We have included below the relevant extract from the ATO’s Practice Statement PS LA 2010/4, reminding that the corrective action needs to be undertaken on or before 31 December 2011.

Extract from PS LA 2010/4:

Self corrective options – Applicable until 31 December 2011

30. During the consultation process for this practice statement, the ATO received feedback that some small businesses may have been incorrectly classifying UPEs as loans in their accounts or alternatively were not aware that Division 7A can potentially apply to ordinary loans (as opposed to UPEs) between a private company and an associated trust.

31. In recognition of the genuine concerns of small business and their willingness to comply, the ATO has introduced two self corrective administrative options for taxpayers. Provided certain conditions are met, these options allow taxpayers to:

• self correct accounts where a UPE has been misclassified as a loan
• operate on the basis that the Commissioner would exercise his discretion under section 109RB to disregard a deemed dividend.

A private company or trust may be able to correct their accounts where a UPE has been misclassified as a loan

32. Whether an amount is a UPE or an actual (Section two) loan is a question of fact. However, the ATO will accept that an amount is not a loan but a UPE where all the following conditions have been met:

(a)        the financial accounts of the trust and / or the private company have incorrectly classified the amount, which is in fact a UPE, as a loan from the private company to the trust

(b)       with the exception of the financial accounts and their underlying working papers, including the journal entries, accounting ledgers and / or trial balance, all available evidence supports the view that the amount is in fact a UPE

(c)        the private company has never included that amount in calculating the amount of loan reported at Label 8N of the private company’s income tax return (label marked ‘loans to shareholders and their associates’)

(d)       the trust has not paid or credited any interest on or in respect of that amount

(e)        the loan account in which the amount is included is entirely comprised of amounts correlating to UPEs and repayments of such UPEs between the trust and the private company (that is, its balance is not affected by any unrelated transactions)

(f)        on or before 31 December 2011 , the financial accounts of all relevant entities are amended or restated to properly classify the amount as a UPE

(g)       on or before 31 December 2011 , the trustee of or public officer of the trust, or public officer of the company, (as is relevant) signs and dates a declaration setting out all of the above conditions listed in this paragraph in the context of the amount and declaring them to be true and correct.

Where this is the case, irrespective of the turnover of the entity, the ATO will not treat the amount as a Section two loan for Division 7A purposes. 

Disclaimer

‘The Assessment’ is intended to provide general information or comments on the particular topic. The content is not intended to exhaustively deal with all issues relating to that topic. As the content is general in nature, they are not to be used, relied or acted upon without seeking further professional advice. Webb Martin Consulting accepts no liability for any errors or omissions, or for any loss or damage suffered as a result of any person acting without such advice.

The payment of a living‑away‑from‑home allowance (LAFHA) is treated as a fringe benefit under the current tax system. A LAFHA does not form part of the employee’s assessable income.

The payment of a LAFHA is an extremely tax effective proposition where an employee is required to relocate temporarily from their usual place of residence in order to fulfil the duties of a particular role for their employer.  The ability to pay a LAFHA applies equally to both employees temporarily relocating within Australia as well as those temporarily relocating to Australia from an overseas country.

On the 29th of November 2011, Treasury released a consultation paper titled - ‘Fringe Benefits Tax (FBT) Reform – Living Away From Home Benefits’. A copy of the paper can be found at the following link:

http://www.treasury.gov.au/contentitem.asp?NavId=002&ContentID=2235

The new proposed treatment

The taxation treatment of LAFHA will return to the income tax system as it was prior to the introduction of the FBT law in 1986. Any allowance paid by an employer to an employee as compensation for being required to live away from home will be included in the assessable income of the employee.

The fringe benefit tax (FBT) treatment of LAFH benefits will be reformed so:

• temporary resident employees (i.e. expatriates) will be required to maintain a home for their own use in Australia (which they are living away from for work) to access the concession, and in those cases the expenses will need to be substantiated; and
•  all other employees will be required to substantiate their LAFH expenses.

The proposed changes will apply from 1 July 2012 for both new and existing arrangements. There do not appear to be any general transitional rules at this stage and so all benefits and allowances provided in respect of the period commencing 1 July 2012 will be subject to the new arrangements.

Flow on effects for income tests

Should the proposed revised treatment proceed as planned, the inclusion in an employee’s assessable income of a LAFH without a corresponding deduction is likely to be taken into account for Centrelink and various other income testing purposes.

Employment on-costs

For the employer entity, a LAFHA paid to an employee in an assessable income form is likely to be regarded as salary and wages for Workcover, payroll tax and superannuation guarantee purposes thereby increasing the cost of employment in respect of the particular employee.

Increased paperwork requirements

Employee LAFHA recipients will be required to substantiate their accommodation and food costs beyond a yet to be determined statutory threshold if deductions are to be claimed.

Presumably the current proscriptive work related deduction substantiation rules will apply adding an additional record keeping burden on employees. Given the material nature of LAFHA’s this will also presumably make LAFHA recipients more susceptible to ATO desk audits.

Impact on employee satisfaction and retention

Employees facing the prospect of paying additional tax or losing Centrelink and other entitlements are likely to be resistant to the proposed reforms and this could indirectly lead to employee dissatisfaction and loss of productivity.

In extreme cases employers may lose staff or find it difficult in attracting staff and this could be a highly likely scenario where expatriate staff are concerned.

What should employers do?

All employers with LAFHA arrangements in place with staff should review the impact the proposed changes will have on staff. Employers will need to openly discuss the changes and should seek professional assistance where necessary.

If no transitional rules are put in place (which appears to be the case) employers should consider whether prepaying 12 months of LAFHA prior to 1 July 2012 is an option to at least extend the current LAFHA benefits for another year.

As more details in respect to the proposed measures are released we will inform our Assessment subscribers accordingly.

Any specific enquiries relating to this article can be directed to Rob Power on 03 8662 3200 or robp@webbmartinconsulting.com.au

Disclaimer

‘The Assessment’ is intended to provide general information or comments on the particular topic. The content is not intended to exhaustively deal with all issues relating to that topic. As the content is general in nature, they are not to be used, relied or acted upon without seeking further professional advice. Webb Martin Consulting accepts no liability for any errors or omissions, or for any loss or damage suffered as a result of any person acting without such advice.

The legislative provisions require trustees to report annually, in the ‘approved form’ details of payments made to beneficiaries, even if there was no withholding because the beneficiary quoted their TFN to the trustee by the requisite time.

A payment, for this purpose, is defined to be:

- a distribution during the year from the ordinary or statutory income of the trust;

- if the beneficiary is presently entitled at the end of the income year to a share of the income of the trust – that share of the net income the trust.

Label ‘S‘ in the beneficiary Statement of Distribution section appears to require payments to beneficiaries made during the year to be reported twice.

However, the ATO 2011 trust tax return instructions confirms reporting such payments twice is not required where the payment is reported at another label. The following extract confirms this:

The above instructions outline the Commissioners ‘approved form’ requirements for the 2011 Annual Trustee Payment report and clarify that Label ‘S’ is essentially a residuary label for payments that have not already been included in the Statement of Distribution.

Any specific enquiries relating to this article can be directed to Rob Power on 03 8662 3200 or robp@webbmartinconsulting.com.au

Disclaimer

‘The Assessment’ is intended to provide general information or comments on the particular topic. The content is not intended to exhaustively deal with all issues relating to that topic. As the content is general in nature, they are not to be used, relied or acted upon without seeking further professional advice. Webb Martin Consulting accepts no liability for any errors or omissions, or for any loss or damage suffered as a result of any person acting without such advice.