Trust to provide benefits to employees was not a unit trust

On 14 December 2015 the Full Federal Court in Commissioner of Taxation v ElecNet (Aust) Pty Ltd (Trustee) [2015] FCAFC 178 allowed the Commissioner's appeal from the decision of the Federal Court at first instance, and held that a trust, that was established to provide benefits to workers who leave or change their employment, was not a ‘unit trust’ for the purposes of the public trading trust rules in Division 6C of Part III of the Income Tax Assessment Act 1936 (ITAA 1936).

Briefly, ElecNet (Aust) Pty Ltd was the trustee of the Electrical Industry Severance Scheme which was established to provide benefits to ‘workers’ leaving or changing their employment in circumstances prescribed under the constituent document establishing the Scheme. Under the Scheme, employers within the relevant industry were required to make weekly contributions to the Scheme in respect of their workers pursuant to obligations under industrial agreements or awards. The trustee then credited those contributions to an account in the name of each of the relevant workers. At such time as a worker’s employment was subsequently terminated with his or her employer, the trustee was generally required to make a severance or redundancy payment to the worker.

The trustee applied for a private ruling from the Commissioner to the effect that the trust was a ‘unit trust’ that is a ‘public unit trust’ and a ‘public trading trust’ for the purposes of Division 6C of Part III of the ITAA 1936. If the trust was a trust to which Division 6C applied, an effect would be that the trustee would be taxed on the trust’s net income at the corporate tax rate (i.e. 30 per cent). In the case where individual beneficiaries are not presently entitled to the income of a trust, that rate is favourable when compared to the top marginal rate that would otherwise apply via the application of Division 6 of Part III of the ITAA 1936 to the trust.

The Commissioner determined that the trust was not a unit trust for the purposes of Division 6C, and the trustee successfully appealed to the Federal Court (at first instance) against that determination.

In holding that the trust in question was not a unit trust for the purposes of Division 6C, the Full Federal Court said that it was “not appropriate in this case, assuming it to be possible, to attempt to formulate a single, comprehensive definition of ‘unit trust’ for the purposes of Division 6C that applies in every instance. It is also not necessary to attempt to formulate a single test for a unit trust in this case because this appeal can be resolved on the short point that in determining what is encompassed within the concept of a unit trust within Division 6C, there is a necessity for something which fits a description of ‘units’ within the functional, and descriptive, notion of a unit trust. This includes a focus upon one of the core indicia of a unit, namely a beneficial interest in any of the income or property of the estate”.

Whilst the decision by the Court dispels some uncertainty as to the boundaries of Division 6C, trustees will need to carefully reconcile the facts in this case with their own circumstances in determining whether the trust which they administer, may be treated as a unit trust for the purposes of Division 6C. 

Consultation paper on new Tax Transparency measures

On 11 December 2015, the Board of Taxation released a consultation paper regarding a voluntary tax transparency code (TTC). The paper contains the Board’s preliminary recommendations for additional disclosure of tax information by ‘large businesses’ (Australian turnover of at least $A 500 million) and slightly less disclosure for ‘medium businesses’ (Australian turnover at least $A 100 million but less than $A 500 million). The Board considered that the TCC should be operational in time for the reporting period for 2015-16 financial statements or annual reports.

For further information see TaxTalk Insights Corporate Tax: Tax Transparency Code - what you need to know – 17 December 2015.

High Court determines in favour of liquidator concerning Commissioner’s power to require retention of sale proceeds for payment to the Commissioner

The decision of the High Court in Commissioner of Taxation v Australian Building Systems Pty Ltd (In Liquidation); Commissioner of Taxation v Muller and Dunn as Liquidators of Australian Building Systems Pty Ltd (In Liquidation) [2015] HCA 48 (Australian Building Systems) concerns the obligations of a company liquidator under section 254 of the TAA 1936.

Section 254 of the ITAA 1936 imposes a number of general obligations upon agents and trustees (including company liquidators) in respect of any income, profits or gains of a capital nature derived by the agent or trustee in their representative capacity, or derived by the principal by virtue of their agency. Specifically, paragraph (d) of subsection 254(1) provides that the agent or trustee is “authorized and required to retain from time to time out of any money which comes to him or her in his or her representative capacity so much as is sufficient to pay tax which is or will become due in respect of the income, profits or gains.” If an agent or trustee is required to retain moneys under paragraph (d), they become personally liable for the tax payable.

In Australian Building Systems, the principal issue for determination by the High Court was whether section 254 authorised and obliged the liquidators of a company, as trustees, to retain an amount sufficient to pay the income tax to be assessed in respect of the sale by the liquidators of a property owned by the company, prior to the issue of an assessment.

In its judgment on 10 December 2015, the High Court, by majority, dismissed the appeal by the Commissioner of Taxation in respect of this issue, and held that the retention obligation under paragraph (d) of sub-section 254(1) arises only after the making of an assessment or deemed assessment in respect of the income, profits or gains.

