On Monday 31 March 2014, Tax Counsel Stephanie Caredes CTA and Thilini Wickramasuriya ATI attended a meeting with the ATO to discuss the ATO letters recently issued to taxpayers in relation to dividend washing. Over 3,000 letters have been issued, with the possibility of more to come as the ATO gathers additional information from market intermediaries and other sources. The letters urge taxpayers to self-amend prior year tax returns by 24 April 2014, otherwise further compliance action may occur that could result in follow-up action under Part IVA where scheme penalties will apply.
Concerns raised in the meeting included the timing of the compliance activity prior to the finalisation of the Draft Taxation Determination, whether the Draft Taxation Determination was retrospective, and the consistency of the ATO’s approach with draft legislation recently released by Treasury.
Following this discussion, the ATO agreed to extend the period for self-amendment without penalty to four weeks from the date of publication of TD 2014/D1 (the Determination is expected to be published on 14 April 2014). The Tax Institute requested that the ATO formally communicate this extension of time to taxpayers, and the ATO has agreed, with the time extension to be communicated via the ATO homepage www.ato.gov.au from Monday, 14 April 2014.
The Tax Institute has also since escalated the issue of the ATO acting on the basis of a Draft Taxation Determination prior to its finalisation.
We recommend that members with clients who have been involved in the ATO’s compliance activity consider the facts and circumstances of each individual case in responding.
Further details on our discussion with the ATO are below:
ATO firm on Part IVA
Dividend washing came to the ATO’s attention in early 2013 via a request for a private ruling, and since then the ATO has been firmly of the view that Part IVA applies to the vast majority of cases.
Draft TD 2014/D1 - Income tax: can section 177EA of the Income Tax Assessment Act 1936 apply to a 'dividend washing' scheme of the type described in this Taxation Determination?
TD 2014/D1 is still in draft and is not expected to be finalised until 14 April 2014. The arguments put by the main professional bodies in their joint submission in response to the draft Determination have been considered within the ATO. However, it is not expected that the final ruling will differ markedly from the draft. In particular, the view expressed in TD 2014/D1 that Part IVA applies to the dividend washing arrangement outlined in the draft will likely not change when the final Determination is published.
Consistency with proposed legislation
The ATO does not agree that there is any inconsistency between the proposed legislative approach to dividend washing (which it regards as an integrity measure consistent with the Government’s announcement) and the decision to invoke Part IVA. The ATO is firmly of the view that the views expressed in TD 2014/D1 on the application of Part IVA apply both before and after the date that the ruling is finalised.
Resolving the issue quickly with no disputes
To expedite the process, the professional bodies raised for ATO consideration:
- The automatic granting of extra time to self-amend without penalty. This is to cater for the finalising of TD 2014/D1, the need to obtain relevant data and perform calculations which in some cases go back several years, and the Easter school holiday period. The ATO has advised that it has extended the self-amend without penalty period to four weeks from publication of TD 2014/D1 (expected publication is 14 April 2014). This extension will be covered at publication of the final Tax Determination.
- The waiver of shortfall interest charge in appropriate circumstances (e.g. small tax shortfall, naïve taxpayer whose dividend washing transaction was effected by an intermediary). The ATO advised that, if a taxpayer believes that their circumstances support a remission, then they need to apply for a remission with their self-amendment request.
Given that Part IVA is not self-executing (i.e. it requires the Commissioner to make a determination in each case), the ATO was also asked to consider whether a more attractive settlement offer could be formulated which encourages finalisation of the matter with reduced costs for both the ATO and the taxpayer. In particular, the settlement offer would discourage ‘protective’ objections to the amended assessment (i.e. objections which seek to protect the taxpayer’s interests in the event a different taxpayer succeed in litigation against the Commissioner on the application of Part IVA). The ATO advised that it encourages taxpayers to take the opportunity to self-amend within the time limitation to avoid a penalty.
Calculations used in the amended assessment
It was suggested that the ATO provide guidance on the calculation of tax payable in the amended assessment (i.e. a simple calculation appropriate in the majority of situations encountered to date). Taxpayers would still be able to undertake their own calculations to suit their particular facts and circumstances. The ATO advised that it will provide guidance in the finalised version of TD 2014/D1 that is expected to be published on 14 April 2014.
Potential application of promoter penalty legislation
The ATO is still undertaking research on how dividend washing arrangements were promoted. No decision has yet been made to invoke promoter penalty legislation, or refer intermediaries to regulators such as the Tax Practitioners Board.
Members who seek further information in relation to the above should contact us at Tax Policy