What if tax planning is based on expected changes that don’t happen?

While naturally the best advice for most taxpayers would be to not act on an anticipated change to the rules until the Royal Assent stamp has dried, it is not entirely unheard of for some taxpayers to be enthused enough about an expected change in tax law that they jump in feet first.

But what are the consequences if a change doesn’t go through, and our rash taxpayer has already requested certain transactions be made or arrangements put in place anticipating a certain tax outcome that simply does not eventuate?

The ATO in its wisdom has already thought about these scenarios, and has set out a general response in case they come to pass. 

If a taxpayer self-assesses by anticipating an announced law change
If a taxpayer lodges a return or activity statement, anticipating an announced law change, and the retrospective law changes are:

  • as anticipated — the self-assessment will not be affected
  • not as anticipated (for instance, because amendments were made to the relevant legislation during the parliamentary process) — an amendment or revision to the return or activity statement will be required.

If an amendment or revision is made and it:

  • reduces their liability, the ATO will pay appropriate interest on any overpayment
  • increases their liability,  
    • no tax shortfall penalties will apply, on the basis that it is reasonable for a taxpayer to follow an announced government proposal to change the law and that the existence of such an announcement represents special circumstances
    • any interest accrued will be remitted to the base interest rate up to the date of enactment of the relevant law change
    • any interest in excess of the base rate accruing after the date of enactment will be remitted if the taxpayer actively seeks to amend assessments or revise activity statements within a reasonable time after enactment of the law change (the ATO says “a reasonable time” is to be determined on a case-by-case basis).

If the announced law change is not enacted
On rare occasions an announced law change may not be enacted – for example, because it is rejected altogether by the Parliament.

Some taxpayers may have lodged returns or activity statements anticipating the announced law change. Other taxpayers may have lodged and self-assessed under the existing law but delayed payment of a liability in anticipation that it would be removed by the announced law change.

In these cases the ATO says it will publicly advise tax agents and their clients that the law has not been enacted, explaining the relevant circumstances and the need for affected taxpayers to seek amendments to their assessments or lodge revised activity statements as necessary and make any consequent tax payments.

If a taxpayer needs to make an amendment or revision, the ATO says the interest and penalty consequences will be as outlined above, depending on whether they self-assessed by anticipating the announced change or not. The interest consequences for delayed payments will be similar, although the ATO says it won’t apply penalties.

Note however that these are general guidelines only and will depend on the law change announced.  The ATO will usually release information with respect to the anticipated law change to provide guidance and its approach. 

Example:
A law change was announced that had the effect of treating certain loans by companies to their shareholders as dividends if they weren’t properly documented, including the terms for repayment, before the end of the financial year in which the loan was made. The proposed law change was to apply to the current income year, even though the legislation to give effect to the change was not likely to be enacted before the end of the income year.

The ATO published advice on its website to the effect that companies and relevant shareholders should consider documenting any loans made in the current income year even though there was no legal requirement to do so, so that such loans were not retrospectively treated as dividends when the law change was eventually enacted.

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