ATO updates

Product ruling update

The ATO has issued an addendum to Product Ruling PR 2016/3 regarding income tax for the TFS Indian Sandalwood Project 2016 Sophisticated Investor Offer. The addendum amends various citations in the document and specifies which entities are subject to the taxation obligations and which can rely on the taxation benefits. A grower can claim various deductions paid to an Investment Manager including the establishment fee, costs of harvest and performance fees.

Class rulings

The ATO has issued two new class rulings.

CR 2016/85 sets out the Commissioner’s opinion on the way in which the fringe benefits tax applies to certain employer clients of Community CPS Australia Limited (trading as Beyond Bank Australia) who are subject to the provisions of either section 57A (Exempt benefits- public benevolent institutions, health promotion charities, some hospitals and public ambulance services) or section 65J (Rebate for certain not-for-profit employers etc.) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) and make use of Meal Entertainment Card facility under salary packaging.

The Ruling provides that benefits provided under the salary packaging arrangement that constitute the provision of meal entertainment or an entertainment facility leasing expense are an exempt benefit where the grossed-up taxable value does not exceed $5,000.

A participating employer cannot make an election to use Division 9A of Part III of the FBTAA to calculate the taxable value of the meal entertainment provided under a salary packaging arrangement.

The benefits are included as reportable fringe benefits under the FBTAA and provide a rebate to the rebatable employer of the gross tax that would otherwise be payable.

CR 2016/86 considers the income tax treatment of amounts received by eligible applicants who receive an ex-gratia payment from the South Australian Government under the Stolen Generations Reparations Scheme (SGRS).

The SGRS was introduced in 2015 and provides applicants with the opportunity to receive a reparation payment. The class ruling holds that a lump sum payment made under the SGRS is not assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997).

The class ruling also describes that any capital gain or loss made as a result of receiving a payment will also be disregarded under subparagraph 118-37(1)(a)(ii) of the ITAA 1997.

Case Law

The High Court characterises deferred compensation as ordinary income

Blank v Commissioner of Taxation [2016] HCA 42

This case considered whether a lump sum payment received by an employee at the termination of his employment under an Incentive Profit Participation Plan (IPPA 2005) should be considered assessable income. The primary judge Edmonds J, and Kenny and Robertson JJ of the Federal Court (Pagone J dissenting) both considered that the amount was ordinary income, rejecting Mr Blank’s submission that the amount was simply the realisation of the rights attached to the participation agreement.

The High Court confirmed that the characterisation of the payment was unambiguously income. It held that not only was the amount deferred compensation under IPPA 2995, but the right to claim the amount as deferred consideration did not arise until Mr Blank’s employment with Glencore Australia ceased. The fact that the amount was paid after the termination of the contract of service by the person other than the employer and separate to ordinary wages, salary or bonuses, does not detract from its characterisation as income consequential on an incident of employment.

In the circumstances, the applicant was employed by Glencore Australia Pty Ltd (a wholly owned subsidiary of Glencore International AG) (GI) as a Senior Trader in its coal division. The IPAA 2005 was signed by all three parties, which deferred compensation for Mr Blank’s services rendered until after notice of his termination of employment. The participation in profits were in addition to his salary and bonuses.

When the applicant resigned in 2007 he became entitled to receive the compensation to the value of USD $160,003,328.25, payable in instalments. Blank did not return the amount as income but treated it as a capital gain. He claimed that the amount was the proceeds of the exploitation of interconnected rights that conferred on him a right to receive a proportion of the profit of GI.

Although the arrangements in issue had their foundation in Swiss law, the parties conducted the matter in the High Court of Australia on the agreed basis that the proper construction of the arrangements was to be determined according to Australian law.

The Court noted that some things are so obviously income that their nature is unchallengeable, and one of these is the reward for services rendered in the form of remuneration or compensation. The characterisation of the reward for services rendered as income is not lost because the reward is paid in a lump sum, because payment is deferred, or because it is paid on the occurrence of a particular event.

This case demonstrates that the Court will consider that payments from an employer to an employee that derive from employment services in addition to salary and bonuses, are properly characterised as ‘ordinary income’.

High evidentiary bar for primary production land tax exemption

Galea v Commissioner of State Revenue [2016] VCAT 1865

The applicant sought review of decisions made by the Commissioner in relation to a liability for land tax in respect of property owned by him. The applicant claimed an exemption in accordance with the primary production exemption under section 66 of the Land Tax Act 2005 (Vic). The exemption excludes a property from the imposition of land tax where the land is cultivated for the purpose of selling the products of cultivation. The Tribunal found that there was insufficient evidence to justify the taxpayer’s assertion and only applied the exemption in certain years.

The property in question had been in very poor condition when it was purchased by the applicant in 2000 and very little work was done on the property until 2011. The applicant claimed that in December of 2011 the property was cleared and sprayed for weeds and thistles in preparation for cropping and a sunflower crop was planted, but not harvested.

The sunflower crop failed, as did two subsequent barley crops. In 2014, the barley crop finally succeeded and about 15 tonnes was harvested.

All this work was undertaken by a contractor under a formal farm sharing agreement.

The Tribunal was not satisfied on the available evidence that any work that constituted cultivation had actually occurred until the 2013 tax year. This was on the basis that the contractor’s evidence with regards to the sunflower crop was unclear, but that he noted that sunflowers were not usually planted until August.

The Tribunal found that the land tax exemption should be applied from the 2013 tax year, but that there was insufficient evidence to apply it to the 2012 year.

