No penalties will apply if a company issues an incorrect distribution statement on franking credits during the interim period of uncertainty over proposed small business corporate tax rate changes, according to new ATO draft guidelines.
ATO releases new guidelines on tax uncertainty for corporate clients
Today, the ATO release its draft practical compliance guideline PCG 2018/D5 outlining its compliance and administrative approach for corporate entities facing uncertainty in determining their corporate tax rate and franking credit rate for the 2015-16, 2016-17, and 2017-18 income years.
The PCG recognises the uncertainty arising from a series of tax law changes, including Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017, which proposes the removal of the ‘carrying on a business’ requirement and replacing it with the criteria of having no more than 80 per cent of assessable income as passive income to qualify for the reduced rate.
There have been concerns from the industry over their corporate clients’ tax position, given the unenacted amendments in the Bill, including decisions around the correct franking rate.
According to the PCG, the ATO “will not allocate compliance resources to conduct reviews of whether corporate tax entities have applied the correct rate of tax or franked at the correct rate in the 2015-16 and 2016-17 income years”.
However, the approach will not apply if the tax entity’s assessment was “plainly unreasonable” or has entered into arrangements or schemes that seek to manipulate the system.
In relation to franking rates, the ATO recognises that a corporate tax entity may have issued an incorrect distribution statement for a frankable distribution due to the uncertainty around the proposed Bill, and has given consent to entities to inform its members of the correct rate in writing without reissuing the distribution statement.
“The Commissioner will not impose penalties on the corporate tax entity for giving a member an incorrect distribution statement provided it gives written notice to each of its members clearly showing the correct amount of the franking credit,” the PCG said.
Speaking to Accountants Daily, Knowledge Shop tax director Michael Carruthers said the PCG did provide a level of assurance to advisers who were dealing with a period of uncertainty.
“It goes as far as the ATO probably can do to try and provide a bit of comfort to companies and advisers,” said Mr Carruthers.
“It does seem like the ATO will let companies make up their own mind if they were comfortable with whether they were carrying on a business or not and the second aspect is around the distribution statement to shareholders on franked dividends which is very similar to what the ATO did around this time last year with all the uncertainty as well and I guess it does provide a bit of comfort that if you have to change franking percentages at a slightly later date, you won't be penalised.”
However, Mr Carruthers said practitioners would still have to stay on top of changes once the Senate’s winter break ends of 12 August, to ensure their clients were applying the right rates.
“If and when things change we clearly have to revisit that and update things,” said Mr Carruthers.
“Companies and advisers have to keep an eye on the legislation and when it does actually pass through, contact those shareholders and confirm what those franking rates should be.”