1 Cases............................................................................................................................................... 4 1.1 Hacon refusal to make private ruling ......................................................................................... 4 1.2 News Australia derivation of interest income ............................................................................. 6 1.3 Sunraysia GST and sham ......................................................................................................... 8 1.4 Bisvic rural land and land tax................................................................................................... 10 1.5 Alexander duty and deceased estates..................................................................................... 14 1.6 Fordyce discretionary trusts and asset protection .................................................................... 16 1.7 Happy Days duty and superannuation custodians ................................................................... 17

2 Legislation..................................................................................................................................... 20 2.1 Progress of legislation................................................................................................................ 20 2.2 GST integrity measures bill ..................................................................................................... 20 2.3 Withholding tax foreign residents............................................................................................. 21

3 Rulings .......................................................................................................................................... 22 3.1 Employee remuneration trusts ................................................................................................... 22 3.2 Deductions for work related travel expenses .............................................................................. 24 3.3 GST redeliverers and low value imported goods ........................................................................ 26 3.4 GST on supplies made through electronic distribution platforms................................................. 27

4 Determinations.............................................................................................................................. 30 4.1 Division 7A and interposed entities............................................................................................. 30 4.2 ESS trusts and dividend equivalent payments............................................................................ 31 4.3 Benchmark Division 7A interest rate 2017/18 ............................................................................. 32

5 ATO materials ............................................................................................................................... 33 5.1 Companies carrying on a business............................................................................................. 33 5.2 ESS trusts and dividend equivalent payments............................................................................ 33 5.3 Liability of legal personal representatives ................................................................................... 34 5.4 UPE unitisation arrangements.................................................................................................... 35 5.5 ESS Statements ........................................................................................................................ 35 5.6 No ABN withholding................................................................................................................... 35 5.7 TFN withholding for closely held trusts ....................................................................................... 36 5.8 Plutus payroll arrangements guidance........................................................................................ 37 5.9 GST and scrap metal: code of compliance ................................................................................. 37 5.10 Foreign resident capital gains withholding .................................................................................. 38 5.11 Changes for DASPs for working holiday makers ........................................................................ 38

Our tax training notes are edited by Matthew McKee and prepared by members of our tax, property and estate planning team:

Amanda Comelli Matthew McKee Sam Ayoubi

Elena Mangioni Rachel Vijayaraj Taseen Rafi

Lauren Sieprath Ryan Miu

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About Brown Wright Stein

Brown Wright Stein is a medium-sized commercial law firm based in Sydney. We provide legal advice in the following areas:

Tax Dispute Resolution Corporate & Commercial Franchising Property Employment Estate Planning Elder Law Intellectual Property Corporate Governance Insolvency & Bankruptcy Our lawyers specialise in working with business owners and their business advisors, such as accountants, financial consultants, property consultants and IT consultants what we see as our clients' 'business family'. We develop long-term relationships which give our lawyers a deep understanding of our clients' business and personal needs. Over the years we have gained a unique insight into the nature of operating owner-managed businesses and the outcome is that we provide practical commercial solutions to business issues. At Brown Wright Stein, we believe in excellence in everything we do for our clients. It's this commitment that enables us to develop creative, innovative solutions that lead to positive outcomes.

This paper has been prepared for the purposes of general training and information only. It should not be taken to be specific advice purposes or be used in decision-making. All readers are advised to undertake their own research or to seek professional advice to keep abreast of any reforms and developments in the law. Brown Wright Stein Lawyers excludes all liability relating to relying on the information and ideas contained within. All rights reserved. No part of these notes may be reproduced or utilised in any form or by any means, electronic or mechanical, including photocopying, recording, or by information storage or retrieval system, without prior written permission from Brown Wright Stein Lawyers. These materials represent the law as it stood on 13 July 2017. Copyright Brown Wright Stein Lawyers 2017.

{/01729584:1}Liability limited by a scheme approved under Professional Standards Legislation

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1 Cases

1.1 Hacon refusal to make private ruling

Facts

Peter Hacon, Robert Hacon and George Hacon were the sons of Walter Hacon who died on 6 June 2012. Walter was a grazier during his lifetime with his extensive grazing business being conducted by Hacon & Sons Pty Ltd as trustee for the Hacon Family Trust. Hacon Pty Ltd was a beneficiary of that trust.

