Legislation and government policy

Treasury Laws Amendment (2017 Enterprise Incentives No 1) Bill and a more flexible similar business test introduced

On 30 March 2017, the Treasury Laws Amendment (2017 Enterprise Incentives No 1) Bill 2017 was introduced into Parliament. The proposed changes will provide companies and listed widely held trusts with better access to previous year tax losses, and provide taxpayers with the choice to self-assess the effective life of certain intangible depreciating assets.

The Bill amends Income Tax Assessment Act 1997 and Income Tax Assessment Act 1936 to supplement the same business test with a more flexible similar business test – to be known as the “business continuity test”. If a company’s current business is a similar business to its former one, it will satisfy the similar business test. The amendments apply to income years starting on or after 1 July 2015.

The similar business test will focus on the identity of the business. It is not sufficient for the current business to be of a similar kind or type to the former business to meet the test.  The test compares all of the commercial operations and activities of the former business with all the commercial operations and activities of the current business in order to determine the similarity of the businesses. The following factors must be taken into account in considering if the current business is similar to the former business:

  • the extent to which the assets (including goodwill) used in the current business to generate assessable income were also used in the company’s former business to generate assessable income
  • the extent to which the activities and operations from which the current business generates assessable income were also the activities and operations from which the former business generated assessable income
  • the identity of the current business and the identity of the former business and
  • the extent to which any changes to the former business resulted from the development or commercialisation of assets, products, processes, services, or marketing or organisational methods, of the former business.

The Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 passed by the Senate

On 31 March 2017, the Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 was passed by the Senate with six Government amendments. The Bill will be returned to the House of Representatives for consideration of, and agreement to, the Senate’s amendments before they come into effect.

The Bill amends:

  • the Income Tax Rates Act 1986 to:
    • reduce the corporate tax rate for small businesses with an aggregated turnover of less than $10 million to 27.5% for the 2016-17 financial year, and progressively extend that lower rate to all corporate tax entities by the 2023-24 financial year; and
    • further reduce the corporate tax rate in stages so that by the 2026-27 financial year, the corporate tax rate for all entities will be 25%;
  • the Income Tax Assessment Act 1997 to:
    • increase the small business income tax offset to 16% of an eligible individual’s basic income tax liability that relates to their total net small business income from the 2026-27 financial year; and
    • enable small businesses with an aggregated turnover of less than $10 million to access most small business tax concessions, and small businesses with an aggregated turnover of less than $5 million to access the small business income tax offset;
  • the Income Tax Assessment Act 1936 and Income Tax Assessment Act 1997 to make consequential amendments.

Offshore tax evasion: Government update on investigations by taskforce

On 31 March 2017, the Minister for Revenue and Financial Services, Kelly O’Dwyer provided an update on offshore tax evasion. It was reported that 346 Australians with links to Swiss banking relationship managers, alleged to have actively promoted and facilitated tax evasion schemes, have been identified by the Serious Financial Crime Taskforce (SFCT) through a joint international investigation.

The Minister said information gathered throughout the course of international collaboration by the SFCT indicates that the Australians identified hold unnamed numbered accounts with a Swiss bank, which means that, by their very nature, they are likely to have been established to hide the identity of the owner. The Minister reported that 23 out of the 346 Australian identified have already come forward under ATO’s Project DO IT or have been previously subject to ATO compliance action.

The SFCT will conduct interviews with bank employees, taxpayers and lawyers, as part of its investigation into whether Australians identified in the data have failed to comply with their tax obligations or been involved in criminal activity. It was noted by the Minister that as revenue authorities continue to gather and share intelligence in the coming weeks, they expect to move quickly to identify the people who have deliberately promoted or been willingly involved in tax evasion schemes.

The Minister stated that anyone who is found to have offshore tax arrangements now and into the future, and who did not disclose under Project DO IT, will face the full force of the law, including significant financial penalties and possible jail time.

Despite the Minister’s comments, Taxpayers who may be affected by this announcement, and who did not disclose under Project DO IT, are encouraged to come forward as taxpayers who make a voluntary disclosure can generally expect a reduction in the administrative penalties and interest charges that would normally apply.

Diverted Profits Tax Bills passed by the Senate

The Treasury Laws Amendment (Combating Multinational Tax Avoidance) Bill 2017 and the Diverted Profits Tax Bill 2017 were passed by the Senate without amendment on 27 March 2017.

The purpose and aim of the diverted profits tax (DPT) has been previously discussed in Talking Tax Issue 71 and Issue 60.

The DPT will also complement the application of the existing anti-avoidance rules and capabilities available to the Commissioner, including:

  • the multinational anti-avoidance law, which is intended to clamp down on artificial profit shifting by major multinationals
  • the transfer pricing rules, which are intended to prevent multinational businesses from shifting their profits to low-tax jurisdictions, by setting unrealistic prices for their actual commercial or financial dealings with their related parties
  • the Part IVA general anti-avoidance rules, which are intended to protect the integrity of the tax system by ensuring that arrangements that have been contrived to obtain tax benefits will fail
  • promoter penalty laws, which operate to deter the promotion of tax exploitation schemes
  • the introduction of a new Tax Avoidance Taskforce to crackdown on tax avoidance by multinationals and high wealth individuals
  • new protections for whistle-blowers who disclose information about tax misconduct to the ATO and
  • increased penalties for breach of tax reporting obligations for global companies with incomes of $1bn or more.

Case law

Primary production land tax exemption refused by the Commissioner and the Courts

In Frontlink Pty Ltd v Commissioner of State Revenue [2017] VSC 121, the taxpayer was unsuccessful in its application to appeal a Victorian Civil and Administrative Tribunal (VCAT) decision ruling that it was not entitled to the primary production land tax exemption for various properties over a number of years.

