Tax bulletin

This month’s newsletter material was sourced from Thomson Reuters WTB issues on 17 August, 24 August and 7 September 2012.

In this month’s Tax Bulletin we provide an update on the development in tax law changes in respect to the Carry Back Loss Provisions as well as address the key targeted audit compliance focus by the ATO and taskforce groups being created for these audit focus areas.

For further information in respect to any matter raised in this month’s bulletin please contact Tanya Moran (Tax Partner Sydney) or Stephen Smith (Tax Partner Gold Coast).

Development in carry back loss provisions

In regards to the 2012-2013 Federal Budget announcements on 6 May 2012 in particular the Company carry back loss provisions, on 23 August 2012, the Government released for consultation the draft legislation and explanatory material to introduce thee provisions into the business tax system.

The government explained that the introduction of loss carry-back would give currently profitable companies greater certainty that, if they incur a loss from undertaking an investment to adjust to changing economic circumstances, they will be able to utilise that loss. This reduces the asymmetry between the taxation of profits and losses. The Government also stated that restricting loss carry-back to those companies that have recently paid tax would also target the measure to companies that have had a history of being profitable, and would improve companies' cash flow by allowing access to losses in a timelier manner.

From 1 July 2012, companies will be able to carry back up to $1m worth of losses to get a refund of tax paid in the previous year. From 1 July 2013, companies will be able to carry back up to $1m worth of losses against tax paid up to 2 years earlier. The Key features of the draft legislation included;

• Corporate entities only would be eligible and claiming the loss carry-back will be optional but must be decided by the time the corporate entity lodges its tax return for the current year or within such further time as the Commissioner allows. Corporate entities are defined as a company, a corporate limited partnership, a corporate unit trust or a public trading trust.
• Where a corporate tax entity has net exempt income in the current year, prior year unutilised losses must be applied against these amounts before loss carry-back can be claimed.
• Amounts deemed to be a tax loss because the corporate tax entity has excess franking offsets for that year will not be eligible for carry-back. The reason for this exclusion is that excess franking offsets represent payments of tax and are not economic losses.
• Tax losses not used for loss carry-back in the current year will be available to reduce any taxable income in that year or a future year.
• Loss carry-back will be available to the head company of a consolidated group or MEC group. However, consolidated groups and MEC groups cannot access loss carry back in relation to losses brought into the group by a joining entity. Also when an entity with prior year tax liabilities joins a consolidated group or MEC group, the group will not be able to carry back any tax loss against tax previously paid by the joining entity. An entity can only carry its losses back against its own tax liabilities.

Under the proposal the maximum loss carry-back tax offset will be the least of the:

• the chosen amount of loss carry-back offset;
• the tax value of the quantitative cap ($1m) (the maximum potential refund would be $300,000). More than $1m can be carried back to years that have net exempt income if the amount remaining after being reduced by that net exempt income does not exceed $1m;
• the franking account balance at the end of the current year - in this regard, the maximum amount of the loss carry-back tax offset for a year ($300,000) will be limited by the surplus balance of the corporate tax entity's franking account at the end of the current year (i.e. the loss carry-back tax offset cannot exceed the value of past taxes paid that have not been distributed to shareholders as franking credits). There will also be a debit to the company's franking account balance for each loss carry-back tax offset claimed, which is recorded when the assessment of the refundable tax offset is made; and
• the sum of the unutilised tax liabilities in the years to which the losses were carried back

The normal loss test rules will apply to a corporate entity will be unable to carry-back an unutilised loss where it fails to satisfy the "continuity of ownership" or "same business" tests of Div 165.

Under this new legislation the continuity of ownership test will be modified so that the ownership test period runs from the beginning of the year the loss is carried back to until the end of the current year. This will provide symmetry between the operation of loss carry-forward and loss carry back, and that the rules apply identically across the test period for both loss carry-back and loss carry-forward.

ATO compliance focus

On 3 September 2012, the ATO issued a release on its current targeted compliance area’s including:

• tax avoidance schemes in general including tax-effective arrangements;
• taskforce to deal with complex retail and wholesale financial products that are marketed without a product ruling and are structured or implemented in ways that are potentially not available at law, including (but not limited to):
• deferred purchase agreements with novel features;
• indirect investments in swap arrangements or products designed to circumvent the franking credit trading provisions.
• implementation of arrangements covered by ATO product rulings in materially different ways;
• business structuring arrangements being marketed to medical, dental and other health practitioners;
• certain types of trust schemes, i.e. hybrid trust structures that attempt to exploit the trust income calculation rules;
• uncommercial schemes to create excessive entitlement to deductions or industry concessions, i.e. R&D tax offsets and education offsets;
• tax-driven employment arrangements that attempt to avoid income tax, FBT or super guarantee liabilities on employment income; and
• boutique structured arrangements marketed by certain individuals within advisory firms and financial institutions with a history of being associated with controversial tax planning schemes. 

ATO debts and payment arrangements

The Tax Office has confirmed that the General Interest Charge (GIC) and Shortfall Interest Charge (SIC) rates for the 2nd quarter of the 2012-13 financial year (1 October 2012 - 31 December 2012) are:

• GIC annual rate is 10.62% (equal to 90 day Bank Accepted Bill (BAB) rate (3.62%) + 7% uplift factor);
• GIC daily compounding rate is 0.02901639%;
• SIC annual rate is 6.62% (90 day BAB rate (3.62%) + 3% uplift factor); and
• SIC daily compounding rate is 0.01808743%

The Tax Office also says the Interest on Overpayments, Interest on Early Payments and Delayed Refunds Interest rate is 3.62%.

ATO warning - scammers about

The Tax Commissioner Mr D’Ascenzo has provided warning to taxpayers of scammers using fake job advertisements to illegally access people's personal information. The commissioner advised that personal information can be used by scammers to lodge false tax returns in your name, enable use of credits cards and even take out bank loans.

Illegitimate ads are being posted on recruitment websites where people are being asked to provide their TFNs as a part of their job application. In some cases, people have even been offered the advertised position and then asked to provide their TFN and bank account details prior to the employment start date, and after providing this personal information, the job offer is then withdrawn. The ATO said the scams are generally communicated by email or mobile phones.

If you are subject to any ATO scams please notify your tax advisor immediately to report the information to appropriate bodies with the Australian Taxation Office.