The problem has emerged in the Government's draft legislation designed to crackdown on non-commercial loans. In last year's budget, the Government proposed laws that would see a tax imposed on assets purchased by a company intended solely for private use by the company's shareholders.
Some examples of these assets include holiday homes, boats, and various types of plant and equipment.
But the crackdown on vehicles purchased via non-commercial loans may affect businesses which purchased cars under the 50% investment allowance.
Businesses were told by both the Government and a range of tax experts they could purchase vehicles under the allowance even if the vehicle was to be used for private purposes some of the time.
However, the proposed non-commercial loans legislation could see businesses imposed with a tax because they are using these vehicles for private purposes, even though they were not purchased through a non-commercial loan scheme.
Chartered Accountants tax counsel Yasser El-Ansary says the risk of increased tax comes as a surprise to businesses which were attempting to operate within the law.
"This is an unforseen consequence of buying assets under last year's investment allowance initiative, and some taxpayers are going to be shocked and surprised by it."
Chris Wookey, director of taxation at GMK Centric, also believes the proposed legislation in its current form will unfairly restrict businesses.
"Given the large numbers of small business owners who made significant purchases including cars and computer equipment on the strength of the Government's investment allowance, there is real potential for them to experience a lot of pain if this draft legislation is finalised in its current form."
Wookey warned a business owner could be taxed on the whole of the value of the right to use the car for private purpose, and would not have access to the "more concessional FBT valuation methods available".
Assistant treasurer Nick Sherry has told the Australian Financial Review that no businesses will not likely be penalised for buying vehicles for private use under the investment allowance.
"However, I am advised that the non-commercial loans amendments would likely have no role in the scenario described as under the existing rules, to qualify for the tax break the asset in question must be used to produce income," he said.
"As such it would be unlikely that the assets such as cars and yachts for private use, would or should qualify anyway."
However, El-Ansary has said there seems to be miscommunication between the Government and what is being discussed in the industry as a possible threat to small businesses.
"The assistant treasurer's advice is a bit different to our view, and his view is being briefed from the treasury which is not necessarily in line with how the law may operate. This is an issue that all the major professional bodies are raising with the Government."
He also says the Government must discuss with professionals the potential outcomes of the legislation and ensure any loopholes are closed.
"There is a possibility that businesses will face significant tax liabilities. We do need to have a dialogue about this after the Government has received all submissions. It's going to have consequences for businesses, and I would encourage the Government to carve out particular parts of the new rules to ensure there are no adverse consequences."
Wookey has said the Government should scrap the loophole entirely and commit to clarifying certain areas of the proposed laws which are causing problems.
"The potential practical outcomes of these provisions are manifestly unfair and may pose a significant problem for many law-abiding, tax-paying business owners. Our call is for the amendment of these provisions before the Bill is introduced."
This is not the first issue the Government has had with the new division 7a crackdowns. Late last year a number of farmers raised issues with the laws that would see farmland and on-property housing be taxed.
