The ATO said these arrangements relate to offshore permanent establishments, GST and the operation of the Multinational Anti-Avoidance Law (MAAL), and the incorrect calculation of debt capital for thin capitalisation purposes.
ATO deputy commissioner Jeremy Hirschhorn said the first alert sent by the ATO deals with arrangements whereby Australian consolidated groups use offshore permanent establishments that have entered into intra-group transactions.
“Through these arrangements, groups may be understating their true Australian income and claiming deductions incorrectly. The end result is double non-taxation, and in some cases groups are even claiming further tax relief they’re not entitled to,” said Mr Hirschhorn.
“Taxpayers need to ensure the taxable income returned properly reflects the economic substance and significance of operations carried on, consistent with the arm’s length principle.”
The ATO said it is investigating cases using these contrived arrangements, some of which may attract the application of part IV A of the Income Tax Assessment Act 1936, also known as the general anti-avoidance rule.
ATO deputy commissioner Mark Konza said the ATO is also reviewing structures developed by companies in response to the MAAL, which are designed to reduce the amount of GST payable.
“We’re concerned some of these structures have been set up to avoid GST, which is clearly inconsistent with the underlying policy intent of MAAL and the GST act,” said Mr Konza.
The ATO cautioned that any companies found to have established these types of arrangements will be forced to pay back liabilities and may face penalties of up to 75 per cent of tax owed.
According to Mr Konza, the ATO is also looking closely at intermediaries who have encouraged these arrangements and may consider them to be “promoters of tax exploitation schemes”.
In a taxpayer alert released yesterday, Mr Konza said the ATO has cautioned companies “against the intentional miscalculation of debt capital for the purposes of thin capitalisation rules”.
“In some cases, taxpayers are failing to include the value of a debt interest that’s been treated as equity for accounting purposes in their debt capital. As a result, the taxpayer’s adjusted average debt is understated, allowing them to claim more debt deductions than they’re entitled to,” he said.
“Taxpayers need to consider the debt capital values used in thin capitalisation calculations carefully. If we think a taxpayer has undervalued debt capital then we will pursue compliance action. Taxpayers may be liable to penalties in addition to paying back any tax owed.”
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.