Practical Compliance Guideline PCG 2018/D5

The ATO has updated its preliminary guidance on the compliance approach to whether small business taxpayers use the appropriate company tax rate for the 2015/16, 2016/17 and 2017/18 income years.

Draft Practical Compliance Guideline PCG 2018/D5 extends the application of, and replaces, draft PCG 2017/D7, which dealt with how small business taxpayers who are corporate tax entities may inform shareholders of a correction to the amount of franking credit on distribution statements, as a result of a change in the applicable company tax rate.

In the revised guidance, the ATO acknowledges that taxpayers may be uncertain of their correct tax rate as a result of:

  • • changes to the tax laws
  • • further changes to the eligibility for the reduced corporate tax rate that are yet to be enacted; and
  • • the subsequent release of Draft Taxation Ruling TR 2017/D7 Income tax: when does a company carry on a business within the meaning of section 23AA of the Income Tax Rates Act 1986?

This may mean some corporate tax entities lodged tax returns for the 2015/16 and 2016/17 income years without certainty of the correct position and may also issue distribution statements to members based on an incorrect franking rate.

The ATO has indicated that it will not allocate compliance resources specifically to conduct reviews of whether corporate tax entities have applied the correct rate of tax or franked at the correct rate in the 2015/16 and 2016/17 income years. This is unless the ATO becomes aware that a taxpayer’s assessment of whether they were carrying on a business in those income years was plainly unreasonable, or involved artificial or contrived arrangements or a tax avoidance scheme. In addition, the approach will not apply where a corporate tax entity has attracted ATO compliance activity for reasons unrelated to whether the correct corporate tax rate has been applied by the corporate tax entity.

Similar to the guidance in the earlier draft, a corporate tax entity that applied an incorrect franking rate in 2016/17 or 2017/18 as a result of the above uncertainties may inform its members of the correct franking credit in writing without reissuing the distribution statement. The Commissioner will not impose penalties on the corporate tax entity for giving a member an incorrect distribution statement provided it gives written notice to each of its members clearly showing the correct amount of the franking credit. The corporate tax entity can provide this notice to their members without seeking an exercise of the Commissioner’s discretion to allow amendment of the distribution statement.

The guidance applies from the first day of a taxpayer’s 2015/16, 2016/17 or 2017/18 income year, as relevant.