Concerns raised with ATO’s approach to section 109U
The ATO’s tax ruling could be better targeted towards arrangements of concern instead of a blanket approach, CPA Australia has said.
CPA Australia has called for the ATO to clarify its position in draft tax ruling TD 2024/D3 and provide guidance and examples for legitimate guarantee arrangements for private companies.
The ATO issued taxpayer alert TA 2024/2 and taxation determination TD 2024/D3 in late December, which explain its views on where section 109U of the Income Tax Assessment Act may apply to arrangements where a private company gives a guarantee to another private company.
The ATO issued the taxpayer alert to warn entities and tax practitioners about its concerns regarding contrived arrangements seeking to circumvent Division 7A.
In a recent submission, CPA Australia said it is concerned the approach taken by the ATO under TD 2024/D3 does not provide certainty for legitimate guarantee arrangements.
“In most private groups, entities, including corporates, would generally be required to provide security that will fall within the definition of s109U,” the professional body said.
Arrangements that fall under the expanded conduit financing test under the new thin capitalisation rules will also fail section 109U under the ATO's new interpretation where the financing company is a company and the borrower is a trust, the professional body warned.
"To address our concerns, the ATO could provide a link to TD 2011/16 in the binding section and state that those factors can be used if the arrangement is commercial," CPA Australia said.
It also said the ATO should it make clear that the tax determination does not apply to a genuine conduit financing arrangement that is used for thin capitalisation purposes.
The professional body noted that there will be many private groups that use a financing company that undertakes commercial borrowings from banks and on lends to group entities such as trusts where the banks require security or guarantees from the other companies in the group.
"Even if the FinCo lends on Division 7A terms, there is no clear comfort from TD 2024/D3 that section 109U will not apply and result in a deemed dividend," it said.
"This gives rise to significant uncertainty for taxpayers trying to self-assess their position."
The ATO also outlines its compliance approach in the tax determination in very general terms, CPA Australia said.
"The TD should instead include binding comments and examples such as those that were included in TD 2011/16 to give certainty to taxpayers," it said.
"Similar to TD 2011/16, where the final stage is a complying Division 7A loan for which annual repayments are being made where the borrower has capacity to repay and is not forgiven, the ATO should include binding comments that the Commissioner will determine the amount of any notional payment under 109V as nil."
CA ANZ agreed in its submission that the ATO's comments on its compliance approach do not provide any certainty or comfort to taxpayers.
"As it is common for a financing company within a private group to be a pass-through entity with minimal retained earnings, we recommend further commentary and examples be included to provide more guidance and examples on what arrangements would low risk from the ATO’s point of view," CA ANZ said.
"An example which would assist taxpayers is where a private company guarantee is provided in respect of a back-to-back loan arrangement (originating from a bank) with the last leg being a Division 7A complying loan to a shareholder/associate."
