Low transparency of tax affairs.
  • Large, one-off or unusual transactions or shifting of wealth.
  • Aggressive tax planning, non-compliance or controversial interpretations of tax laws.
  • Lifestyle not supported by after-tax income.
  • Accessing business assets for tax-free use.
  • Poor governance and risk-management systems.

If you have attracted the attention of the ATO during their review, you can expect individual contact from them in the form of a notification letter. You should be able to provide information to the ATO about:

  • Business operations including details about the business structure, information on significant transactions, financial statements, tax workpapers and reconciliations between accounting and taxable income.
  • Tax governance such as details of risk management policy, tax reporting process and controls in place to test the accuracy of reporting,
  • Significant and new transactions.
  • Key tax risks such as tax issues affecting trusts and private company loan issues.
  • Reasons for any variances in accounting and tax results.

Findex can help you manage the ATO early engagement process by examining your tax position to identify and address potential tax risks and help reduce penalties through early detection and voluntary disclosure of errors.

Roelof van der Merwe, National Tax Director (Melbourne)

Peter Fallon, Senior Partner, Tax Advisory (Perth)

Anthony Patrk, Partner, Tax Advisory (Sydney)