The Trustee's grazing business is conducted on four properties:

1. Buckingham Downs and Double Lagoon, which are owned by companies wholly owned by the Trustee; 2. Euraba, Franchar, Bunda Bunda and Nelia Ponds, which are owned by Robert; 3. Kallala and Wirrilyerna, which are owned by George; and 4. Granada, Ballaghmore, Tyndol and Cubbaroo, which are owned by Peter.

Business profits were generally distributed to Hacon Pty Ltd and it used such profits to acquire `off-farm assets' so that in bad years Hacon Pty Ltd could assist the funding of the business. Hacon has net assets of some $30 million.

From 2006, with Walter's health failing, Peter, Robert and George came to have a greater say in the operation of the grazing business.

After Walter's death, Peter, Robert and George decided to restructure the grazing business so that each of them, had greater control over that part of the grazing business conducted on the properties that they respectively owned.

On 20 May 2016 Hacon Pty Ltd, Peter, Robert and George made an application for a private ruling to the ATO. The application for a private ruling appeared to request that the Commissioner rule on the operation of the Part IVA to the `scheme' to give effect to the restructure.

On 12 July 2016 the Commissioner wrote to Hacon Pty Ltd, Peter, Robert and George advising he was considering declining to make the ruling, noting that he considered that he did not have sufficient information. In the letter, the Commissioner stated:

Consideration of the questions asked by section 177C and by section 177D properly requires the entire facts and circumstances (including surrounding circumstances) to be known, in order for the proposed scheme to be properly identified and analysed.

The whole of the circumstances which might comprise a `scheme' within the meaning of the questions do not appear to have been identified in the description.

In the letter, the Commissioner also expressly stated that the letter was not a request for further information but was merely notice of his intention to decline to make the ruling requested.

On 19 July 2016 the solicitors for Hacon Pty Ltd, Peter, Robert and George wrote to the Commissioner providing him with further information and noting that there was no legal basis for the Commissioner to refuse to rule. The letter stated that `if the Commissioner requires further details of the facts and circumstances that he requires to issue a private ruling, our clients will supply that information.'

Section 359-25 of Schedule 1 of the TAA provides as follows:

359-35 Dealing with applications (1) The Commissioner must comply with an application for a * private ruling and make the ruling.

However, this obligation is subject to subsections (2) and (3). (2) The Commissioner may decline to make a * private ruling if: (a) the Commissioner considers that making the ruling would prejudice or unduly restrict the

administration of a * taxation law; or

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(b) the matter sought to be ruled on is already being, or has been, considered by the Commissioner for you.

(3) The Commissioner may also decline to make a * private ruling if the matter sought to be ruled on is how the Commissioner would exercise a power under a relevant provision and the Commissioner has decided or decides whether or not to exercise the power.

Section 357-105 of Schedule 1 of the TAA provides as follows:

357-105

Further information must be sought

(1) If the Commissioner considers that further information is required to make a * private ruling or an

* oral ruling, the Commissioner must request the applicant to give that information to him or her.

Note: The Commissioner should make a private ruling within 60 days. However, if the

Commissioner requests further information under this section, that period is extended: see

subsection 359-50(2).

(2) The Commissioner may decline to make the ruling if the applicant does not give the information

to the Commissioner within a reasonable time.

Note: The Commissioner must give the applicant written reasons for declining to make a

private ruling: see section 359-35.

357-110 Assumptions in making private or oral ruling (1) If the Commissioner considers that the correctness of a * private ruling or an * oral ruling would depend on which assumptions were made about a future event or other matter, the Commissioner may: (a) decline to make the ruling; or (b) make such of the assumptions as the Commissioner considers to be most appropriate. (2) Before making the ruling, the Commissioner must: (a) tell the applicant which assumptions (if any) the Commissioner proposes to make; and (b) give the applicant a reasonable opportunity to respond.

On 17 August 2016 the Commissioner made a decision to refuse to make the ruling requested. The Commissioner contended that he was not required to make the ruling as the ruling would depend upon on which assumptions were made about a future event or other matter and, therefore, he could decline to make a ruling under section 357-110 of Schedule 1 of the TAA.

