October 2024 Round Up - can you achieve certainty with the ATO?

Can you achieve certainty with the ATO? We look at the updated guidance on utilising the commercial deals service.

Plus, the tax treatment when clients are buying and selling ETFs.

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Inside this month, Michael Carruthers (Tax Director), Ann Dai (Tax Adviser) and Lisa Armstrong (MD) bring you:

Achieving certainty with the ATO

• Engage with us for your commercial deal
• Commercial deals service resources

The ATO is encouraging taxpayers to engage with the ATO if they want certainty on the tax implications of complex or unusual commercial deals and avoid future compliance action.

The ATO’s commercial deals service enables taxpayers to engage with the ATO after the relevant transaction has been completed but prior to lodgment of the tax return. The idea is that this service assists taxpayers and the ATO to reach mutual agreement on the tax implications of the deal and resolve any tax issues before lodgment.

The commercial deals service can be used in a range of situations, including significant business transactions that may impact on the structure of the business. For example:

• Financing and refinancing
• Initial public offerings
• Mergers and acquisitions
• Restructures
• Sale of business (partial or complete) or business assets
• Sale of commercial property
• Share buybacks
  

The ATO has also updated its website guidance with case studies to provide examples of how the commercial deals service might be utilised. These include:

• Applying the market value substitution rule when siblings sell shares in a family company to other siblings
• Applying the general value shifting regime to a company restructure
• Negotiations with the ATO regarding capital gains liabilities and variation of the foreign resident capital gains withholding (FRCGW) amount.

The ATO is also focusing its pre-deal completion and pre-lodgment compliance activities for commercial deals where there is a potential risk of:

• Misapplication of the capital gains tax exemption for foreign residents and taxable Australian property under Division 855;
• The dissipation of assets, such as the movement of funds outside Australia (for example, where a foreign resident is selling their sole Australian asset).

Tax treatment of buying and selling ETFs

Reference:  Exchange traded funds

The ATO has released new guidance on the tax treatment of buying and selling exchange traded funds (ETFs).

In broad terms, ETFs are managed (investment) funds that trade on the ASX or another registered exchange. Generally, when you invest in an ETF, you are purchasing units in a trust/fund which owns the underlying investments, rather than owning the underlying assets directly.

Broadly, taxpayers are required to declare in their tax returns:

• Income from distributions from ETFs
• Income from ETFs that have been reinvested into a distribution reinvestment plan (DRP)
• Capital gains or losses from the disposal of any ETF units.

ETF distributions are essentially trust distributions that represent a share of the income of the fund. Depending on the assets held by the ETF, the income can be comprised of different types of income including interest, dividends, franking credits and capital gains and which need to separately disclosed in the tax return at the correct labels.

Generally, Australian ETFs will provide an annual ETF tax statement which will notify taxpayers of the breakdown of their distributions and how to disclose the amounts in their tax return. However, foreign-owned ETFs may not provide investors with a similar statement, so clients will need to use their own records to correctly calculate and disclose the foreign income in their tax return.

Many ETFs offer DRPs to investors, where instead of receiving a cash distribution, the investor has the option to re-invest the distribution in order to purchase additional units in the ETF. The ATO has clarified that the distribution income is assessable in that year, irrespective of whether it was reinvested or if they received a cash distribution. This is because general trust income rules apply to ETF. That is, trust distributions are assessable in the income year they relate to, and not the year they are paid.

Important: This information is general information only and not intended to be financial product advice, investment advice, tax advice or legal advice and should not be relied upon as such. As this information is general in nature it may omit detail that could be significant to your particular circumstances. Scenarios, examples, and comparisons are shown for illustrative purposes only. Certain industry data used may have been obtained from research, surveys or studies conducted by third parties, including industry or general publications. Knowledge Shop has not independently verified any such data provided by third parties or industry or general publications. No representation or warranty, express or implied, is made as to its fairness, accuracy, correctness, completeness or adequacy. We recommend that individuals seek professional advice before making any financial decisions. This information is intended to assist you as part of your own advice to your client. Use of this information is your responsibility. To the maximum extent permitted by law, Knowledge Shop expressly disclaims all liabilities and responsibility in respect of any expenses, losses, damages or costs incurred by any recipient as a result of the use or reliance on the information including, without limitation, any liability arising from fault or negligence or otherwise. While all care has been taken to ensure the information is correct at the time of publishing, superannuation and tax legislation can change from time to time and Knowledge Shop Pty Ltd is not liable for any loss arising from reliance on this information, including reliance on information that is no longer current. Tax is only one consideration when making a financial decision.