1 Cases
1.1 Douglas Personal Services Income
Facts
From 2000 to 2015, Mr Douglass, an electronics engineer, worked on large infrastructure projects. He did so as the sole service provider of a business which contracted with a labour hire firm. The client(s) of the labour hire firm would engage Mr Douglass' services.
Mr Douglass provided his services:
1. in the 2000 to 2007 tax years, through a partnership with his spouse at the time known as the 'RGD & SED' partnership,
2. in the 2008 to 2010 tax years, through Douglass Engineering Services Pty Ltd; and
3. in the 2011 to 2014 tax years, through a partnership with his wife known as 'RGD & MLG' (the
Partnership).
The only documentation between Mr Douglass and the labour hire firm were the invoices issued by the Partnership in respect of the services provided by Mr Douglass. The Partnership would invoice the labour hire firm (rather than the end client) for the number of hours Mr Douglass worked multiplied by his hourly rate. The invoices indicated that from 2010 to 2014 Mr Douglass only worked for one client of the labour firm and typically worked at the client's premises.
Although Mr Douglass did not enter into a formal contract with the labour hire firm, he used as examples of his arrangements 2 contracts entered into with a different labour hire firm, being a 'Conditions of Engagement' dated 19 February 2015, accompanied by an 'Independent Contractor Agreement Terms' statement. Mr Douglass considered that these documents were typical of the contractual arrangements under which the Partnership operated. Some of the relevant terms of the contracts are as follows:
1. an explicit agreement that the relationship was that of an independent contractor, not employment; 2. the payments were made by instalments or at the end of engagements; 3. the engagement could be terminated without notice, with Mr Douglass only entitled to payments for work
performed; 4. Mr Douglass had an obligation to perform `the services' carefully and efficiently and in compliance with
any performance standards and time limits agreed before or during the contract period; 5. Mr Douglass had permission to do other work, provided it did not prejudice contractual performance; 6. Mr Douglass could delegate the service performance (subject to the labour hire firm's written consent, and
insurance against liability for delegate injury); 7. there was acknowledgment of the client's ownership of `all inventions, improvements or discoveries ...
made whilst performing the services'; 8. there was an obligation for `the contractor' to `ensure that they present themselves for work wearing
appropriate clothing and footwear'; 9. there were alternative obligations for the client to pay the `amount agreed' either:
(a) at the end of the contract, (b) by instalments in response to invoices; or (c) as agreed; 10. the contractor had responsibility for all expenses incurred in providing `the services'; 11. the labour hire firm's was entitled to terminate the contract without notice when the client no longer required the services; and 12. the contractor's payment entitlement for all `services' provided before contract termination.
Mr Douglass' work required extensive use of sophisticated computer systems and software, which contracted engineers of the client were typically not required to provide. Contractors were, in fact, often prohibited form introducing such items into the workplace or project environment.
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Mr Douglass conducted his own research as to the tax efficacy of his arrangements. He had consulted a media release issued by the Commissioner on 13 December 2015 entitled `Refocus of the Income-Splitting Test Case Program, a High Court decision he had seen publicised on the ATO website some time in about 2006, ATO Practice Statement PS LA 2005/24: Application of general anti-avoidance rules, the ATO Guide `Part IVA: The General Anti-Avoidance Rule For Income Tax' and possibly a February 2006 publication by the Independent Contractors Association. From this research Mr Douglass concluded that income splitting was permissible notwithstanding the PSI rules.
On 3 November 2015, following an audit of Mr Douglass' affairs, the Commissioner issued amended assessments to Mr Douglass, applying the 'personal services income' rules in the ITAA 1997. The Commissioner formed the opinion that Mr Douglass had engaged in fraud or evasion and issued amended assessments for Mr Douglass' for the 2006, 2007, 2011, 2012, 2013 and 2014 tax years. The fraud or evasion finding was not necessary for the 2013 and 2014 tax years (the Relevant Years) as the amended assessments for those years were issued within the 4 year statutory period to issue amended assessments under section 170 of the ITAA 1936 but the four year period had expired for the 2006, 2007, 2011 and 2012 tax years (the Earlier Years).
The Commissioner imposed a 50% penalty on the shortfall amounts, on the basis that Mr Douglass was reckless about the operation of the PSI provisions. The Commissioner noted that the PSI provisions were not an overly complex area of law, with readily available information available on the ATO website. Additionally, Mr Douglass did not make further enquiries or seek expert advice on the correct tax treatment.
On 8 December 2015 he objected to the amended assessments. Mr Douglass contended that the Partnership conducted a `personal services business' (PSB) and, therefore, that his income was exempt from being treated as `personal services income' assessable to him personally pursuant to section 85-4 of the ITAA 1997. Mr Douglass contended that he satisfied the 'results test' in section 87-18 of the ITAA 1997.
To satisfy the results test, it was necessary for the following conditions to be met:
1. at least 75% of the Partnership's PSI arose from contracts for `producing a result' (Result Criterion); 2. the Partnership is required to provide the plant or tools needed for the work performed (Tools Criterion);
and 3. the Partnership is liable for the cost of remedying any defective work (Liability Criterion).
Mr Douglass also objected to the amended assessments for the Earlier Years on the basis that the Commissioner should not have formed an opinion of fraud or evasion.
On 23 July 2016 the Commissioner disallowed Mr Douglass's objection.
Mr Douglass applied to the Tribunal for a review the objection decision in relation to the Relevant Years. Mr Douglass also challenged the Commissioner's fraud and evasion opinion for the Earlier Tears in separate Federal Court proceedings and those proceedings resolved on the basis that the Commissioner would withdraw the assessments for the Earlier Years.
It was common ground that Mr Douglass did not satisfy any other test to qualify as a PSB.
Mr Douglass submitted that the Partnership satisfied the Result Criteria because:
1. the fact that the invoices used an hourly rate was not by itself conclusive; 2. the terms of the Independent Contractor Agreement demonstrated that Mr Douglass was paid for the
completion of a particular task; 3. that `custom or practice' was a determinative consideration, even where the contractual terms were
contrary to the custom and practice; 4. regard should be had to the following:
(a) there was an industry wide expectation that roles like his were typically terminable on 5 days' notice;
(b) the contracts typically involved work on 'huge', long duration infrastructure projects with many components and progress reporting obligations;
(c) it was typically impossible or impractical to specify discrete results achieved at the outset of any contract engagement;
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(d) it was ordinary part of his role to develop 'discrete results'; (e) contractors typically understood they would not be paid for defective work, that they had a
responsibility to rectify defective work, and worked long hours to catch up with slipping milestones; (f) contractors carried their own professional indemnity insurance; and (g) all engineers, whether employed or independently contracted, worked to 'achieve a result'; 5. there were 19 'deliverables' for which he was responsible for the project he worked on in the 2011 to 2014 tax years. This included the preparation of project design documentation and work schedules, software system design and configuration, hazard management procedure documentation, the preparation of user manuals, and testing commissioning and handover procedures; 6. Mr Bedford, a control systems principal engineer involved in Mr Douglass' project, provided a statement detailing Mr Douglass' role as including responsibility for the delivery, technical quality, integration and adequacy of all electrical controls and instrumentation, `ensuring' the safety and efficiency of the construction, providing technical supervision, staffing resources, and quality controls. He also referenced 14 specific responsibilities of Mr Douglass' lead engineer role, which he believed to constitute producing a result; and 7. evidence from Messrs Vodermeier, White, Lacy and Janossich, being other engineers or professionals involved in the infrastructure projects, who all made general claims that independent consultants were engaged to achieve specific results, as they had responsibility for completing complex multi-disciplinary infrastructure projects. However, they all failed to provide clarity or specificity with those claims.
The Commissioner submitted the fact that Mr Douglass had to use the equipment of the client to complete his work meant that he failed the Tools Criterion.
