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Australia To Improve Tax Rules For Small Firms

by Mary Swire,, Hong Kong

11 December 2006

The Minister for Revenue and Assistant Treasurer, Peter Dutton has announced improvements to the integrity rules concerning distributions by private companies, in an effort to ease the compliance burden on small firms.

The changes affect Division 7A of the Income Tax Assessment Act 1936, which prevents private companies from making tax-free distributions of profits to shareholders (or their associates). Unless they come within specified exclusions, advances, loans and other credits to shareholders (or their associates) are treated as assessable dividends to the extent that there are realised or unrealised profits in the company under the current law.

When a deemed dividend arises under Division 7A, the private company’s franking account is debited, and the deemed dividend is taxable in the hands of the shareholder or associate, but without access to a franking credit to offset the tax paid by the company.

“These amendments will provide a significant reduction in compliance costs for taxpayers, especially for the thousands of small businesses which use a private company structure," said Dutton.

He went on to explain that:

“The Government will reduce the double-penalty nature of Division 7A by removing the automatic debiting of the company’s franking account when a deemed dividend arises."

“This double penalty is not in proportion to the potential tax mischief involved. However, deemed dividends will continue to be treated as assessable income in the hands of shareholders or their associates."

“The Commissioner of Taxation will also be provided with a discretion to disregard a deemed dividend where there is evidence that a taxpayer has attempted to comply with Division 7A but they have made an honest mistake and efforts have been made to rectify the mistake."

“This new discretion will allow the Commissioner to appropriately handle taxpayers that have unintentionally breached Division 7A, but where there was no tax mischief involved."

He concluded: “A range of other technical amendments will also be made to the rules to provide more flexibility for taxpayers, including changes to the fringe benefits tax (FBT) laws to simplify their interaction with Division 7A. These changes will reduce the extent to which taxpayers can be inadvertently caught by Division 7A in the first place."

The Government will also repeal section 108 of the Income Tax Assessment Act 1936 (the precursor to Division 7A), as it is a duplicate provision that is no longer necessary.

The changes generally have effect from 1 July 2006. However, the discretion will apply from 1 July 2002 and the FBT amendments from 1 April 2007.

The Government expects to introduce the changes into Parliament in the Autumn 2007 sittings, following consultation with the accounting profession and other key stakeholders.

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