A Cautionary Tale in Applying for a PBR

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A Cautionary Tale in Applying for a PBR

In a recent case, Progress Engineering Company Pty Ltd and Commissioner of Taxation [2020] AATA 4726, the Tribunal has dismissed an appeal from a self-represented company director/shareholder in relation to an adverse private ruling issued by the ATO to the taxpayer company.

There are a few things that had gone wrong and could have been avoided had the director obtained proper tax advice.

Background Facts

The Taxpayer company proposed to make a lump sum compensation payment to the director in the 2020 income year for “pain and suffering and change of lifestyle” suffered while at work. The lump sum amount would be equivalent to moneys owed on a Division 7A loan of approximately $1 million by the directors to the company and would be used as funds to repay the debit loan. The Taxpayer requested a private ruling to determine whether the proposed lump sum payment would be exempt on the basis that it was compensation payable to an employee (the director) “injured in workplace accidents”.

The private ruling was lodged on 13 February 2019 and the ATO issued an adverse decision on 23 September 2019. The Taxpayer then lodged an objection on 25 November 2019 and the ATO disallowed the objection on 19 June 2020. The Taxpayer then lodged an appeal to the Tribunal on 17 August 2020 but it had not made any lump sum payment on or before 30 June 2020 in accordance with the ruling.

The Tribunal dismissed the case on the basis that the taxpayer did not meet the requirement of an entity dissatisfied with the private ruling decision. As the Taxpayer did not implement the scheme in the ruling and no payment was ever made to the director, there were no “adverse tax consequences” that the Taxpayer was dissatisfied about.

MKT Note

The proposed lump sum payment was conveniently equal to the Division 7A loan outstanding and would have been used to offset the loan balance in full. While the facts did not specify the rationale in detail, the ATO was always going to be sceptical with the scheme.

Another mistake the Taxpayer committed is overlooking the time period needed to go through the process. In this case, the taxpayer could have requested the ATO to extend the ruling period for another year to the 2021 income year, on the basis that the compensation payment would be paid in either 2020 or 2021 year. In this way, the Taxpayer would still have had the time to make the proposed lump sum payment either before or after the appeal went to the Tribunal on 17 August 2020.

At MKT, we regularly assist our Premium Accountant’s Network members and their clients in their options and, where appropriate, assist them in preparing a private ruling, Reasonably Arguable Position or an objection to the ATO.

If you or your clients require assistance on this, in any tax areas, please contact Peter Hong.

 

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