Hacon Pty Ltd, Peter, Robert and George appealed to the Federal Court of Australia for review of the Commissioner's refusal to make the ruling.

Issues

Whether the Commissioner's decision to refuse to make the ruling requested involved an error of law.

Decision

Logan J noted that section 357-105 requires that, where the Commissioner considers further information is required, the Commissioner must request the taxpayer to provide such information. Logan J held that the Commissioner's letter of 12 July 2016 was evidence that the Commissioner considered that further information was required and, therefore, the Commissioner was required under section 357-105 to request Hacon Pty Ltd, Peter, Robert and George to provide such information. As the Commissioner did not request such information, he made an error of law that amounted to a jurisdictional error. Accordingly, Logan J ordered that the Commissioner consider and determine the private application according to law.

In relation to the Commissioner's contention on the operation of section 357-110 of Schedule 1 of the TAA 1997, namely that the Commissioner could decline to rule as the ruling would depend upon on which assumptions were made about a future event or other matter, Logan J referred to the comments on Gummow J in CTC Resources NL v Commissioner of Taxation [1994] FCA 947 as follows:

An `assumption' in s 14ZAQ would not ordinarily be a fact or matter which, if given the Commissioner by the applicant, would assist the Commissioner to comply with the application for a private ruling. In such a case, if s 14ZAM applies, the Commissioner must request the supply of the information.

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...

... the Commissioner should not make assumptions as to information which the applicant might be given the opportunity to provide under s 14ZAM.

In other words, section 357-110 of Schedule 1 of the TAA is not dealing with assumptions as to a fact where the taxpayer could supply the necessary information to the Commissioner in relation to that fact.

Citation Hacon v Commissioner of Taxation [2017] FCA 659 (Logan J, Brisbane) w http://www.austlii.edu.au/au/cases/cth/FCA/2017/659.html

1.2 News Australia derivation of interest income

Facts

During the relevant years, News Australia Holdings Pty Ltd was the provisional head company of a multiple entry consolidated group. This group included News Limited and SRC Holdings Pty Ltd.

News Limited was a wholly owned subsidiary of News Australia and owned all of the shares in SRC between 2003 and 2011.

SRC was a company incorporated in the Cayman Islands and was a controlled foreign corporation in relation to the consolidated group. News Australia as the head company of the multiple entry consolidated group, was assessable on any attributable income of SRC.

From incorporation SRC had no employees and no operating expenses. Its assets were cash, receivables, intracompany debts and shares in wholly owned companies. Since incorporation, SRC applied its capital to make loans or provide financial accommodation to other members of the group in series of complex arrangements and transactions.

There was a loan agreement dated 28 April 2006 between News Limited and SRC covering a loan made by SRC to News Limited. The loan agreement provided for the payment of interest at the rate of 7.5% per annum (or 7% if prepaid) and had a maturity date of 31 May 2011 and was for an amount of AUD151,325,329. The loan agreement provided for interest to become due and payable as at 28 June in each year in which the loan remained outstanding. A further loan was made pursuant to the loan agreement in the 2006 year.

SRC accounted for its interest income on an accruals basis in accordance with generally accepted accounting principles consistent with the accounting policies of its ultimate parent, and relied upon the accrued amounts in its dealings.

Interest income of USD66,023,141 accrued to SRC in the 2010 income year pursuant to the loan agreement but it was not paid until 2 July 2010, the 2011 income year. SRC's general ledger and the unaudited balance sheet recognised a credit for interest of USD66,023,141 as at 27 June 2010. On 2 July 2010 the interest due was capitalised in accordance with the loan agreement.

Withholding tax was paid in respect of the interest on 8 July 2010.

News Australia's accountant formed the view that SRC's interest income was derived on a cash basis and not an accruals basis. In forming that opinion the accountant considered the Taxation Ruling TR 98/1 in which the Commissioner states as follows

17. When accounting for income in respect of a year of income, a taxpayer must adopt the method that, in the circumstances of the case, is the most appropriate. A method of accounting is appropriate if it gives a substantially correct reflex of income. Whether a particular method is appropriate to account for the income derived is a conclusion to be made from all the circumstances relevant to the taxpayer and the income.