In relation to the Liability Criterion, Mr Douglass submitted that service providers understood their responsibility to perform their work to appropriate standards, to rectify defective work and work long hours when necessary to meet milestones. Where there was an error, contractors would typically bear the cost of rectification work, often working longer hours than they billed. Mr Douglass submitted he was required to carry professional indemnity insurance. However, Mr Douglass failed to provide details of any insurance policy and had previously submitted to the ATO he did not have an insurance policy.
Mr Douglass' submissions in relation to the Tools Criterion and Liability Criterion were ultimately irrelevant, as the proceedings were decided on the Result Criteria.
In relation to penalties, Mr Douglass contended that had a reasonably arguable position and, presumably, therefore he had not been reckless.
The Commissioner disputed this contention, noting that for there to be a reasonably arguable position, the position must be on a contentious area of law, where the law is unsettled, or the principles are unsettled and there is a serious question about the application of those principles to the facts. The Commissioner noted there was existing case law which was analogous with Mr Douglass' facts.
Issues
1. Was the partnership a PSB for the purpose of the personal services income rules? 2. Should a 50% base penalty have been imposed on the basis that Mr Douglass was reckless about the
operation of a taxation law?
Decision
PSB?
The satisfaction of the Results Criterion was the main focus of the Tribunal.
The Tribunal, referencing previous case law, noted that the results test required a consideration of any `custom or practice' in relation to the matters to which that criterion relates but custom and practice could not be applied where it was inconsistent with the actual contractual arrangements, consistent with the approach set out in Taneja v Federal Commissioner of Taxation [2009] AATA 87.
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The Tribunal acknowledged that, while the alternative payment obligations in the Independent Contract Agreement supported Mr Douglass' contention that the income was for producing a result, the overall content of the terms indicated a primary contemplation that the contractual obligation was to provide 'services'. The documents contemplated termination by the passage of time, or by notice, and described the role as providing services, rather than results. No payment was linked to, or created an obligation to produce, a specific result. The documents alone did not satisfy the Results Criterion.
The Tribunal rejected Mr Douglass' assertion that all engineers, regardless of the nature of their engagement, worked to `achieve a result'. The Tribunal considered this incorrectly conflated the concept of `working for a result' with the concept of `income.... for producing a result'. The fact that a person is working for the completion of a profit or that they have specific responsibilities in relation to components of the work, does not mean that the income that they earn from the work is 'for producing a result'.
The Tribunal noted that accepting Mr Douglass assertion that all independent contractors are expected to achieve a result would result in every independent contractor providing personal services satisfying the Results Criterion.
The Tribunal noted that the question posed by the Results Criterion requires consideration of the character of the income a taxpayer receives. The Tribunal noted it was easy to understand why Mr Bedford, being management, would view the description of Mr Douglass' role as imposing responsibilities to achieve an outcome. However, this is not the test the test is whether the income to be received is linked to achieving an outcome. The mere specification of duties directed to achieving a task does not satisfy the test.
Whilst it was not necessary to consider them given the conclusion on the Results Criterion, the Tribunal noted that:
1. the Tools Criterion was not satisfied as Mr Douglass had to use the client's equipment in order to complete the work; and
2. the Liability Criterion was not satisfied as there was not sufficient evidence that Mr Douglass would ever be held liable for a defect. At the highest, the evidence only established that there was a service quality standard. Further, the work that Mr Douglass undertook was a cooperative endeavour with the client such that it would be unlikely that the client would seek to blame Mr Douglass for any defect.
Penalties
The Tribunal concluded the Commissioner was justified in finding Mr Douglass' behaviour amounted to recklessness. The Tribunal noted the difficulty with Mr Douglass' arguments were the inability to draw attention to any specific basis for his original argument, his inability to identify any contractual obligation to produce results, his inherent conflating of the distinction between employees and 'genuine independent contractors', his assertions that all engineers worked or were engaged for results and a failure to appreciate the extent to which decided case law involved facts essentially similar to Mr Douglass' circumstances.
The Tribunal concluded Mr Douglass' view that income splitting was permissible on the basis of his own research was problematic. The documents Mr Douglass relied on dealt with the wrong provisions, being the general antiavoidance rules in Part IVA of the ITAA 1936, not the PSI provisions. Additionally, Mr Douglass could not point to the specific High Court decision that he based this view on, and he selectively quoted from the documents he did cite. The Tribunal concluded Mr Douglass reliance on his own research amounted, as a minimum, to gross carelessness.
Citation Douglass and Commissioner of Taxation [2018] AATA 3729 (SM P W Taylor SC, Sydney) w http://classic.austlii.edu.au/au/cases/cth/AATA/2018/3729.html
1.2 Tavern Operator enforceability of deed
Facts
Bronwyn Nixon was the registered proprietor of a property in Menangle Park. Bronwyn, and her brother, Gregory, were the directors and shareholders of Tavern Operator Pty Ltd acting as trustee for the Tallis Trading Trust.
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Tavern Operator operated a hotel and function business from the Menangle Park property.
In 2009, Bronwyn and Gregory took steps to acquire poker machine licences. The evidence indicated that the poker machines and corresponding expansion were required in order to secure the profitability of the hotel business.
By 2011, the cost of building work together with the payments required to obtain the poker machine licences, meant that Bronwyn and Gregory required urgent additional finance. Bronwyn and Gregory were introduced to Ron Brown and his son, James.
A Heads of Agreement was entered into in May 2012 under which James agreed to pay certain debts of the business and to arrange finance for the business, in exchange for Bronwyn and Gregory agreeing to appoint James as a director and shareholder of Tavern Operator and to transfer half of the Menangle Park property to him.
Between May and September 2012, James paid some of the debts of the business (amounting to around $200,000) using funds advanced to him by Ron.
During this stage, James and Ron directed a lawyer to prepare a more formal document (a deed) to reflect the Heads of Agreement.
The evidence indicated that a first draft of the proposed deed was changed significantly to remove references to further payments and funding. The final form of the deed was essentially an acknowledgement that a one-half interest in the Menangle Park property and in the business represented fair consideration for the amounts paid by James (the Deed). The amount lent by James up until the execution of the Deed was far less than had been contemplated by the Heads of Agreement.
On 21 September 2012, at a meeting at the Menangle Park property, Bronwyn and Gregory signed the Deed. Bronwyn and Gregory said that only Ron and Dominic Lambrinos, an adviser to Ron and James, were present during this meeting. Bronwyn and Gregory stated that Ron and Dominic said that the Deed was being signed just for security and that it would be `placed in a drawer'.
James and Ron insisted that they, Dominic and Lana, Ron's partner, were all in attendance at the meeting.
Lana signed the Deed as a 'witness' for Bronwyn and Gregory. Bronwyn and Gregory disputed this and provided a copy of the Deed without Lana's signature.
James did not sign the Deed during the meeting but, rather, signed it sometime later that day (on his evidence) or some days afterwards. James signature was witnessed by Patrick Moloney, the lawyer who had prepared various drafts of the Deed.
In 2015, James commenced proceedings in the Supreme Court of New South Wale, asserting rights under the Deed, and seeking a declaration as to his beneficial 50% ownership in the Menangle Park property, the shares in Tavern Operator and the units in the Tallis Trading Trust.
Bronwyn and Gregory contended that James did not have any enforceable rights under the Deed as:
1. the Deed had not been validly executed as a deed; 2. as the Deed was not a deed, it was not a validly binding contract as there was no consideration given by
James; 3. that Ron had made oral representations that the Deed would only be used as security for repayment of
James' money; and 4. that the oral representations made were false and misleading conduct or unconscionable conduct under
the Australian Consumer Law.
Issues
1. Was the Deed a validly executed deed? 2. If the Deed was not a deed, was it a legally binding contract?
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3. Was there an oral representation by Ron, acting as James' agent that the Deed was only to be used a security for the repayment of sums of money provided by James and did such an oral representation false and misleading conduct under the Australian Consumer Law?
