ATO looking at loss carry-back, temporary full expensing & accelerated depreciation schemes
Businesses that have claimed economic stimulus measures such as loss carry-back, temporary full expensing and accelerated depreciation need to take extra care this tax time. The ATO is increasing its scrutiny and will be reviewing all claims as a part of its compliance activity. It will be actively looking for signs that businesses are entering into schemes to benefit from the measures and will impose penalties if they are justified. All taxpayers that have used schemes are encouraged to review their claims to ensure they are eligible and the amount claimed is correct.
ATO compliance activity
The ATO has announced that it will be conducting compliance activity on various economic stimulus measures introduced to help businesses recover from the effects of COVID-19. These stimulus measures include loss carry-back, temporary full expensing and accelerated depreciation. While the ATO said it will continue to support most businesses doing the right thing, it is looking at behaviour or development of schemes designed to deliberately exploit various stimulus measures. Taxpayers who have entered into identified scheme arrangements will be subject to increased ATO scrutiny.
Background to the economic stimulus measures
By way of background, the loss carry-back measure allows eligible corporate entities to claim a refundable tax offset in their 2020-21 and 2021-22 company tax returns. In essence companies get to “carry-back” losses to earlier years in which there were income tax liabilities which may result in a cash refund or a reduced tax liability.
The temporary full expensing measure allows eligible businesses to immediately deduct the business portion of the cost of eligible new depreciating assets or improvements held and ready for use between 6 October 2020 and 30 June 2022. Eligible businesses also have access to the accelerated depreciation measure for the 2019-20 and 2020-21 income years, under which the cost of new depreciating assets can be deducted at an accelerated rate.
Loss carry-back compliance activity
Specifically, in relation to loss carry-back, the ATO will looking for businesses that are deliberately inflating deductions or omitting income to generate losses. It will also look for signs of businesses entering into contrived schemes to obtain the benefit of the loss carry-back tax offset such as shifting or creating losses through non-arm’s length dealings or shifting franking credits to a corporate entity (either directly or indirectly).
Temporary full expensing and accelerated depreciation compliance activity
In relation to temporary full expensing and accelerated depreciation, the ATO notes the following behaviours which will attract its attention:
- entering into contrived schemes to obtain a benefit of a temporary full expensing deduction, including schemes involving:
- manipulation of aggregated turnover;
- non-commercial transactions involving the transfer of an asset between related entities;
- artificially inflating the cost of assets (including inappropriate valuations) through non-arm’s length dealings;
- claiming deductions for assets acquired solely for a non-business purpose or failing to take into account any portion of non-business use;
- deliberately misclassifying or reclassifying excluded assets (g. reclassifying capital works and buildings as eligible assets under temporary full expensing or Division 43 capital works and buildings as eligible assets under accelerated depreciation);
- deliberately inflating the amount of accelerated depreciation deduction by applying the incorrect adjustable value or effective life;
- failing to take into account the car limit when calculating the deduction; and
- lacking evidence to substantiate the claim (including the cost of assets) such as invoices, contracts, supplier agreements or independent valuations.
The ATO notes that it will review claims for loss-carry back, temporary full expensing and accelerated depreciation as part of its tax time compliance activities as well as actively identifying tax schemes and arrangements seeking to exploit those schemes. Where cases of concerning or fraudulent behaviour are identified, the ATO will actively pursue the claims, including imposing financial penalties, prosecution and imprisonment for the most serious of cases.
We can help
If your business has taken advantage of the various stimulus measures, we can help you confirm your eligibility to avoid potentially costly compliance activity from the ATO in future. If you need advice or help, please contact us.