Tax agents still failing Div 7A basics, ATO warns
The Tax Office has begun a year-long lecture series to educate practitioners on Division 7A after finding most breaches related to "fundamental concepts".
Tax agents across the board are still getting Division 7A wrong by ignoring fundamental concepts or being “too cute” when trying to get around the provision, the ATO says.
During the launch of a year-long campaign to deliver “tough messages” to tax agents, Assistant Commissioners Anthony Marvello and Kasey Macfarlane told participants they were disappointed with how many practitioners were “not sufficiently focussed on getting the basics right”.
“We're quite concerned with the number of mistakes and lack of attention being paid to getting the basics right when it comes to navigating the tax consequences when owners take money and benefits from their companies,” Marvello said.
Breaches of fundamental requirements were happening “across the board”, according to Macfarlane, with the ATO finding two-thirds of breaches relating to “core and fundamental aspects” of the provision.
“From very small business all the way up to some of the largest and private wealth groups … it's evenly dispersed across, and they're common across the board,” she said.
“The issues that we see occur regardless of whether our client's agent is perhaps a sole practitioner all the way up to perhaps if they have an adviser from one of the top tier advisory firms.”
Issues frequently stemmed from the failure to recognise that companies were separate legal entities, which meant clients were dipping into company funds “like their own personal bank account”.
“We see clients paying their private expenses from their company's bank account without consideration or regard for any of the tax consequences of that,” she said.
Another issue was co-mingled funds – not maintaining separate bank accounts for individual entities and managing payments – and failing to maintain appropriate records that account for payment taken out of the company.
Macfarlane said clients were also frequently missing complying loan agreements and failing to make minimum yearly repayments “whether that's a miscalculation, not being aware or having regard to the benchmark interest rate or making payments late”.
An increase in the benchmark interest rate from 4.77 per cent to 8.27 per cent in FY2023-24 also required advisers to follow interest rate fluctuations when making minimum yearly repayments. “It’s not a set and forget,” Macfarlane said.
She said tax agents needed to take responsibility by having “proper conversations” with clients and performing annual checks.
“Not all payments give rise to a Division 7A consequence. But every payment from a private company does have a tax consequence. And there's no such thing as an obligation-free or tax-free payment or benefit from a private company.”
For tax agents with clients who wanted to avoid the section’s application, the Assistant Commissioners warned: “Don’t try to get too funky or don’t try to get too cute when planning”.
“Some might think it's cute not to report the Division 7A shareholders loans at those income tax return labels, but that doesn't mean that you'll escape any engagement or scrutiny from the ATO. And perhaps it's probably the opposite,” Macfarlane said.
Marvello added: “You can't borrow money from the company to meet your minimum yearly repayments and that seems to be an obvious thing … you start being cute, as I mentioned before, thinking you're paying for it but you're not really paying for it. Yeah, it doesn't work.”
Clients with Division 7A issues that cropped up as a result of an ATO review or audit often requested the Commissioner’s discretion under section 109RB to disregard their breaches due to the “honest mistake or inadvertent omission” of their agent.
This meant that “some of those reasons that get put forward really highlight that there may be some that aren't applying the level of care and due diligence required," Macfarlane said.
“The discretion is not a get out of jail free card in every case where there is a Division 7A issue. And that's why it becomes really important around the record-keeping, the planning ahead, understanding the payments that are coming from the company and their character and making sure obligations are met because the discretion isn't there to fix up every issue that arises after the event.”
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