RR Phantom
Location : Wasted Space
Job/hobbies : Cayman Islands Actuary
 |  Subject: OZschwitz slave pen: Extortionist tax rulings that should worry the small business serfs  Tue Jan 26, 2010 1:59 am | |
| There have been two income tax developments in recent months that should have small business owners very worried.
The first occurred in December when the ATO issued a draft ruling relating to family trusts that distributed profits to companies. The most disturbing part of the ruling is the ATO wants to make it retrospective.
The second happened last week when Ken Henry, chairman of the recent review into the Australia taxation system, said Australians will have to pay more tax.
In criticising opponents of previously unpopular tax initiatives he argued most new taxes were required to preserve the fairness and integrity of the tax system. What Dr Henry failed to mention was that, like beauty, fairness and equity is in the eye of the beholder.
Unfortunately the Australian taxation system is more about maximising tax revenue collection, with fairness and equity often coming a distant second.
If we had a fair tax system many of the tax thresholds, such as the depreciation cost limit on cars and the $500,000 limit on the small business retirement exemption, would be a lot higher than they are now to reflect the effect of inflation.
At the heart of a fair and equitable taxation system should be a tax office that interprets tax legislation more with the spirit and intention of the law in mind rather than using the letter of the law to maximise tax collected.
There have been numerous examples over the years where the ATO has forsaken fairness and equity and applied their interpretation to the detriment of taxpayers.
The draft ruling issued by the Tax Commissioner Michael D'Ascenzo in December is trying to ensure shareholders that have benefited from the low company tax rate do not use the profits for personal reasons.
In this case the ruling relates to income earned by trusts that has been distributed to a company without the cash being paid to the company. This results in what is known as an Unpaid Present Entitlement.
Before this draft ruling the ATO’s position had been a sensible one. Where a trust used that cash for business reasons and a UPE existed, no penalty taxes were imposed. If instead individual beneficiaries took cash out of the trust for personal use, which resulted in them owing the trust money, tax penalties were imposed on the UPE owed to the company.
Under the draft ruling the ATO is changing its approach. It now wants to impose tax penalties on all UPEs to companies. The most disturbing part of the draft ruling is the ATO wants to apply this new interpretation retrospectively.
This means trusts that have been playing by the rules for many years will now face tax penalties purely because the ATO has changed its mind.
This change of heart by the ATO appears to have come as a result of auditsof several trusts revealing they had used the
cash to buy assets, such as holiday homes and boats, for the personal use of the individual beneficiaries.
Instead of attacking the few trusts that are trying to beat the system, the draft ruling is arguing that all trusts with a UPE to a company should be penalised.
Small business owners, especially those that have trusts with companies they distribute to, have a nervous few months ahead. Depending on whether the ATO changes its mind on the retrospectivity, and what findings of the Henry inquiry that are adopted by the Rudd government, they will know how much the tax system has forsaken fairness and equity to maximise tax revenue.
LNK |
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