Some SMEs to be subject to 4 year period of review
Some small and medium business entities (SMEs) could soon be excluded from the shorter 2 year amendment period and subject to the standard 4 year period if Draft Regulations proposed by the government are registered. In their current form, the Regulations will only affect entities with related-party dealings, international dealings, those entitled to the R&D tax offset or those who can claim certain CGT relief. The shorter 2 year period of review will apply to assessments made after the Regulations commence for income years starting on or after 1 July 2021.
Background to the proposed changes
At the start of the COVID-19 pandemic in 2020, the previous government passed a measure to increase the small business threshold from $10 million to $50 million for the purposes of most of the small business exemptions. This was part of a Bill to implement various Budget measures for economic recovery.
Among other things, this legislation meant that the Commissioner was only able to amend an income tax assessment of “medium businesses” (those with a turnover between $10 million and less than $50 million) for a limited period of 2 years. The Commissioner was still able to amend an assessment at any time if an opinion that there was fraud or evasion was made, to give effect to an objection decision, or a decision on review or appeal.
While the current government is not seeking to disturb a majority of the measures contained in the legislation, it has recently introduced a proposal to exclude certain small and medium entities (SMEs) from the shorter 2 year amendment period and move those entities back to the standard 4 year amendment period.
Exposure draft regulations released for consultation
Draft Regulations have been released for consultation which propose to exclude certain entities with particularly complex tax affairs or significant international tax dealings from the shorter period of review, which according to the government is in line with the original intentions of the 2020-21 Budget announcement.
Entities that would be subject to a longer 4 year period of review should the Draft Regulation be registered include:
- those with related-party dealings in relation to assets or non-cash benefits with a market value of at least $50,000;
- entities that derive assessable income of at least $200,000 from any source that is not an Australian source. To prevent structuring arrangements being undertaken to avoid this, the $200,000 threshold is assessed as a combined threshold including the assessable income from the relevant assessed entity and any entity affiliated with or connected with the entity;
- foreign controlled Australian entities (including Australian companies, trusts and partnerships) and non-resident entities at any time during the income year;
- any entities that engage in schemes captured by either the Diverted Profits Tax (DPT) or Multinational Anti-avoidance Law (MAAL);
- certain entities with at least 10 other entities connected with or affiliated with the entity at any time during the assessment year;
- entities that may be entitled to the R&D tax offset or certain related deductions, recoupments and adjustments; and
- entities that claim the following CGT relief:
- restructure rollover relief;
- demerger relief;
- rollovers relating to CGT asset transfers between two companies or the creation of a CGT asset between companies within the same wholly owned group, where one company is a non-resident; and
- entities subject to Division 855 (where a foreign resident can disregard a capital gain or loss in certain circumstances).
The Draft Regulations also seek to remove the current requirement that a 4 year period of review only applies where at least one of the related parties already has a 4 year period of review in relation to related party dealings. This means that even if all related parties have a 2 year amendment period, if all other conditions are satisfied, a 4 year period of review may apply to a relevant assessed entity.
The above proposed changes to amendment periods will apply to assessments made after the Regulations commence for income years starting on or after 1 July 2021.
What does this mean for your business?
With these potential changes on the horizon, will your business be affected? Contact us today for expert help and advice.
Disclaimer: The information on this page is for general information purposes only and is not specific to any particular person or situation. There are many factors that may affect your particular circumstances. We advise that you contact Mathews Tax Lawyers before making any decisions.