...

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19. As a general rule, the receipts method is appropriate to determine income derived from investments. However, there are exceptions to the general rule (refer paragraphs 47...).

...

47. The general principle is that interest is only derived, or arises, when it is received or credited. This general rule is subject to the overall principle that the appropriate method is that giving a substantially correct reflex of income. So exceptions to the general rule include (but are not limited to):

interest from a business of money lending carried on by the taxpayer;

interest derived by a financial institution (Taxation Ruling TR 93/27); unless from a 'non-accrual loan' (Taxation Ruling TR 94/32);

interest from the everyday provision of credit as part of business activities (Taxation Ruling IT 2227);

interest derived by taxpayers, whose other income is calculated on an accruals basis, who invest in fixed or variable interest securities cum interest (Taxation Ruling TR 93/28); and

interest from deposits made in the ordinary course of carrying on a business, where the business income is properly assessable on the earnings basis, may be derived on a due and receivable basis. An example of this would be a large trading business that actively manages its funds on deposits.

The Commissioner assessed SRC on an accruals basis for the interest income despite the interest not being received by SRC until the 2011 income year. News Australia, presumably by way of an objection, argued that SRC was not in the business of money lending and was to be assessed on a receipts basis. News Australia further argued that, in any event, the Commissioner was bound by Taxation Ruling TR 98/1 to treat the interest as being derived on a receipts basis.

News Australia appealed to the Federal Court of Australia.

Issue

1. Whether the interest under the loan to News Limited was derived on a receipts or accruals basis during the 2010 year.

2. Whether the Commissioner was bound by TR 98/1 to treat the interest as being derived on a receipts basis.

Decision

Time of derivation

Pagone J referred to Brent v Federal Commissioner of Taxation (1971) 125 CLR 418 where Gibbs J explained that `the time of derivation of income is to be determined by application of ordinary business and commercial principles and depends, at least in part, upon which of the receipts (or cash) basis or the accruals (or earnings) basis of tax accounting gives the substantially correct reflex of the taxpayer's true income' [emphasis added]

Pagone J considered that an accruals basis provided a more appropriate reflex of SRC's true income for the following reasons:

1. SRC's own accounting records recognised the interest on an accruals basis; 2. whilst SRC had only made two advances in 10 years, its undertaking was substantial and the derivation of

interest income was significant; 3. there was no suggestion that payment of the accrued interest was uncertain; and

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4. whilst SRC may not have carried on a business of investment or of lending money, its income earning activities included the lending of money to, amongst others, its parent on commercial terms for reward.

Whether Commissioner bound by TR 98/1

Pagone J considered that TR 98/1 clearly provided that the general principle that interest is derived on a receipts basis needed to be read in the context of the general principle set out at [17] of TR 98/1 that the appropriate method of tax accounting was that which gave a substantially correct reflex of income in the case of a particular taxpayer and, therefore, that it would always depend upon the particular circumstances of the taxpayer. The Court noted the examples provided at [47] of TR 98/1 were not stated to be exhaustive and were provided as guidance to the application of the general principle that the appropriate method of tax accounting was that which gave a substantially correct reflex of taxpayer's income.

Pagone J considered that the Commissioner was not bound by TR98/1 on the circumstances of SRC.

Pagone J also noted that section 357-60 of Schedule 1 to the TAA 1953 provides that the Commissioner is bound by a ruling in relation to a taxpayer if the ruling applied to the taxpayer's circumstances and the taxpayer relied upon the ruling by acting or omitting to act in accordance with the ruling. Pagone J observed that it was not clear that the accountant's consideration of TR 98/1 in forming the view as to whether the interest was derived on an accruals or receipts basis satisfied the requirement of reliance for the purpose of section 357-60 of Schedule 1 to the TAA 1953

COMMENT in considering whether interest is derived on an accruals or receipts basis, consideration

should be given to the `qualifying security' definition in Division 16E of the ITAA 1936 which, under the TOFA rules, treats interest entitlements under deferred interest arrangements as assessable on an accruals basis. A loan will be a deferred interest arrangement where, for example, there is a fixed rate of interest per annum but the interest is not payable under the arrangement each year and, instead, is capitalised and repaid at some time after the end of a 12 month period. If it is sufficiently certain that a financial benefit will be provided or received during a financial year, it must be accounted for within that financial year.