4. Was the presentation of the Deed to Bronwyn and Gregory for signature unconscionable in all the circumstances pursuant to the Australian Consumer Law?
Decision
Execution as a deed
The Court preferred the evidence of Bronwyn and Gregory as to the circumstances of them signing the Deed. In particular, the Court noted that the copy of the Deed retained by Bronwyn and Gregory did not have Lana's signature on it and that it was the case that the James' witnesses had discussed the case amongst themselves.
As the Court considered that Lana was not in attendance at the meeting, it followed that the Deed was not validly witnessed by her and, therefore, was not a valid deed.
The Court rejected the submission that the requirement for attestation of a 'deed' simply meant that a witness needed to be present at the signature of the party to be bound, but did not require the witness to sign to signify that presence. This was in response to the contention on behalf of James that a witness was present when the Deed was signed by Bronwyn and Gregory, being Ron.
Legally binding contract
The Court held that there was no binding and enforceable contract, as the only consideration for the Deed was past consideration, being the funds already paid by James before September 2012, and past consideration is not good consideration for a contract.
False and misleading conduct
The Court noted that Bronwyn and Gregory's assertion that the agreement could be set aside because the oral representations by Ron were false and misleading could only succeed if Ron was the agent of James in making the representation. The Court considered that there was no evidence that actual authority was conferred on Ron by James for Ron to make representations outside of the terms of the Deed.
However, the Court considered that Ron had ostensible authority in that James had held out to Bronwyn and Gregory that Ron and Dominic were authorised to act on his behalf in relation to the overall transaction.
Through considering the evidence as a whole, the Court was satisfied that in a practical sense, the Nixons were left with the understanding that the terms of the transactions were being determined by Ron for James' ultimate benefit.
The Court considered whether the oral representations amounted to false and misleading conduct. The Court considered they did not as at the time the representations were made they were not made with the intention of obtaining an immediate beneficial interest in the Menangle Park property or the business. Instead, the Court considered it was genuinely intended that the Deed would only be used as security and it was only subsequently that James took advantage of it to claim an interest in the property and business.
Unconscionable conduct
The Court held that the presentation of the Deed to Bronwyn and Gregory for signature was unconscionable conduct in all the circumstances including:
the Deed contained a substantially amended agreement from that comprised by the Heads of Agreement; the amendments were to Bronwyn and Gregory's disadvantage as they removed any obligation for James to
arrange further finance; that the Browns demanded that Bronwyn and Gregory sign the Deed there and then; that the Browns discouraged Bronwyn and Gregory from seeking legal advice; and that the Browns did not explain the amendments to the Deed to Bronwyn and Gregory any way.
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Citation Brown v Tavern Operator Pty Ltd [2018] NSWSC 1290 w http://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWSC/2018/1290.html
1.3 Dixon and Citiline duty and stamping of instruments
Facts
Stephen Robert Dixon and Nick Mellos (the Trustees) as trustees for the bankrupt estate of Rostom Nasr applied to the Federal Court of Australia to extend a caveat that they had lodged over the property of Citiline Developments Pty Limited.
Citiline resisted the application and appeared to do so on the basis that it had contracted to sell the property to its sole director. Citiline sought to have the contract between Citiline and the sole director admitted into evidence. The contract had not been stamped for duty
The Trustees did not object to the contract being admitted into evidence, but Lee J in the Federal Court drew the parties attention to section 304 of the Duties Act 1997 (NSW), which relevantly provides as follows:
(1) An instrument that effects a dutiable transaction or is chargeable with duty under this Act is not available for use in law or equity for any purpose and may not be presented in evidence in a court or tribunal exercising civil jurisdiction unless:
(a) it is duly stamped, or
(b) it is stamped by the Chief Commissioner or in a manner approved by the Chief Commissioner.
After considering the matter, Lee J considered that the prohibition in section 304 did not prevent the contract being admitted as it was admissible in accordance with section 56(1) of the Evidence Act 1995 (Cth) and, the Evidence Act, being a Commonwealth law, had to be given preference over a State law in the event of any inconsistency. Accordingly, Lee J ruled that the contract was admissible.
Lee J then had cause to re-consider the issue.
Issue
Whether the unstamped contract was admissible in the Federal Court?
Decision
Lee J noted that in making his original decision, he had not considered the effect of section 9(3) of the Evidence Act. Section 9(3) provides as follows:
(3) For the avoidance of doubt, this Act does not affect a law of a State or Territory so far as the law provides for:
...
(b) the admissibility of a document to depend on whether stamp duty has been paid; or
As section 9(3) provides that the Evidence Act does not affect the operation of section 304 of the Duties Act, section 304 was not inconsistent with the Evidence Act and applied to the admissibility of the contract in the Federal Court.
As the contract was not stamped, it was not admissible in the Federal Court proceedings commenced by the Trustees.
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Citation Dixon (Trustee) v Citiline Developments Pty Limited, in the matter of Nasr (Bankrupt) [2018] FCA 1446 (Lee J, Sydney) w http://classic.austlii.edu.au/au/cases/vic/VSC/2018/524.html
1.4 H.E.S.T Australia and Inkley court ordered amendment to trust deed
Facts
H.E.S.T Australia Ltd is the trustee of the Health Employees Superannuation Australia Trust, with superannuation fund having been established on 30 July 1987.
H.E.S.T's board is comprised of an equal number of directors appointed by employer associations and employee associations.
As at 30 June 2016 the superannuation fund had 827,031 members with account balances totalling $33.8 billion. Out of this, 63,113 of the members were located in South Australia and they had account balances totalling $2.7 billion.
H.E.S.T had attempted to amend its deed on 27 occasions since the superannuation fund was established. The amendments to the trust deed had been made over time to implement various changes, including changes needed to meet regulatory requirements. The superannuation fund has only ever been an accumulation fund.
Clause 31 of the trust deed for the superannuation fund relevantly provides as follows:
31. AMENDMENT TO THE DEED OF RULES OR REGULATIONS
31.1 Deed or Rules Subject to any restriction on the powers of amendment of a Complying Superannuation Fund pursuant to the Applicable Requirements, and clauses 31.4, 31.5, 31.7 and 31.8 of this Deed, the Trustee may by supplemental deed or written declaration amend, delete from or add to all or any of the provisions of this Deed (including the provision of this clause) with effect from such date (whether before on or after the date on which the supplemental deed is executed or the declaration is made) as may be specified in that deed or declaration. ...
31.4 31.5
Except for an amendment deletion or addition which the Trustee considers necessary or desirable for securing or better securing relief from taxation in respect of any income of the Fund or any Benefits or for ensuring or better ensuring that this Deed conforms to any Law or the Applicable Requirements the effect of an amendment deletion or addition may not: (a) reduce a Member's Retirement Credit; (b) vary or affect to the detriment of a Member:
(i) the method of determining a Member's Retirement Credit; (ii) any vested or contingent rights that a Member or the Dependants of that Member have on the date the deed or declaration is effective in respect of the Member's Retirement Credit; or (iii) the method of calculating any benefit set out in this Deed; (c) impose a liability upon a Member to contribute a greater amount to the Plan without the consent of the Member or; (d) vary or affect any Benefit which on or prior to the date on which the deed or declaration is effective has become payable to a person pursuant to this Deed without the consent of that person; or (e) increase the obligations of an Employer under this Deed or any other Deed of Adoption or Deed of Amendment whether referred to in this Deed or not, or detrimentally affect any of the rights of an Employer thereunder without the consent of that Employer. An amendment deletion or addition may not authorise the making of any payment (other than an expense incurred pursuant to the provisions of this Deed) from the Plan to an Employer unless at least two thirds of the aggregate number of Members consent thereto.
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H.E.S.T became concerned about the lack of certainty as to the application of clauses 31.4 and 31.5 of the trust deed and its power to amend the deed. This also led to concerns as to whether the previous 27 amendments to the trust deed had been validly made.
