Division 7A and Guarantee Arrangements

Under Section 109U, a private company is considered to have lent money to a shareholder or an associate of a shareholder if:

• The private company provides a guarantee for a payment or loan made by another entity.
• A reasonable person would determine that the private company gave the guarantee as part of an arrangement that includes a payment to the target entity.
• Another private company makes a payment to the target entity.
• The payment made by the other private company to the target entity exceeds its distributable surplus.

The ATO has issued Taxpayer Alert TA 2024/2, which addresses situations where private companies guarantee third-party loans to related companies with a minimal distributable surplus. The related company may then lend or transfer the loan amount to the shareholders or associates of the first company, circumventing Division 7A requirements.

Thin Capitalisation – Third Party Debt Test

The third-party debt test is a new thin capitalisation test introduced by the Treasury Laws Amendment Act 2024. It replaces the arm’s length debt test. Schedules 1 and 2 of the draft Guideline were released on 9 October 2024, with the initial public consultation closing on 8 November 2024. Schedule 3 is part of the updated draft PCG, which outlines the ATO’s targeted compliance approach for specific issues under the third-party debt test. Schedule 4 details the ATO’s compliance approach to certain restructures in response to the new thin capitalisation rules.

Capital Raised for the Purpose of Funding Franked Distributions

For Section 207-159 to apply and make a distribution unfrankable, four criteria must be met:

• The distribution is not consistent with the entity’s established practice of making such distributions on a regular basis.
• There is an issue of equity interests by the entity making the distribution, or by another entity.
• Based on all relevant circumstances, it should be concluded that:
  • The primary effect of issuing the equity interests was to directly or indirectly fund part of the distribution, and
  • Any entity involved in the issuance of the equity interests did so for the purpose of funding part of the distribution.
• The issuance of the equity interests was not directed by the Australian Prudential Regulation Authority (APRA) or the Australian Securities and Investments Commission (ASIC).

Time Limits for Claiming Input Tax or Fuel Tax Credits

The ATO has released its finalised ruling MT 2024/1 which sets out the time limits that apply to input tax credit or fuel tax credit set out in:

• Subsection 93-5 (1) of the A New Tax System Act 1999, and
• Subsection 47-5 (1) of the Fuel Tax Act 2006.

The changes have been made to the final version of the ruling to clarify that the four-year time period normally applies for claiming GST credits and fuel tax credits doesn’t apply in the context of the decreasing or increasing adjustment rules.

GST Supply of Burial Rights

The determination explains how Division 81 works to exempt the supply of a burial right made by an Australian Government agency from GST.

Financial Advice Fees Paid from Member Accounts by Super Funds

The ATO has released a draft PCG 2025/D1 outlining its proposed compliance approach regarding deductions and PAYG withholding obligations for financial advice fees paid from member accounts by superannuation funds.

ESIC Tax Offsets Involving Circular Financial Arrangements

The ATO has issued Taxpayer Alert TA 2024/1, warning taxpayers about tax avoidance schemes involving early-stage innovation company (ESIC) tax offsets. These schemes promote investments in start-ups, claiming eligibility for the tax offset through financing arrangements. The ATO cautions that investors may not qualify for the offset, may be denied interest deductions, lose CGT exemptions, and face the application of Part IVA to cancel any benefits.

Simplified transfer pricing record keeping options

The ATO has updated PCG 2017/2 on transfer pricing record-keeping, specifying that for the 2024-25 income year, the maximum interest rate for low-level inbound loans is 5.61%, and the minimum rate for low-level outbound loans is also 5.61%.

Application of CGT event K6

The ATO has issued a draft update to TR 2004/18 regarding CGT event K6 under section 104-230 of the ITAA 1997. The update clarifies that only one capital gain may arise when both conditions in sections 104-230(2)(a) and 104-230(2)(b) are met, and specifies which property is considered when calculating the capital gain under subsection 104-230(6).

Suspected fraud involving unconnected third parties

The ATO has issued practice statement PS LA 2024/1 outlining its policy on handling suspected fraud involving unconnected third parties. It highlights indicators such as stolen personal details, unauthorised changes to financial account details, payments going to third-party accounts, and multiple refunds being paid to the same account for different taxpayers.

ATO Interpretative Decisions

The ATO has updated PS LA 2001/8, outlining its policy on ATO Interpretative Decisions (ATO IDs). ATO IDs summarize decisions on how the law applies to specific situations, providing a precedential ATO view. Moving forward, the ATO will no longer issue new ATO IDs or make significant updates to existing ones. Minor updates to existing ATO IDs may be made, but substantial updates will lead to their withdrawal and replacement with a new product. In some cases, an ATO ID may be withdrawn without replacement if the relevant provision is repealed or the issue is no longer valuable enough to update.

PAYG withholding – employees

The ATO has issued an Addendum to TR 2023/4, clarifying when an individual is considered an ‘employee’ under section 12-35 of the Taxation Administration Act 1953 (TAA). TR 2023/4A1 updates the ruling by adding guidance in Appendix 2 on the definition of ’employee’ under the Superannuation Guarantee (Administration) Act 1992 (SGAA). The appendix:

• Reflects the ATO’s view on recent case law developments related to the SGAA.
• Consolidates the ATO’s stance on the common law definition of ’employee’ from previous rulings.
• Provides a comprehensive ATO view on the common law and extended meanings of ’employee’ under the SGAA.