Citation News Australia Holdings Pty Ltd v Commissioner of Taxation [2017] FCA 645 (Pagone J, Sydney) w http://www.austlii.edu.au/au/cases/cth/FCA/2017/645.html

1.3 Sunraysia GST and sham

Facts

Mr Erdogan operated a business of supplying casual labour to meet the seasonal demands of orchadists and vignerons (Growers). Mr Erdogan carried on his business prior to June 2011 through a company, Alper Harvesting Contractors Pty Ltd. The Growers paid Alper, who employed and paid wages to the casual labourers. As an employer, Alper was required to account to the Commissioner for PAYG deductions and to State authorities for payroll tax.

In 2011, Mr Erdogan engaged the services of a financial consulting entity, 'SME's R Us'. On their advice, Mr Erdogan altered the structure of his operations as follows:

1. Sunraysia Harvesting Contractors Pty Ltd was incorporated to be the trustee of the Sunraysia Harvesting Contractors Trust (the Sunraysia Trust). Mr Erdogan and his spouse were the beneficiaries;

2. Sunraysia took over the role that Alper had in contracting with Growers; and 3. Unlike Alper which directly employed casual labourers, Sunraysia subcontracted with three companies (the

Subcontracting Companies). The Subcontracting Companies would engage and pay the casual labourers. The Subcontracting Companies were accordingly liable to account for PAYG deductions and payroll tax.

After a few years, the Subcontracting Companies were placed into liquidation and deregistered. The Subcontracting Companies had unpaid PAYG debts at the time of deregistration.

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Following an audit of the arrangement between Sunraysia and the Subcontracting Companies, the ATO concluded that the arrangement between Sunraysia and the Subcontracting Companies was a sham. The Commissioner contended the arrangement was a scheme allowing Sunraysia to avoid remitting PAYG withholding deductions from amounts it paid to its employees.

The Commissioner gave effect to this finding by disallowing the deductions and input tax credits claimed by Sunraysia on supplies made by the Subcontracting Companies. The Commissioner determined that the amounts paid by Sunraysia to the Subcontracting Companies were not allowable deductions or creditable acquisitions. Deductions were allowed by reference to industry standards. GST shortfall penalties were imposed on Sunraysia. Mr Erdogan and Mrs Erdogan, being the beneficiaries of the Sunraysia Trust entitled to the income of the year in which deductions were reduced, received amended assessments and had shortfall penalties imposed as a result. Penalties were also imposed on Sunraysia for the failure to deduct and remit PAYG withholding amounts for the payments made to the employees

Sunraysia, Mr Erdogan and Mrs Erdogan objected to the assessments. The Commissioner disallowed these objections.

Sunraysia, Mr Erdogan and Mrs Erdogan subsequently made an application to the Administrative Appeals Tribunal for a review of the Commissioner's objection decision which was covered in out October 2015 notes.

The Tribunal concluded that Sunraysia, Mr Erdogan and Mrs Erdogan failed their discharge the onus of proof and agreed with the Commissioner's conclusion that the scheme was designed to avoid remitting PAYG deductions. Factors supporting this finding included:

1. evidence that suggested that the directors of the Subcontracting Companies were `straw men'. Namely, the directors did not perform any function in the management of the Subcontracting Companies, nor knew of the affairs of the companies. They were merely paid to assume a role as a member and director;

2. the failure to prove that the payments made from Sunraysia to the Subcontracting Companies were made in accordance with a contract to provide labour to meet Sunraysia's obligation to the Growers;

3. the absence from AAT proceedings of the two consultants from 'SME's R Us' who primarily worked on Sunraysia. The Court noted the 'SME's R Us' consultants could have provided evidence as to whether the arrangement was a sham;