Given this uncertainty, H.E.S.T decided to apply to the Supreme Court of South Australia for it to make orders to amend the trust deed under section 59C of the Trustee Act 1936 (SA). Section 59C relevantly provides as follows:
59C--Power of Court to authorise variations of trust (1) The Supreme Court may, on the application of a trustee, or of any person who has a vested,
future, or contingent interest in property held on trust-- (a) vary or revoke all or any of the trusts; or (b) where trusts are revoked--
(i) distribute the trust property in such manner as the Court considers just; or (ii) resettle the trust property upon such trusts as the Court thinks fit; or (c) enlarge or otherwise vary the powers of the trustees to manage or administer the trust property. (2) In any proceedings under this section the interests of all actual and potential beneficiaries of the trust must be represented, and the Court may appoint counsel to represent the interests of any class of beneficiaries who are at the date of the proceedings unborn or unascertained. (3) Before the Court exercises its powers under this section, the Court must be satisfied-- (a) that the application to the court is not substantially motivated by a desire to avoid, or reduce the incidence of tax; and (b) that the proposed exercise of powers would be in the interests of beneficiaries of the trust and would not result in one class of beneficiaries being unfairly advantaged to the prejudice of some other class; and (c) that the proposed exercise of powers would not disturb the trusts beyond what is necessary to give effect to the reasons justifying the exercise of the powers; and (d) that the proposed exercise of powers accords as far as reasonably practicable with the spirit of the trust. (4) An order made by the Supreme Court in the exercise of powers conferred by this section is binding upon all present and future trustees and beneficiaries of the trust.
H.E.S.T sought three broad categories of amendment:
1. variation of the power of amendment of the Trust Deed; and 2. variation of substantive provisions of the trust deed to reflect past amendments the validity of which has
been doubted; and 3. new proposed variations of substantive provisions of the Trust Deed.
Bruce Inkley, a member of the superannuation fund, was the defendant and had been appointed to represent the interests of beneficiaries and potential beneficiaries of the fund in the proceedings. The Australian Prudential Regulation Authority (APRA) was joined as an intervenor to assist the Court.
Issues
1. Whether the court has jurisdiction to make orders under section 59C in respect of the superannuation fund?
2. If the grounds in section 59C are satisfied, whether the court should exercise its discretion under section 59C to amend the trust deed?
3. Whether the grounds in section 59C necessary for the Court to exercise discretion under that section are satisfied?
Decision
Jurisdiction to make orders
Blue J in the Supreme Court of South Australia noted that there are 8 prerequisites that must be satisfied in order to exercise the discretion under section 59C of the Trustee Act as follows:
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1. an application is made by a trustee of a trust or a person with a vested, future, or contingent interest in property held on trust;
2. the interests of all actual and potential beneficiaries are represented in the proceeding; 3. the application is not substantially motivated by a desire to avoid or reduce the incidence of tax; 4. there is good reason to make the proposed variation; 5. the proposed variation would be in the interests of beneficiaries; 6. the proposed variation would not result in one class of beneficiaries being unfairly advantaged to the
prejudice of another class; 7. the proposed variation accords as far as reasonably practicable with the spirit of the trust; 8. the proposed variation would not disturb the trust beyond what is necessary to give effect to the reasons
justifying the exercise of the powers.
Blue J noted that none of the pre-requisites require a connection to South Australia and there was authority that no such connection to South Australia for the Court to entertain such an application: Retail Employees Superannuation Pty Ltd v Pain (2016) [2016] SASC 121.
Should discretion be exercised?
Blue J noted that, given the exhaustive nature of the pre-requisites, if they are satisfied, it would likely be appropriate for the Court to exercise its discretion. However, Blue J noted that a reason to decline an application may be that there is no or an insufficient connection between a trust and South Australia.
Blue J noted that there was a real and substantial connection with South Australia in these circumstances given the number of members who are located in South Australia and their account balances.
Blue J concluded that, if the pre-requisites were satisfied in this case, the discretion in section 59C should be exercised.
Were pre-requisites satisfied?
Blue J noted that the first three pre-requisites were satisfied but the remaining pre-requisites would need to be considered on an amendment by amendment basis.
Blue J considered that it was appropriate to make all amendments, albeit some with modification, apart from the following:
1. H.E.S.T sought that certain covenants of the trustee in the deed be removed on the basis that such covenants replicated covenants in the SIS Act. However, during the hearing Blue J expressed the preliminary view that the removal of many of the covenants would weaken the protection of the beneficiaries and he did not consider that the duplication of the covenants would overly burden the trustee. Blue J agreed to amend the covenants so that the wording was consistent with the equivalent covenants in the SIS Act;
2. H.E.S.T sought to remove a clause that provided that the trustee must establish a procedure in its constitution for the appointment and removal of Employer Representatives and Member Representatives, except as provided for in the SIS Act. Blue J considered that it was not in the best interest of members to remove this clause;
3. Blue J refused to remove a requirement that H.E.S.T maintain certain records for 10 years. H.E.S.T sought the removal of this clause on the basis that it mirrored its obligation under the SIS Act and, therefore, was otiose. Whilst Blue J considered such a clause was otiose whilst it mirrored the requirements of the SIS Act, he considered its removal would result in the members losing an existing protection should the requirements of the SIS Act change; and
4. Blue J refused to remove a clause requiring the trustee to make investments on an arm's length basis. This was an amendment that H.E.S.T sought removed as it mirrored the requirement of section 109 of the SIS Act. Blue J considered that the removal of the clause would result in members losing a protection in the event that section 109 of the SIS Act was repealed.
Citation H.E.S.T. Australia Ltd v Inkley [2018] SASC 127 (Blue J, Adelaide) w http://classic.austlii.edu.au/au/cases/sa/SASC/2018/127.html
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1.5 Appeal Update Sharpcan capital versus revenue
The Full Federal Court has disallowed the Commissioner's appeal from the decision of Pagone J in Sharpcan Pty Ltd and Commissioner of Taxation [2017] AATA (see our March 2018 tax training notes) in which it was held that expenses incurred by Sharpcan in obtaining a gambling operator's license (the need for which was caused by regulatory changes in Victoria) were on revenue account and, therefore, deductible.
In upholding the decision of Pagone J, a majority of the Full Court (Greenwood ACJ and McKerracher J) placed emphasis on the fact that the expenses were incurred in relation to an integrated business, being the hotel and gaming functions, and that the expenditure was incurred to preserve the hotel business as a going concern. The Full Court also noted that the mere fact that, had Sharpcan purchased the hotel with the gaming operator's license, the whole of the expenditure would be capital, did not determine the position of expenditure incurred in Sharpcan's circumstances, as the operator of an existing business.
Thawley J did not agree with the decision of the majority and would have allowed the Commissioner's appeal.
Citation Commissioner of Taxation v Sharpcan Pty Ltd [2018] FCAFC 163 (Greenwood ACJ, McKerracher and Thawley JJ, Melbourne) w http://classic.austlii.edu.au/au/cases/cth/FCAFC/2018/163.html
1.6 Appeal Update The Optical Superstore payroll tax and relevant contracts
The Supreme Court of Victoria has disallowed the Commissioner of State Revenue's appeal from the decision of Victorian Civil and Administrative Appeals Tribunal in The Optical Superstore Pty Ltd & Ors v Commissioner of State (Review and Regulation) (Corrected) [2018] VCAT 169 (see our August 2018 tax training notes).
The case concerned whether payments made by The Optical Superstore Pty Ltd to optometrists of amounts that The Optical Superstore Pty Ltd held on trust for the optometrists were amounts `paid of payable ... for or in relation to the performance of work' that they were deemed wages for payroll tax under the relevant contract provisions. Section 35 of the Payroll Tax Act 2007 (Vic) relevantly provides as follows:
35 Amounts under relevant contracts taken to be wages
(1) For the purposes of this Act, amounts paid or payable by an employer during a financial year for or in relation to the performance of work relating to a relevant contract or the re-supply of goods by an employee under a relevant contract are taken to be wages paid or payable during that financial year.
