Recently incorporated law firms might be up for a nasty surprise when the Australian Tax Office delivers its long-awaited public ruling addressing capital gains tax (CGT).
According to Neil Wickenden, a tax partner at accountants and advisors HLB Mann Sydney, the ATO's public ruling - due on 3 November - could reveal that a good portion of recently incorporated firms have not paid what the ATO deems as appropriate amounts of CGT.
"The ATO has indicated it is concerned that firms which incorporated using CGT roll-over relief have not done so correctly, and it has undertaken a number of audits of firms - in particular law firms - that have recently incorporated," said Wickenden.
Firms that did not use the roll-over relief may still come under ATO scrutiny, according to Wickenden, as the ATO has also expressed concern that incorporated firms may have relied on a 1989 public ruling to minimise CGT.
"The 1989 ruling, which dealt with the application of CGT provisions for disposals of partnership interests, says that, if no amount is payable for goodwill, then for CGT purposes it will be accepted that the value of the firm's goodwill is nil," said Wickenden.
"However, the concessional approach outlined in this ruling has a limited scope and does not apply to restructures of professional firms."
Therefore, according to Wickenden, firms that have relied on the 1989 ruling when incorporating could find the ATO will soon challenge its treatment of CGT.
And given an ATO taxpayer alert has not een issued on the issue, Wickenden added that a number of firms may not be aware of the renewed interest in CGT by the ATO.
"The only reference to the issue, and the forthcoming public ruling, is in the ATO's 2010-11 compliance program, which it released on its website in August," he said. Therefore, firms may still be unaware that there could be a tax problem looming."