4. that only one employee of the Subcontracting Companies was called for evidence. The Tribunal largely disregarded the credibility of the evidence of this employee. This was on the basis of the employee's affidavit being noteworthy for its brevity and the fact that responses provided in the witness box were largely in response to leading questions. The employee also failed to back up their employment status with group certificates or PAYG summaries;

5. the material in evidence included a `Services Agreement' between Sunraysia and one of the Subcontracting Companies for the provision by the Subcontracting Company of `services'. The document had been signed by someone described as Danny Wood. Mr Wood gave evidence that the signature was not his; and

6. over 100 documents were adduced in evidence as invoices from Sunraysia to the Subcontracting Companies. These were handwritten by Mr Erdogan in a pre-printed and numbered invoice book the type, the Tribunal observed, able to be purchased at newsagents. The invoices of the Subcontracting Companies were also written by Mr Erdogan.

Sunraysia, Mr Erdogan and Mrs Erdogan appealed to the Federal Court on the basis that the Tribunal had made an error of law in finding that the arrangement was a sham.

Issues

1. Whether the Tribunal erred in concluding that the arrangement was a sham. 2. Whether Sunraysia had the obligation to withhold and remit amounts for tax from the payments to the farm

workers.

Decision

Logan J dismissed the appeal.

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His Honour noted that the Federal Court's original jurisdiction for appeals from the Tribunal extends only to questions of law. His Honour doubted whether the notice of appeal filed by Sunraysia, Mr Erdogan and Mrs Erdogan stated any question of law. Rather, the notice of appeal largely (and impermissibly) sought to re-agitate questions of fact decided against the Applicants in the Tribunal.

His Honour concluded the Tribunal's findings were backed by persuasive evidence. His Honour commented that Sunraysia, Mr Erdogan and Mrs Erdogan failed to properly appreciate that the onus of proof fell upon them to prove that the assessments were excessive. The Commissioner was not required to prove the arrangement was a sham.

In terms of the question of whether Sunraysia was the entity with the obligation to withhold given it did not make the payments, Logan J noted that this point had not been raised in the Tribunal. Logan J considered that, in any event, Sunraysia clearly had a withholding obligation under either section 12-35 (salary and wages) or section 1260 (labour hire arrangements) of Schedule 1 of the TAA 1953 in circumstances where the Tribunal had concluded that the Subcontracting Companies had not employed anyone and the arrangements were a sham.

His Honor concluded his reasons for dismissing the appeal with:

In design, the structure put to Mr Erdogan by `SME's R Us' looks to be but a crude, interposed company of no worth, run by a straw man (a feature reminiscent of the `bottom of the harbour' behaviours of a generation ago) with `phoenix' successors. Whatever fiscal efficacy that had depended on its intended adoption in fact by Mr Erdogan. As it happened, he failed to show that he ever intended the key legal elements of the structure to take effect. The Tribunal's conclusion that, in respect of each such company, he failed to do this was reasonably open, for the reasons given by the Tribunal. That being so, in an appeal of this nature a principled restraint is called for by this Court in respect of the applicants' endeavours to disturb it.

COMMENT the issue of whether Sunraysia had an obligation to withhold under section 12-35 of Schedule

1 of the TAA 1953 is interesting in light of the ATO's recent acceptance (see ATO Materials below) that it is the entity making the payment that has the withholding obligation under section 12-35. This issue was not properly considered by the Federal Court as it had not been raised in the Tribunal and, further, there would likely have been an obligation to withhold under the labour hire arrangements withholding provision (section 12-60 of Schedule 1 of the TAA)

Citation Sunraysia Harvesting Contractors Pty Ltd (Trustee) v Commissioner of Taxation [2017] FCA 694 (Logan J, Brisbane) w http://www.austlii.edu.au/au/cases/cth/FCA/2017/694.html

1.4 Bisvic rural land and land tax

Facts

Bisvic Pty Ltd owned a parcel of land located south of Wollongong of approximately 28 hectares in size.