The Court considered that section 35 requires that amounts be characterised as a `payment' in order to be deemed wages under that section. The Court considered that the meaning of `payment' under the PTA does not extend to a return of money by `one person to another in circumstances where the second person earned that money from providing services to a third party and directed the money be deposited in the bank account of the first person and held in trust.'
Citation Commissioner of State Revenue v The Optical Superstore Pty Ltd [2018] VSC 524 w http://classic.austlii.edu.au/au/cases/vic/VSC/2018/524.html
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2 Legislation
2.1 Progress of legislation
Title
Income Tax Rates Amendment (Working Holiday Maker Reform) 2016
Superannuation (Objective) 2016
Introduced House
12/10
Passed House 17/10
Introduced Senate
7/11
Passed Senate
Assented
9/11
22/11
23/11
Treasury Laws Amendment (Enterprise Tax Plan No. 2) 2017
Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 2) 2017 Treasury Laws Amendment (2018 Measures No. 2) 2018 Treasury Laws Amendment (2018 Measures No. 3) 2018 Treasury Laws Amendment (2018 Measures No. 4) 2018 Treasury Laws Amendment (2018 Measures No. 5) Bill 2018 Treasury Laws Amendment (2018 Superannuation Measures No. 1) 2018 Treasury Laws Amendment (Accelerated Depreciation for Small Business Entities) 2018 Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) 2018 Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) 2018 Treasury Laws Amendment (Tax Integrity and Other Measures) 2018 Treasury Laws Amendment (Tax Integrity and Other Measures No. 2) 2018 Treasury Laws Amendment (Working Holiday Maker Employer Register) 2017
11/5 14/9
8/2 15/2 28/3
24/5 24/5 18/10 8/2 28/3 24/5 16/2
8/2 23/10
25/6 27/6 25/6
19/6 19/6 8/2 1/3 10/5 25/6 9/5
12/2 13/11
26/6 27/6 25/6
25/6 25/6 12/2 19/3 18/6 27/6 10/5
23/8
31/8
2.2 PAYG payments and denial of deductibility
A Bill, Treasury Laws Amendment (Black Economy Taskforce Measures No. 2) Bill 2018, has been introduced into Parliament containing changes to the ITAA1997 to deny deductions for payments for work and services where the payer was required to have withheld an amount from the payment and did not withhold or failed to report the payments to the Commissioner (either through standard reporting or Single Touch Payroll).
The Bill introduces a new section 26-105 into the ITAA 1997 that potentially denies a deduction for the payment of an amount or the provision of a non-cash business benefit where an amount is required to be withheld from the amount or paid to the Commissioner in respect of the non-cash business benefit under any of the following provisions:
1. section 12-35 (payments to employees); 2. section 12-40 (payments to directors); 3. section 12-47 (payments to religious practitioners); 4. section 12-60 (payments under labour hire and certain other arrangements); 5. section 12-190 (non-quoting of ABN), other than in the case of a supply of goods or a supply of real
property.
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The deduction is denied where the payer fails to withhold any amount from the payment. To satisfy the obligation to withhold (in order to avoid a denial of a deduction), it is sufficient that any amount has been withheld, irrespective of whether it is correct amount.
There is also no denial of a deduction where, at the time of the payment:
1. the payer has been supplied with an invoice or some other document on which the individual has quoted their ABN; or
2. the payment relates to a supply through an agent and there is an invoice or some other document quoting the agent's ABN; or
3. in the event that the individual supplies an invoice or some other document with an ABN but either the individual did not have an ABN or the ABN quoted is not the individual's actual ABN, the payer had no reasonable grounds to believe that the individual does not have an ABN, or that the invoice or other document does not quote the individual's ABN;
4. for a supply through an agent, there is an invoice or some other document with an ABN but either the agent did not have an ABN or the ABN quoted is not the agent's actual ABN, the payer had no reasonable grounds to believe that the agent does not have an ABN, or that the invoice or other document does not quote the agent's ABN;
5. the payer makes a voluntary disclosure to the Commissioner of its failure to withhold or report the payment before the Commissioner tells you that an examination of your tax affairs is to begin.
The changes in the Bill are to apply from 1 July 2019.
COMMENT there will be two interesting considerations if this Bill passes as is. One is the fact that the late
reporting of an amount withheld will prevent deductibility of an amount unless you make a voluntary disclosure. The other is that it is unclear in many instances whether the entity required to withhold and remit is the employer of a person, or the payer of the person.
w http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fbillhome%2Fr6199 %22
2.3 Removal of GST on feminine hygiene products
At the Council on Federal Financial Relations meeting on 3 October 2018, the Commonwealth and States and Territories agreed to make feminine hygiene products GST-free from 1 January 2019. A consultation paper was released by Treasury on 8 October 2018.
The following definition of `feminine hygiene products' has been proposed:
`Feminine hygiene products' refers to:
(a) products that are specifically designed to absorb or collect menstrual or vaginal blood, such as tampons, pads and menstrual cups; and
(b) panty liners and maternity pads specifically designed to absorb or collect menstrual or vaginal blood.
w https://treasury.gov.au/consultation/c2018-t333064/
2.4 Director Identification Numbers
Treasury has released draft legislation providing for the modernisation of the Australian Business Registers and the creation of Director Identification Numbers (DIN).
The DIN regime is being proposed to combat phoenix activity. The DIN will require all directors to confirm their identity and will be a unique identifier for each person who consents to being a director.
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The draft legislation requires that a director of a body corporate apply for a DIN within 28 days of becoming a director with existing directors have 15 months to apply from the date the new requirement starts. There are proposed to be civil and criminal penalties for failing to comply with the requirement.
There is no set start date for the measures, with the draft legislation setting out that a start date will be determined by proclamation.
w https://treasury.gov.au/consultation/c2018-t330649/
2.5 Reforms to superannuation work test
Treasury has released draft legislation for proposed reforms to the superannuation work test to provide a oneyear exemption from the work test for superannuation contributions to allow certain recent retirees to boost their superannuation balances if they met work test in the previous financial year.
To be eligible for the exemption, the draft legislation provides that:
the member must not meet the conditions of the work test in the contribution year; and the member met the conditions of the work test in the previous financial year; and the member has a `total superannuation balance' below $300,000 on 30 June of the previous financial
year; and the individual has not previously relied on the work test exemption.
There are also proposed consequential changes to the bring forward of the non-concessional contributions cap. Where a person has excess non-concessional contributions solely due to having made 'work test exemption contributions', they will not be entitled to access the bring forward non-concessional contributions cap. This is to prevent the use of bring-forward arrangements to obtain benefits equivalent to a three-year work test exemption.
The amendments are to apply from the 2020 financial year onwards.
w https://treasury.gov.au/consultation/c2018-t331580/
2.6 Small business CGT concession reforms
The Treasury Laws Amendment (Tax Integrity and Other Measures) Bill 2018, containing the proposed integrity changes to the CGT small business concessions, received Royal Assent on 3 October 2018. The Bill passed by the Senate contained an amendment under which the start date of the amendments was changed from 1 July 2017 to 8 February 2018.
w https://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r6092
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3 Private Binding Rulings
3.1 GST free sale of a going concern
Facts
A company is an Australian resident and is registered for GST.
The company acquired a residential property for arm's length consideration from an unrelated party.
No GST was payable as the sale of the property to the company was not a taxable supply. The supply to the company was not a GST free supply of a going concern or subject to the margin scheme.
A special condition in the contract allowed the company to delay settlement to enable the company to apply for a town planning permit and sub-division prior to settlement and conduct activities necessary to obtain the permit and approvals.
The company intended to build and sell townhouses.
The company exchanged contracts with a builder to build 4 townhouses on the property. Formal execution of the contract with the builder was deferred. The builder had been used by directors of the company previously in other property development activities conducted by them.