In reaching this decision, the majority relied heavily on the previous High Court decision in Bluebottle UK Limited v Deputy Commissioner of Taxation [2007] HCA 54 (Bluebottle), which considered the application of a similar retention provision in section 255 of the ITAA 1936. In Bluebottle, the High Court held that the words “sufficient to pay the tax which is or will become due” must be read as referring to an ascertained sum, and more specifically, to an amount of tax that has been assessed. The phrase “tax which … will become due” was held to be referring to tax which, although assessed, was not yet due for payment. In Australian Building Systems, the majority rejected the Commissioner’s attempt to distinguish between the operation of section 255 and section 254.

The High Court also held that the Full Court’s views in respect of the application of Division 6 of Part III of the ITAA 1936 to a liquidator were erroneous in that, whilst a liquidator is a ‘trustee’ as defined in sub-section 6(1) of the ITAA 1936, a liquidator is not a trustee of a trust estate for the purposes of applying Division 6. An effect of this is that the assessment that is required to be made before section 254 can apply, does not need to be an assessment arising through the operation of Division 6.

On 6 January 2016, the Commissioner published a Decision Impact Statement (DIS) in respect of this High Court judgment. In that DIS the Commissioner states that he accepts that a trustee or agent has no obligation to retain under paragraph (d) of sub-section 254(1) of the ITAA 1936 until an assessment has first issued in respect of the income, profits or gains (IPG) derived by them in their representative capacity.

The Commissioner also states that he will consider where it is now necessary to finalise draft Taxation Determinations TD 2012/D6 and TD 2012/D7.

Federal Court dismisses taxpayer’s appeal in relation to the ATO’s Part IVA determination

On 7 December 2015 in Orica Limited v Commissioner of Taxation [2015] FCA 1399, the Federal Court at first instance dismissed the taxpayer’s appeal against the Commissioner’s objection decision which confirmed that the general anti avoidance provision in Part IVA of the ITAA 1936 applied to deny the taxpayer (as head company of a tax consolidated group) a deduction for interest costs incurred under an intra-group financing arrangement. The taxpayer’s appeal in relation to the objection decision on administrative penalties assessed by the Commissioner was also dismissed.

The taxpayer’s position was that Part IVA should not apply since the dominant purpose in entering into the financing schemes identified by the Commissioner was to enhance the consolidated profit result of the taxpayer through ‘rebooking’ the benefit of accumulated tax losses of the taxpayer’s United States (US) subsidiary. This rebooking (of the benefit tax losses which had previously been written off) was to occur as the US tax losses of the subsidiary were used to shelter from US tax, interest income derived by that company from funds provided to it in three tranches under the financing arrangement. The Commissioner treated each tranche as a separate scheme for the purposes of Part IVA.

A fundamental aspect of each scheme identified by the Commissioner was that the US subsidiary issued redeemable preference shares in return for capital provided to it by its Australian holding company (which was a subsidiary member of the taxpayer’s tax consolidated group). These funds were then used by the US subsidiary partly to repay existing intra group borrowings, and to lend the remaining part at interest to another Australian subsidiary (FinCo) of the taxpayer. The interest cost incurred by FinCo was then claimed as a deduction by the taxpayer, as the head company of the tax consolidated group which included FinCo as a subsidiary member.

In dismissing the taxpayer’s appeal, Justice Pagone considered in detail the matters required to be objectively taken into account in determining whether Part IVA should apply. In his Honour’s view, when objectively determined, the taxpayer’s sole or dominant purpose in entering into the three schemes was to obtain a tax deduction for the interest on the monies lent by the US subsidiary to FinCo. In response to the taxpayer’s position outlined above, his Honour concluded that “the increase in the reported profits depended upon the allowability of the deductions claimed for the interest incurred”.

In relation to the objection decision confirming the administrative penalties assessed by the Commissioner, Justice Pagone dismissed the taxpayer’s appeal, holding that the scheme had been entered into with the dominant purpose of obtaining the ‘scheme benefit’ being the deduction for the interest expense incurred by FinCo, and further, that the taxpayer had not been able to demonstrate that at the time of entering into each of the schemes it was ‘reasonably arguable’ that Part IVA should not apply to each scheme. The effect of not having a ‘reasonably arguable’ position at the time of entering into each scheme, was that penalties equal to 50 per cent of the ‘scheme shortfall’ applied, instead of penalties equal to 25 per cent of the ‘scheme shortfall’. 

Chevron files appeal against Federal Court transfer pricing decision

The taxpayer has appealed to the Full Federal Court against the decision of the Federal Court in Chevron Australia Holdings Pty Ltd v Commissioner of Taxation (No 4) [2015] FCA 1092. This decision was reported in the 2 November 2015 TaxTalk: Corporate Tax Update.

Commissioner releases first Tax Transparency Report

On 17 December 2015, the Commissioner of Taxation published the first Tax Transparency Report which contains the total income, taxable income and tax payable of over 1,500 public and foreign owned private entities for the 2013-14 income year. In his media statement, the Commissioner made the important point that, “no tax paid does not necessarily mean tax avoidance”. The Commissioner went on to add that over half of these 1,500 companies have been subject to review or audit by the Australian Taxation Office (ATO) over the past three years, with the ATO’s risk and intelligence systems working all the time to ensure confidence in the tax system. The report is available on the data.gov.au website.