This case demonstrates that the SRO as well as the Tribunal will require detailed evidence to apply the exemption. It therefore highlights the importance of diligent record keeping in relation to any land tax exemption.

Van Duren & Anor v Commissioner for ACT Revenue [2016] ACAT 121

The applicants were unsuccessful in their application for review of a decision to disallow an objection to an assessment of land tax.

The applicants had purchased a property in 2005. In 2014, they made voluntary disclosure that the property was rented from December 2010.

The Commissioner issued assessments for the 2006-7 year until the 2015-16 year, the actual period for which the property was rented, and imposed premium statutory interest and 50% penalty tax. However, due to the voluntary disclosure, the penalty tax was reduced by 80% and the interest was fully remitted at the assessment stage. The taxpayers then objected to the penalty tax, claiming it should be completely remitted because they had exercised reasonable care on the basis of the voluntary disclosure.

On review the Commissioner rejected the objection. He found that for the period before the voluntary disclosure was made, there was no ground on which to remit or reduce the penalties and imposed the 50% penalty tax, market and premium interest.  This was because the taxpayer had contravened section 14 of the Land Tax Act 2004 by failing to notify the Commissioner in 30 days that the property was being rented.

The taxpayers also claimed that the Commissioner’s correspondence had been sent to the wrong address, despite the taxpayer having notified them of a change of address. The Commissioner had used the incorrect address to send rates notices for the rental period and two section 82 notices advising that an investigation had commenced. The taxpayer claimed that lack of notice contributed to the argument that the taxpayer had taken reasonable care.

The Tribunal held that the applicants did not take reasonable care and did not have a reasonable excuse, the circumstances resulting in penalty tax were not exceptional and as such there were no grounds for a remission of penalty tax. The decision not to remit interest is not a reviewable decision.

Reasonable care a high standard to prove to justify remission of penalties

Tacey v Chief Commissioner of State Revenue [2016] NSWCATAD 225

In this case, the applicant applied for a review of the Chief Commissioner’s decision to disallow the remission of penalty tax and interest imposed as a result of payroll tax assessments. The taxpayer claimed that he had reasonably relied on another person in conducting his tax affairs, but the Tribunal disagreed and upheld the penalty tax.

In his decision, the Chief Commissioner had decided to group a series of entities under the Payroll Tax Act 2007, and found that each member of the group had failed to take reasonable care in preventing a tax default that was within their control. As such, 25% penalty tax was imposed.

The applicant objected to the imposition of penalty tax in relation to the tax default, on the grounds that he had relied on an accountant’s advice for another member of the group, who had been an advisor to the member for 30 years to conduct the group affairs.

The Tribunal noted that it is a question of fact whether a taxpayer has taken reasonable care in the circumstances and discussed the following relevant factors.

Factors that would indicate that a taxpayer took reasonable care include:

  • attempts to comply with the tax law, reasonable professional and other inquiries to ensure compliance, reliance on professional advice or on official published views of the tax law.

Factors which indicate that a taxpayer failed to take reasonable care include:

  • oversight or forgetfulness to meet with obligations, failure to maintain adequate records and procedures to prevent errors from occurring, not seeking professional advice and errors in complying with the law.

The investigation found that Mr Tacey controlled bank accounts, recruited staff, prepared Business Activity Statements and financial statements. As such the Tribunal found it difficult to make a finding that the whole payroll tax matter was delegated to the accountant Mr Bonner.

While it is possible that a taxpayer could rely on the advice of an accountant or other person, the main weakness in the applicant’s case was that he failed to adduce cogent evidence of such reliance. There were no specific discussions or requests for advice, letters of advice or file notes.

This led to the Tribunal finding that the applicant had not discharged the onus of proving circumstances that would warrant a complete remission of penalty tax

The Tribunal did note that the applicant’s unblemished payroll tax record over many years, and his co-operation with the investigation, combined with the relatively low degree of culpability, justified the Tribunal in reducing the premium rate component of the interest from 8 percent to 2 percent.

This case demonstrates the reluctance of Tribunal’s to divest taxpayers of their duty to take reasonable care to comply with the law to third party accountants or professional advisors.

Legislation and Government updates

State Taxation Acts Further Amendment Bill 2016

The State Taxation Acts Further Amendment Bill 2016 (Vic) (Bill) has been passed by the Legislative Council. These changes, such as correcting the relevant date for calculation to provide unanimity, will have a positive effect on ensuring certainty and consistency, cutting red tape and regulatory burden for businesses and accommodating growth.

The Bill amends the following Victorian acts:

  • the Land Tax Act 2005 to align the date for the determination of the taxable value of land that is not rateable land or non-rateable leviable land with the date that applies to other land and to correct one of the surcharge rates of land tax for absentee trusts;
  • the Payroll Tax Act 2007 to change the way the exempt rate used in the calculation of the exempt component of motor vehicle allowances is determined;
  • the Planning and Environment Act 1987 to make further provision in relation to the imposition, payment and apportionment of the growth areas infrastructure contribution (GAIC) in certain circumstances; and
  • the Valuation of Land Act 1960 to make further provision in relation to the meaning of a general valuation under that Act; to permit the Valuer-General to accept a late nomination from a collection agency to be the valuation authority for the purpose of valuing land for the fire services property levy; and to require notices of valuation to show the Australian Valuation Property Classification Code (AVPCC) allocated to relevant land.

This article was written with the assistance of Ella Simmons, Law Graduate.