The company caused a draughtsperson to prepare a plan for the development and contracts for the sale of the townhouses off the plan were entered into. Building was intended to be commenced once a building permit had been obtained.
The existing building was demolished and a large tree was cut down so that the land was vacant land.
The company received approval for the subdivision of the property but the builder advised it was not going to proceed with the project.
The company decided to abandon the project and sell the vacant land as the planning permit was about to expire.
The planning permit was extended for further 12 months at the company's request.
The company entered into a contract to sell the property to a property developer, with settlement not yet having occurred.
The sale agreement made it clear that the sale of the land was a going concern.
The sale agreement also had a margin scheme clause in the event that the ATO considered that the sale was not a going concern.
The sale contract was conditional on the company proceeding to obtain the building permit in its own name with the permit transferred to the developer upon settlement of the sale and the company withdrawing from the townhouse off the plan sales agreements.
Under the contract, the developer was permitted to commence construction works on contract execution and before settlement and could commence selling those townhouses before settlement.
The developer is registered for GST.
The company introduced the developer to a real estate agent and made word of mouth promotion of the townhouses.
Issue
1. Is the supply of the property to the developer a GST free supply of a going concern?
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2. If not, is the company eligible to apply the margin scheme?
Decision and reasons
GST free supply of a going concern?
The ATO ruled that the supply was not a supply of a GST free going concern.
The ATO noted that the key question in these circumstances is whether subsection 38-325(2) of the GST Act had been satisfied, which relevantly provides as follows:
(2) A supply of a going concern is a supply under an arrangement under which:
(a) the supplier supplies to the *recipient all of the things that are necessary for the continued operation of an *enterprise; and
(b) the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as a part of a larger enterprise carried on by the supplier).
The ATO noted that the focal point for 38-325(2) is the identification of the enterprise as the identified enterprise is one for which the supplier must supply all things that are necessary for its continued operation.
The ATO considered that, when the activities undertaken by the property owner prior to entering into the arrangement with the developer were considered, it was appropriate to consider that it undertook such activities in pursuit of an enterprise of property development.
The progress of these activities had slowed whilst obtaining a builder. The proposed builder had been used by the directors previously but had ultimately decided not to proceed leaving the directors with the choice of appointing a new builder or simply selling the land without further development. The company chose the latter.
The ATO considered that the renewal of the building permit and the continued marketing of the townhouses by the company were more appropriately characterised as fulfilling contractual obligations rather than the continued operation of a land development enterprise.
The ATO considered that the termination of the off-the-plan sales was a factor indicating that there was not a continued operation of the enterprise. The ATO also noted, whilst the company held the property, plans and planning approvals, there were no arrangements with contractors and engineers for construction and these were some of the things that might constitute a continued enterprise.
The noted that the circumstances here were similar to those considered in Aurora Developments v FCT [2011] FCA 232 in which it had been held that the supply was not a GST free supply of a going concern.
Eligible for margin scheme
As the company was not related with the persons who sold it the property and did not acquire the property as a GST free supply or as a taxable supply, it was eligible to apply the margin scheme
ATO reference Private Binding Ruling Authorisation No. 1051399755068 w https://www.ato.gov.au/law/view/document?docid=EV/1051399755068
3.2 Small business CGT concessions 15-year exemption
Facts
The taxpayer acquired a two-storey building as joint tenants with their spouse.
The trustee of a trust established by the taxpayer and his or her spouse rented the first floor of the property and operated a caf business from the property. The business had been conducted since prior to the property being purchased by the taxpayer and his or her spouse.
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The taxpayer and his or her spouse were both directors and equal shareholders of the corporate trustee of the trust. The trustee acted in accordance with their directions and wishes.
The second storey of the building was leased to an unrelated party.
The first floor makes up 60% of the total floor space.
The taxpayer and his or her spouse are both over the age of 55.
The taxpayer commenced a marketing campaign to sell the property and was approached by an unrelated party to purchase the property.
It is intended that the property will be sold at the same time that the trust sells the business operated by the trust and is to take place as a move towards retirement for the taxpayer.
The taxpayer may assist with the business infrequently post-sale but would not be employed in the business.
The taxpayer does not carry on business in his or her personal capacity and has no plans to engage in business or employment in the future.
The trust is a CGT small business entity.
Issue
1. Will the basic conditions for the CGT small business concession be satisfied on the sale of the taxpayer's 50% in the property?
2. Will the small business 15-year exemption apply to disregard the capital gain made on the disposal of the taxpayer's 50% interest in the property?
Decision and reasons
Basic conditions
The ATO ruled that the basic conditions for the CGT small business concessions would be satisfied for the disposal of the property.
The ATO noted that the basic condition that needed to be considered here was the active asset test as there was no dispute that the other basic conditions were satisfied.
The ATO noted that the active asset test required the property to have been an active asset for lesser of 7.5 years or half the time it was owned by the taxpayer. An asset in an active asset at a point in time if it is used or held ready for use in a business carried on by the taxpayer, their affiliate or an entity connected with them.
Whilst an asset whose main use is to derive rent is not an active asset, any use of the asset by an affiliate or a connected entity is considered to be use by the taxpayer. Accordingly, an asset that is leased to a connected entity can still be an active asset.
The question was whether main use of the building was for the business of the trust, an entity that was an affiliate of and/or was connected with the taxpayer, or whether it was the leasing to the unrelated party.
The ATO referred to Taxation Determination TD 2006/78 which states that:
If an asset is used partly for business and partly to derive rent at any given time, it will be a question of fact depended on all the circumstances as to whether the main use of the asset at that time is to derive rent. No on single factor will necessarily be determinative, and resolving the matter is likely to involve a consideration of a range of factors such as:
the comparative areas of use of the premises (between deriving rent and other uses); and the comparative levels of income derived from the different uses of the asset.
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The ATO also referred to an example from the TD as follows:
Example 5 considers mixed use of a property:
Mick owns land on which there are a number of industrial sheds. He uses one shed (45% of the land by area) to conduct a motor cycle repair business. He leases the other sheds (55% of the land by area) to unrelated third parties. The income derived from the motor cycle repair business is 80% of the total income (business plus rentals) derives from the use of the land and buildings.
In determining if the main use of the land is to derive rent, it is appropriate to consider a range of factors. In this case, a substantial (although nevertheless not a majority) proportion by area of the land is used for business purposes. As well, the business proportion of the land derives the vast majority (80%) of the total income. In all the circumstances, the Tax Office considers the main use of the land in this case is not to derive rent and accordingly the land is not excluded from being an active asset by paragraph 15240(4)(e) of the ITAA 1997.
The ATO's reasons did not expand upon the application of the active asset test but presumably considered that the active asset test was satisfied as 60% the property was used in the business of an entity connected with the taxpayer.
15-year retirement exemption
The ATO ruled that the 15-year retirement exemption applied as:
the taxpayer continuously owned his 50% interest in the property for the 15-year period ending just before the CGT event;
the taxpayer will be at least 55 years old when he or she disposes of the property, and the disposal will happen in connection with his or her retirement.
ATO reference Private Binding Ruling Authorisation No. 1051394784847 w https://www.ato.gov.au/law/view/document?docid=EV/1051394784847
3.3 Mistaken superannuation contributions
Facts
The taxpayer is an Australian company that is a subsidiary of a global entity with a number of offices in cities around with the world.
The taxpayer offered a secondment to an employee in one of its overseas offices for a number of years.
Prior to the secondment, the taxpayer had been making superannuation contributions for the employee to Superannuation Fund A.
Sometime before the secondment, the employee joined a second superannuation fund (Superannuation Fund B) in accordance with professional advice that he or she had received. The employee directed that future superannuation contributions be made to Superannuation Fund B.
Due to a clerical error in its payroll department, the taxpayer continued to make superannuation contributions for the employee to Superannuation Fund A.
The taxpayer's payroll department realised the error and commenced making contributions to Superannuation Fund B.
