The Australian Taxation Office (ATO) recently released final guidance on the meaning of "expense incurred" for early-stage investments. This information, found in Taxation Determination TD 2023/6, breaks down key definitions and criteria for businesses and investors looking to benefit from tax incentives.
Understanding the Basics
The guidance focuses on the expense tests in sections 360-40(1)(a)(ii) and 360-40(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997). Here's a simplified breakdown of the terms:
Expense Definition:
"Expenses" refer to amounts recognized as expenses under standard accounting rules. This gives a clear idea of what qualifies as an expense.
Incurred Meaning:
"Incurred" follows the same definition as in the general deduction provisions of section 8-1 of the ITAA 1997. It clarifies when an expense is considered incurred for tax purposes.
Test Time:
The "test time" is right after a company issues shares to an investor. This timing is crucial for determining eligibility for early stage tax incentives.
Compliance Insights
The ATO acknowledges that relying on the "total expenses" reported in the company tax return is generally low-risk. While compliance resources won't be used to adjust incurred total expenses based on the reported amount, verification actions may be taken to ensure accuracy.
From Draft to Final Determination
Taxation Determination TD 2023/6 was initially released as Draft Taxation Determination TD 2019/D5. The final determination incorporates feedback, providing a comprehensive guide for businesses and investors navigating early-stage tax incentives.
The ATO's finalised guidance on "expense incurred" brings clarity to businesses and investors seeking early-stage tax breaks. By aligning with common accounting practices and established tax provisions, the ATO aims to simplify the application process for tax incentives. Staying informed and adapting practices to comply with the evolving tax landscape is essential for businesses looking to benefit from these opportunities.
Source: Taxation Determination TD 2023/6, ATO website, 22 November 2023, accessed 22 November 2023.
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