Date issued: 28 May 2008

Private companies have a one-off opportunity to fix up outstanding prior year loans, payments or forgiveness of debts to their shareholders or their associates under special arrangements recently introduced by the ATO.

Companies that undertake the required housekeeping by 30 June 2008 won't need to alert the ATO of any corrective action taken. However, where companies are late in taking appropriate action these transactions will typically be treated as assessable income in the hands of shareholders under 'Division 7A' of the Tax Act in the year the payment, loan or debt forgiveness arose.

CPA Australia senior tax counsel, Mark Morris said that private companies and their shareholders should seize the opportunity to review prior year transactions with shareholders and take any required as the deadline is rapidly approaching.

'A tax liability will be triggered when a private company pays private expenses such as school fees on behalf of a shareholder (or associate), or makes a loan used for private purposes such as to fund the purchase of a holiday home.

'It can also be easy for a company to unknowingly trigger these provisions such as when a company makes a loan to a related family trust. These provisions are so wide that quite innocent transactions like these would fall within the tax net,' Mr Morris said.

Under the special arrangements the ATO will allow private companies and their shareholders to fix up non-compliant loans, payments or debt forgiveness if:

• the failure to comply with Division 7A was the result of an honest mistake or inadvertent omission by the private company, the shareholder (or an associate) or some other party
• 'corrective action' is taken by 30 June 2008 which basically ensures that any prior year error is converted into a compliant loan where all required principal and interest payments are made from the year in which the error arose
• the prior year transaction occurred between 1 July 2001 and 30 June 2007
• the shareholder (or associate) has lodged all required tax returns between the 2002 and 2007 income years.

'The ATO is essentially giving private companies and their shareholders a one-off chance to self assess and be  compliant by ensuring they are in the same position they would have been in had they complied with Division 7A in the year the error arose,' Mr Morris said. 

Post 1 July 2008, shareholders should expect the ATO to take a much harder line and treat prior year errors as assessable income. While they will be able to request the Tax Commissioner to not apply these provisions, there is no guarantee that such relief would be exercised in these circumstances.

Companies and their shareholder should contact their CPA to ensure they have picked up any such errors and taken any required steps by year end.      

For further information visit the ATO website. 

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