The employee requested the trustee of Superannuation Fund A to return the mistaken contributions, which it did, and the employee directed the refund to contributed to Superannuation Fund B.
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Issue
1. Were the mistaken payments to Superannuation Fund A contributions? 2. Can the taxpayer claim a deduction for the payments?
Decision and reasons
Contributions
The ATO ruled that the payments were not contributions.
The ATO noted that, in accordance with Taxation Ruling 2010/1, contributions are anything of value that increase the capital of the fund that are provided with the purpose of benefiting a member or members of the fund. The ATO noted that this means that not every increase in the capital of the fund is a contribution as the person making the payment must have the purpose of benefiting a member or members of the fund.
The ATO considered that as the payments had been made to Superannuation Fund A by mistake, the taxpayer did not have the purpose of benefiting any member of Superannuation Fund A and, accordingly, the payments were not contributions.
The ATO also considered whether the conditions for restitution for mistake were satisfied such that the refund was not the provision of superannuation benefits. The ATO noted that a defence to a claim for restitution for a mistake is that the recipient has changed their position as a result of the mistake. The ATO concluded that Superannuation Fund A had not changed its position as result of the mistaken payments to it.
Entitlement to deduction?
The ATO ruled that the taxpayer was not entitled to a deduction for the payments but did not provide any reasons in support of this ruling.
ATO reference Private Binding Ruling Authorisation No: 1051397501819 w https://www.ato.gov.au/law/view/document?docid=EV/1051397501819
3.4 Prizemoney
Facts
The taxpayer is a professional and the recipient of a prize sponsored by a foreign organisation.
Nominations are made for the prize but a person is not able to nominate themselves.
The prize recognises outstanding individuals or organizations for their theoretical and practical achievements and the winner must be of good conduct.
The winners receive a certificate, a commemorative trophy and a monetary award.
Issue
Is the prize money assessable income?
Decision and reasons
The ATO ruled that the prizemoney was not assessable income.
The ATO noted that the prize would only be assessable if it was income according to ordinary concepts as no statutory provision makes it statutory income.
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The ATO noted that a receipt will be income according to ordinary concepts if it is a receipt arising out of a taxpayer's employment, business activities or income producing activities even if not directly related to any service provided by the recipient to the donor: see Commissioner of Taxation v Dixon (1952) 86 CLR 540.
However, windfall gains which result from winning a prize, a lottery or any other game of chance are not assessable. Further, a receipt that is a mere gift is not ordinary income.
The ATO noted that the following factors are to be considered in determining if a prize or gift is ordinary income:
the circumstances (how, in what capacity and reason) of the recipient receiving the prize or gift: Squatting Investment Co Ltd v. Federal Commissioner of Taxation (1953) 86 CLR 570;
whether the prize or gift is of a kind which is a common incident of the recipient's calling or occupation Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514;
whether the prize or gift is made voluntarily; whether the prize or gift is solicited: Hayes v. Federal Commissioner of Taxation (1956) 96 CLR 47; whether the prize or gift can be traced to gratitude engendered by some service rendered by the recipient
to the prize or gift donor; the motive of the prize or gift donor; and whether the recipient relies on the prize or gift for regular maintenance of themselves and any
dependants.
The ATO noted that in IT 2145 Income tax: BHP awards for the pursuit of excellence - whether assessable income the Commissioner ruled that, although the awards considered by the ruling will sometimes will be made in respect of achievements directly related to a winner's vocation or business, the nature of the award is that of a personal windfall or gain and therefore was not ordinary income. It was important in that case the recipient of the BHP award was chosen from six categories covering every occupation so that the award was open to all.
In contrast, in IT 2474 Income tax: assessability of payments received under the Military Skills Award Programme and IT 167 Treatment for income tax purposes of radio & television competition prizes cash prizes were found to be assessable income as the prizes were limited to specific occupations and, therefore, were an incident of the taxpayer's income producing activities.
In respect of the taxpayer's circumstances, the ATO noted as follows:
the prize is open to world-wide citizens from various fields; the prize is not a common incident of your occupation, it was made voluntarily by the foreign organisation
and the taxpayer did not nominate themselves or otherwise solicit the prize
As such, the prize was not assessable as ordinary income.
ATO reference Private Binding Ruling Authorisation No: 1051403690147 w https://www.ato.gov.au/law/view/document?docid=EV/1051403690147
3.5 Small business restructure rollover
Facts
Four persons are equal partners in a partnership that operates a cattle stud business. Two of the partners are married. One of the other partners is their adult child and the fourth partner is the child's spouse.
The partners will establish a trust that will be a non-fixed trust within the meaning of Schedule 2F of the ITAA 1936.
The adult child and their spouse will be directors and equal shareholders of the corporate trustee of the trust, primary beneficiaries of the trust and will be joint appointors of the trust.
The class of discretionary beneficiaries of the trust is limited to the family group as defined in section 272-90 of Schedule 2F of the ITAA 1936.
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A family trust election (FTE) will be made in respect of the new trust with the adult child specified as the test individual.
All partners are part of the adult child's family group within the meaning of schedule 2F of the ITAA 1936.
The partners are proposing to transfer all of the assets of the partnership to the trust and to operate the business through the trust. There are two main reasons for the restructure:
to simplify how the business is run; and to mitigate the risk the partners being exposed to in the operation of the business.
The assets being transferred include trading stock and plant and equipment.
The day-to-day operations of the business will continue to be run by all four partners after the restructure.
Issue
Will the requirement that there be no material change in ultimate economic ownership for the small business restructure rollover be satisfied?
Decision and reasons
The ATO ruled that the condition for the small business restructure that there be no material change in the ultimate economic ownership of the business was satisfied.
The ATO noted that, where there is more than one ultimate economic owner, that there be no material change of ultimate economic ownership required each individual's share of the ultimate economic ownership must not be materially changed.
The ATO noted that a transfer to discretionary trust would only ever satisfy the requirement that there be no material change in economic ownership if the discretionary trust is a 'family trust' and the special rule in section 328-440 of the ITAA 1997 applies.
The ATO notes that for section 328-440 of the ITAA 1997 to apply the assets must be included in the property of a family trust either just before the transaction or just after it and every individual who had the ultimate economic ownership of the asset just before the transfer must be a member of the family group just after the transfer takes effect.
The ATO noted that in this case as an FTE will be in place for the trust just after the transfer with the adult child as the specific individual, the assets will be included in the property of a family trust just after the transaction takes effect.
ATO reference Private Binding Ruling Authorisation No: 1051409463619 w https://www.ato.gov.au/law/view/document?docid=EV/1051409463619
3.6 GST and in-specie superannuation contributions
Facts
The taxpayer owns a commercial property and carries on an enterprise of leasing the commercial property. The taxpayer is registered for GST.
The commercial property is leased to a related entity which operates a motel and the taxpayer receives rent.
The taxpayer is to make an in-specie contribution to his self-managed superannuation fund (where he is the sole member) by transferring part of the property.
No monetary consideration will be paid by the SMSF.
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Part of the property will be leased by the SMSF to the entity operating the motel and the SMSF will receive rent.
The SMSF will be registered for GST.
Issue
Is the taxpayer making a taxable supply when he makes an in-specie contribution of commercial property to the trustee of his self-managed superannuation fund?
Decision and reasons
The ATO ruled that the transfer of the property was not a taxable supply.
They noted that for a supply to be a taxable supply it must be the case that the supply:
1. is made for consideration; 2. is made in the course or furtherance of an enterprise that the supplier carries on; 3. is connected with the Indirect Tax Zone; and 4. the supplier is registered or required to be registered.
The ATO considered that the issue here was whether there was any consideration for the supply.
The ATO noted that subsection 9-15(1) of the GST Act provides that consideration includes any payment, or any act or forbearance, in connection with, in response to or for the inducement of a supply of anything. For this purpose a payment can be in a non-monetary or in an in-kind form as stated in GSTR 2001/6.
