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The Taxation Institution of Australia has warned businesses are at risk of being taxed on ‘potential’ rather than ‘actual’ benefits should proposed changes to Division 7A of the Income Tax Assessment Act 1936 be finalised.
The director of taxation at GMK Centric, Chris Wookey, who assisted in the preparation of the submission, stated that the proposed changes would seriously disadvantage shareholders in private companies by imposing taxes on benefits that they have not yet received.
“The changes are an attempt to tax the value of private-use-of-asset benefits provided to shareholders and apply irrespective of whether shareholders actually use those benefits,” he said. “In essence, this is a Fringe Benefits Tax (FBT) on shareholder benefits, even though the proposed tax arises through the ‘deemed dividend’ provisions of Division 7A.”
He added that while a mere ‘grant’ of a right could lead to taxability, more than one shareholder might be taxed on a perceived right of use of the same asset.
As an example, he explained that a business owner and his wife could both be taxed on the whole of the value of the right to use a car (purchased through the Government’s investment allowance) for private purposes. Should the company own a fleet of cars, both could also be taxed on the whole value of the right to use every other company car for private purposes, even if incapable of doing so.
Wookey said while being taxed on those ‘potential’ rather than ‘actual’ benefits, they would also be unable to use the more concessional FBT valuation methods available if they had, as employees, been granted the same rights, being the ‘statutory formula method’ of valuing car fringe benefits.
He added that the company’s entitlement to the investment allowance might be jeopardised because the car is now being formally treated as a benefit provided to a shareholder rather than simply as an asset used by the company for the principal purpose of carrying on a business.
The Taxation Institute has called for an amendment to these new rules to address what it considers to be unfair outcomes for business owners.