This case highlights the importance of maintain contemporaneous evidence when seeking an exemption from land tax under the primary production exemption. It is also one of many recent cases concerning the primary production exemption, for instance Chief Commissioner of State Revenue v Metricon Qld Pty Ltd [2017] NSWCA 11 which was discussed in Talking Tax Issue 65.

The taxpayer was a land developer and lessor of land. The taxpayer owned land at Lyndhurst and Clyde North, Victoria and sought the primary production land tax exemption over the Lyndhurst and Clyde North lands during the 2010 to 2015 land tax years. The taxpayer also owned rural land near Shepparton, Victoria. It claimed that the Shepparton land was exempt in 2013 and 2014 when it was used primarily for primary production.

In Frontlink Pty Ltd v Commissioner of State Revenue [2016] VCAT 1339, the VCAT affirmed the Commissioner’s refusal to allow the exemptions sought for the Lyndhurst and Clyde North lands on the basis that the Taxpayer lacked sufficient evidence to satisfy the Tribunal that the exemptions applied. However, the Tribunal allowed the exemption for the 2014 year on the Shepparton land based on the evidence provided by a veterinarian on behalf of the taxpayer.

The Court dismissed the grounds of appeal for a range of reasons, including the taxpayer’s failure to establish the necessary burden of proof that the Lyndhurst and Clyde North lands were used for primary production.

Furthermore, it was found that some of the grounds of appeal were largely concerned with complaints of immaterial factual findings and errors and did not ground any error of law. Hence, they were generally found to be without merit.

Transfer of interest in a partnership held not dutiable

In Danvest Pty Ltd & Anor v Commissioner of State Revenue [2017] VSC 125, the primary issue before the Court what whether the sale and purchase of interests in a partnership constituted a transfer of dutiable property, or more specifically, a “transfer of an interest in an estate in fee simple” for the purposes of section 10(1)(ac) of the Duties Act 2000 (Vic) (Act).

The appellants contended that the interests that were sold and purchased were nothing more than “a species of personal property”, and that such interests “conferred no equitable proprietary interests in partnership assets”. They further contended that the interests did not comprise “an interest in an estate in fee simple”.

The Commissioner contended that the interests that were sold and purchased were sui generis equitable interests in each of the assets of the partnership; and, thereby, that such interests fall within the phrase “an interest in an estate in fee simple”.

The Court found that the manager of the partnership held a number of properties “for” the partners of the partnership, but otherwise has full legal ownership of the properties. Further, the Court found that these properties were ‘dutiable property’ within the meaning of s 10(1)(a)(i) of the Act as they were estates in fee simple over land in Victoria.

However, it was held that:

  • the interests acquired in the partnership were not interests in dutiable property, but were merely rights to any surplus assets of the partnership upon its dissolution. They were therefore not themselves dutiable property
  • there was no transfer of dutiable property. The only dutiable property was the properties which were owned by the manager of the partnership, and they were not transferred and
  • there was no change in beneficial ownership of any dutiable property.

AAT overturns refusal to grant extension of time

In Re Primary Health Care Limited and FCT [2017] AATA 393, a taxpayer was successful before the AAT in setting aside the Commissioner’s decision to refuse its extension of time request for the lodgement of its 2003 to 2007 income tax objections. The Commissioner’s decision was substituted with a decision that the taxpayer’s objections, lodged in 2015, were taken to have been lodged within the required time.

It was held by the Court, on balancing various relevant considerations, that the taxpayer should be granted an extension of time to pursue its claims on the basis of relevant case law, the reasonable explanation for the delay and the strong merits of the taxpayer’s substantive case.

The case highlights that where there are reasonable explanations for delay and a strong case for allowing objections, it should be expected that the Commissioner will accept the lodgement of income tax objections outside prescribed time limits.

ATO updates

Reverse charge to be applied in the precious metals industry

From 1 April 2017, a reverse charge of goods and services tax (GST) will apply to all business-to-business (B2B) taxable supplies of gold, silver or platinum.

Under the changes, those who buy gold, silver or platinum from another business will be required to report and pay the GST to the ATO when lodging their business activity statement (BAS).

However, those selling gold, silver or platinum to another business, will not be required to remit any GST on the sale to the ATO. Instead, they will need to clearly state that the sale is a reverse-charged sale on the tax invoice provided. This will also apply to a buyer who uses recipient-created tax invoices, and who will accordingly be responsible for reporting the sale when lodging their BAS.

The changes are intended to combat fraud in the industry and to make it easier and faster for businesses in the precious metal industry to meet their GST and reporting obligations.

Draft Goods and Services Tax Determination GSTD 2017/D1 sets out the Commissioner’s view on the changes, and the ATO also provides commentary on the changes on its website.

Broadly, the definition of “second-hand goods” in the GST Act will be amended to clarify that goods containing gold, silver or platinum (regardless of the form or fineness of the relevant metal) are not second-hand goods. This change will ensure that GST registered entities do not incorrectly claim input tax credits when buying gold, silver or platinum, regardless of its form.

However, not all goods that contain gold, silver or platinum will be excluded from the definition of second-hand goods. If something is not usually traded at a price determined by reference to the prevailing spot price of its metal content, it is not being traded for its metal value only – it has another character.

For example, collectibles and antiques are ordinarily bought and sold for their value as collectibles or antiques, rather than the value of any constituent gold, silver or platinum. Such items may therefore still qualify as second-hand goods.