The ATO noted that, if the SMSF is itself making a supply in relation to the contribution of the property, that supply may constitute non-monetary consideration for the supply of the commercial property.
The ATO noted that members of SMSFs obtain their rights or prospective rights in relation to the fund by way of the trust deed that creates the fund and that, whilst the contribution of the property may increase the capital of the SMSF, it does not result in the trust making a further supply to the members. Accordingly, the ATO considered that the only supply made by the trustee of the SMSF was upon the member obtaining an initial interest in the SMSF.
As the supply of the initial interest in the fund by the trustee is not a supply made in response, in connection with or for the inducement of the contribution of the commercial property, the SMSF did not provide consideration for the supply of the property.
The ATO considered whether the deemed consideration rule in section 72-5 of the GST Act applied. That rule deems a supplier to have received market value consideration where a supply is made to an associate and the associate either
is not registered or required to be registered, or acquires the thing supplied otherwise than solely for a creditable purposes.
The ATO noted that the taxpayer and the trustee of the SMSF are associates (in accordance with section 318 of the ITAA 1936) as the taxpayer benefits under the fund. However, as the SMSF will be registered for GST and will be leasing the commercial property such it is being acquired for creditable purpose, so that section 72-5 of the GST Act does not deemed the taxpayer to have received market value consideration.
Therefore, the taxpayer is not making a taxable supply upon making an in-specie contribution of commercial property to the SMSF.
ATO reference Private Binding Ruling Authorisation No: 1051414496068 w https://www.ato.gov.au/law/view/document?docid=EV/1051414496068
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4 ATO and other materials
4.1 Compensation from financial institutions
The ATO has published guidance on the tax treatment of the receipt of compensation from financial institutions.
The guidance considers the tax consequences where a person receives compensation for inappropriate advice or for paying for advice that they did not receive.
The ATO notes that the compensation can include compensation for a loss on an investment, a refund or a reimbursement of fees and interest.
The ATO notes that specific advice will need to be sought if the investments were on revenue account, the investments were held on trust or the compensation relates to a superannuation account.
Compensation for investment loss
The ATO notes that the tax consequences will depend upon whether the investment loss is in respect of investments disposed of or investments retainment.
Disposed of investments
Where the investments have been disposed of, the compensation can be treated as additional capital proceeds for the disposal of the investments.
If the investments were held for more than 12 months, you may be entitled to apply the CGT 50% discount to reduce the increased capital gain from the additional capital proceeds.
The ATO notes that this may requirement an amendment to your prior year assessments.
Retained investments
The ATO notes that if the investment has been retained, the cost base or reduced cost base of the investment will be reduced by the amount of the compensation.
Refund or reimbursement of adviser fees
The ATO notes that the tax consequences of a refund or reimbursement of adviser fees depends upon whether a deduction was claimed for the adviser fees.
If a deduction was claimed, the refund or reimbursement amount will be included in the person's assessable income.
If no deduction was claimed but the fees were included in the cost base or the reduced cost base of the investment, the cost base or reduced cost base must be reduced by the amount of the refund or reimbursement.
Interest component
The ATO notes that the interest component is ordinary income and is included in a person's assessable income in the year that it is received.
w https://www.ato.gov.au/Individuals/Income-and-deductions/In-detail/Compensation-paid-from-financialinstitutions/
4.2 Penalty increases for significant global entities
The ATO have noted that significant global entities (SGEs) face increased failure to lodge penalties, ranging from $105,000 to $525,000, where their reporting obligations are not lodged on time. This includes, but is not limited to
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income tax returns, FBT returns, activity statements, PAYGW annual reports, country by country reporting and general purpose financial statements.
An entity is a SGE for a period if it is one of the following:
a 'global parent entity' whose 'annual global income' is AUD$1 billion or more; or a member of a group of entities consolidated (for accounting purposes) where the global parent entity has
an annual global income of AUD$1 billion or more.
This definition includes both:
Australian-headquartered entities (with or without foreign operations) the local operations of foreign-headquartered multinationals.
An entity will also be an SGE if the Commissioner makes a determination that it such an entity.
Where a significant global entity is unable to meet a lodgement deadline due to exceptional or unforeseen circumstances, the entity should immediately contact the ATO and request a deferral.
w https://www.ato.gov.au/Business/Large-business/In-detail/Business-bulletins/Articles/Reminder--penaltyincreases-for-significant-global-entities-apply-to-all-approved-forms/
4.3 GST and benchmark market values non-commercial supplies
The ATO has updated its guidance on when a charitable organisation's supplies of accommodation and meals are GST free. An endorsed charity that supplies accommodation or meals for nominal consideration makes GST free supplies.
An endorsed charity will make a supply for nominal consideration where the consideration received satisfies any of the following tests:
less than 75% of the GST-inclusive market value for supplies of accommodation; or less than 50% of the GST-inclusive market value for supplies other than accommodation.
An endorsed charity can also use the cost of supply test which is where the supply is less than 75% of the cost to the endorsed charity for supplying something.
The benchmark market values are now more detailed and provide benchmark market rent base on zones within capital cities and some key regional cities, type of accommodation (houses and other dwellings) and number of bedrooms per dwelling type.
w https://www.ato.gov.au/Non-profit/Non-profit-News-Service/In-detail/Articles/GST-and-benchmarks-for-noncommercial-supplies/
4.4 Transition to retirement income schemes
The ATO has published new guidance on the tax treatment of transition to retirement income streams which changed from 1 July 2017.
The guidance notes that earnings from assets supporting transition to retirement income streams will be taxed at 15% regardless of the date the income stream commenced.
Income on assets supporting a transition to retirement income stream will now only be exempt current pension income where the member has reached age 65 or has otherwise notified the trustee that it has a nil cashing restriction as a result of retirement, permanent incapacity or terminal illness.
https://www.ato.gov.au/Super/APRA-regulated-funds/Paying-benefits/Transition-to-retirement-income-streams/
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4.5 Cryptocurrency guidance
The ATO have updated their guide on the tax treatment of cryptocurrencies following the conclusion of the consultation process with the public. The ATO's consultation focused on the following 4 issues:
1. Are there any practical issues that arise in relation to the CGT record keeping rules, so far as cryptocurrency transactions are concerned?
2. Are there any specific factors that you think they should take into account when developing further public advice and guidance about CGT record keeping for cryptocurrency?
3. Are there any practical issues in relation to complying with the taxation obligations that arise for each cryptocurrency to cryptocurrency transaction?
4. Are there any specific factors that you think they should take into account when developing further public advice and guidance about cryptocurrency to cryptocurrency transactions?
Broadly, the ATO noted that submissions were concerned about the burdensome nature of a transaction by transaction requirement to maintain records, with some suggesting that cryptocurrency transactions should be recorded on a fiat in and fiat out basis. The ATO disagreed with this suggestion, noting that normal record keeping rules apply to all cryptocurrency transactions, particularly given the availability of low cost software to track such transactions. Submissions also noted a practical issue was the high level of fluctuation in the value of cryptocurrency. The ATO acknowledged that while high fluctuations made it difficult to value cryptocurrency, because they are generally CGT assets, gains will not be realised until the time of disposal. Fluctuation in value was an issue applicable to all investments and did not warrant special treatment for cryptocurrencies.
The ATO have updated their cryptocurrency guidance, which can be accessed at https://www.ato.gov.au/general/gen/tax-treatment-of-crypto-currencies-in-australia---specifically-bitcoin/. The guidance has been revamped so that similar topics are aggregated for increased clarity, further details are provided about record keeping, and the ATO have published its view on the tax treatment of cryptocurrency received as a result of a chain split, which can be accessed here: https://www.ato.gov.au/general/gen/taxtreatment-of-crypto-currencies-in-australia---specifically-bitcoin/?page=2#Chain_splits.
w https://www.ato.gov.au/Newsroom/smallbusiness/General/Thank-you-for-your-feedback-on-cryptocurrency/
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