Section 109RB not your get-out-of-jail-free card: ATO
The Tax Office has urged agents to fix Division 7A mistakes swiftly instead of assuming they will be excused by the Commissioner.
Taxpayers and advisers must not plead ignorance to Division 7A breaches and rely on the ATO’s discretionary powers as a “get out of jail free card”, assistant commissioners have warned.
Section 109RB of Division 7A allows taxpayers to seek the Commissioner’s discretion to disregard the anti-avoidance provision or to allow a deemed dividend to be franked.
But assistant commissioners Kasey Macfarlane and Anthony Marvello said taxpayers and agents should be taking corrective action as soon as they identified a breach and not assume section 109RB would apply.
“If you discover a Division 7A breach in relation to your client, don't bury your head in the sand. Take prompt corrective action,” Macfarlane said.
“The section 109RB discretion is not your get out of jail or your client’s get out of jail free card in relation to Division 7A … don't assume that it will be exercised favourably.”
“The 109RB discretion is not a given. It’s not automatic.”
The message came in the ATO’s most recent Division 7A webinar as part of a year-long campaign to deliver “tough messages” and reduce instances of agents getting the provision wrong.
In cases where the division was breached, Macfarlane and Marvello discussed circumstances where the section 109RB discretion was available.
They said the breach had to be caused by an “honest mistake or inadvertent omission” for section 109RB to apply.
“The honest mistake or inadvertent omission must be genuine. So the belief relating to the purported mistake must be actually held by the entity and is assessed based on objective evidence,” Macfarlane said.
“Ignorance, lack of due diligence or reasonable care would generally not constitute an honest mistake or inadvertent omission.”
While relying on a tax agent’s advice would generally come under this category according to PS LA 2011/29, merely having one would not make every breach an honest mistake or inadvertent omission.
Taxpayers could not simply claim “my tax adviser does everything” and expect section 109RB to apply, Macfarlane said.
“Often it’s put to the ATO is that, ‘well, I've got a Division 7A breach, but hey, I had a tax adviser and a tax professional, they do everything for me so end of story’.”
“It's important to really focus in on those words in the practice statement.”
Situations where reliance is unlikely to be accepted include where Division 7A advice was not specifically discussed or the tax agent deliberately scoped out Division 7A considerations.
Additionally, if the client failed to disclose relevant information to their agent, the agent failed to ask appropriate questions about Division 7A or both parties had knowledge of their obligations, “we would not conclude that the Division 7A breach arose as a result of an honest mistake or inadvertent omission as a result of reliance on a tax professional’s advice”, Macfarlane said.
Another rule for section 109RB to apply was that the Commissioner had to be satisfied the circumstances of the situation supported the exercise of their discretion.
The Commissioner would also consider the extent and how quickly action was taken to correct the mistake or omission that caused the breach.
Macfarlane said the ATO would not look favourably on “repeat customers” who breach Division 7A multiple times.
“We do have some repeat customers that come and ask for exercise of the discretion in relation to similar breaches of Division 7A … that in particular will weigh heavily against favourable exercise of the discretion,” she said.
She advised agents who inherited clients with loans in breach of Division 7A or otherwise discovered a breach to “prompt corrective action”.
“Don’t bury your head in the sand,” she said. “If you consider that circumstances warrant seek exercise of the discretion from the Commissioner and make that application.”
Marvello said: “If you're sticking your head in the sand, that's not going to help. If you do identify a breach, it's really important to go backwards and fix the breach – make good of it.”
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