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You are here: Home » Business Academy » Tax Updates » ATO Loses Landmark Division 7A Battle (Mar 25 Tax Update)

ATO Loses Landmark Division 7A Battle (Mar 25 Tax Update)

Relevant For:

Private businesses facing Division 7A tax implications.

Key Points:

  • Recent court decision challenges ATO’s treatment of unpaid present entitlements (UPEs).
  • Taxpayers penalised since FY2010 may revisit assessments.
  • Businesses following past ATO guidance unlikely to receive refunds.
  • Division 7A risks still apply under subdivisions EA and EB.
  • Reduced tax burden as interest payments on certain UPEs are no longer required.

Full Article:

The Australian Taxation Office (ATO) recently lost a landmark case concerning Division 7A and unpaid present entitlements (UPEs).

The court ruled that UPEs aren’t automatically subject to additional taxes, penalties or interest typically imposed by the ATO under Division 7A.

If your business has paid extra taxes, penalties or interest based on UPE assessments since the 2010 financial year, it’s advisable to review these assessments urgently. You might be eligible to lodge objections, potentially reclaiming substantial amounts.

However, businesses that structured their finances based on past ATO guidance may unfortunately find they’ve incurred unnecessary costs, as the recent decision doesn’t retrospectively protect against financial arrangements already made.

Businesses currently lodging FY24 returns or undertaking FY25 tax planning must stay vigilant. Although the court ruling reduces tax obligations by eliminating compulsory interest charges on certain UPEs, other specific provisions under sub-divisions EA and EB can still impose Division 7A consequences.

It is possible that this court case will be appealed by the ATO and taken to the High Court, which means that it’s still probable for this landmark decision to be overturned.

Finally, this decision underscores a vital lesson: ATO guidance isn’t binding law.