The land was made up of five distinctly identifiable parts. As at 30 June 2011, the land was used as follows:

1. as to 96.5% of the area, for the keeping of horses by a man named Mr Meharg under a lease (or, to use the deliberately neutral expression adopted by the Tribunal, `equine activities');

2. as to 0.26%, for residential purposes. This part consisted of a cottage occupied by Mr Meharg under a lease, and a second cottage occupied by Mr Pastrovic, who was a director of Bisvic;

3. as to 0.20%, by a third party, R&H Hancock Pty Limited, under a lease for its business of repairing and storing wooden pallets and animal skins;

4. as to a small parking area, for truck parking; and 5. the balance was the site of abandoned abattoir buildings.

Mr Meharg's equine activities on the land as at 30 June 2011 involved providing agistment for 30 to 40 horses owned by other people for an agistment fee. The fee covered the keeping of the horses and active care provided

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by Mr Meharg in the form of maintaining paddocks and fencing, and watering and hand-feeding horses where necessary.

After November 2011, the use of the land changed in these respects:

1. both leases to Mr Meharg were terminated; 2. Bisvic used the land formerly used by Mr Meharg for the purposes of Bisvic's own equine activities, which

were managed by Mr Meharg as Bisvic's agent; and 3. Mr Meharg continued to occupy his cottage as consideration for managing Bisvic's equine activities.

Bisvic's equine activities after November 2011 were more in the nature of horse trading rather than agistment, in which Bisvic:

1. acquired from the owners the horses formerly agisted on the land; and 2. granted to the former owners an option to reacquire the horses at a price equal to 110% of the price for

which Bisvic acquired the animals.

A stated commercial objective of Bisvic's activities was horse trading, and it was stated that the key to making a profit was quick turnover.

These arrangements remained in place as at 30 June 2012 and 30 June 2013 (which, in contrast to land tax generally, is when eligibility for an `unitilised value allowance' is assessed).

Bisvic claimed the land was entitled to the primary production exemption in section 10A of the Land Tax Management Act 1956 (NSW). After objecting to the assessments and appealing to the NSW Civil and Administrative Tribunal it was determined that the primary production exemption was not available. Bisvic then applied to the Chief Commissioner on the basis that the land was eligible to have an unutilised value allowance ascertained for its land value in the 2012, 2013 and 2014 land tax years pursuant to section 62J(1)(c) of the LTMA.

If the land was eligible for an unutilised value allowance, the allowance would have been deducted from the land's value in those land tax years, thus reducing the amount of land tax payable by Bisvic (under section 9A of the LTMA).

Section 62J(1)(c) of the LTMA provides, relevantly, that:

Land is eligible to have an unutilised value allowance ascertained for its land value as at 1 July in a year if [the land is]... as at midnight on 30 June in that year... a parcel of rural land ...which is zoned or otherwise designated under an environmental planning instrument so as to permit its use otherwise than as rural land, or its subdivision into two or more lots or portions, one or more of which has an area of less than 40 hectares (emphasis added).

The Chief Commissioner accepted that the land satisfied the latter elements of this condition (as to the zoning or other designation of the permitted uses of the land) but disagreed on whether the land was `rural land' at the relevant dates. The relevant date for ascertaining whether the land was rural land were as follows:

1. for the 2012 land tax year 30 June 2011; 2. for the 2013 land tax year 30 June 2012; and 3. for the 2014 land tax year 30 June 2013.

The reason for these dates being relevant is that, whilst a person is assessed for land tax for a land tax year based on taxable land owned at midnight on 31 December immediately preceding, the value of that land is determined as at the prior 1 July.

For the purpose of the unutilised value allowance, `rural land' takes its meaning from the Local Government Act 1993 (NSW), which, relevantly, provides as follows:

a parcel of rateable land which is valued as one assessment and exceeds 8,000 square metres in area and which is wholly or mainly used for the time being by the occupier for carrying on one or more

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of the businesses or industries of grazing, animal feedlots, dairying, pig-farming, poultry farming, viticulture, orcharding, bee-keeping, horticulture, vegetable growing, the growing of crops of any kind or forestry.

The parties accepted that the land was rateable, valued as one assessment and more than 8,000 square metres in area, but disagreed as to whether the land was `.... wholly or mainly used for the time being by the occupier for carrying on... the business ... of grazing'.

Issues

Whether the land was `rural land' at 30 June 2011, 30 June 2012 and 30 June 2013. To answer this issue, the Tribunal posed the following questions, which had to be considered with respect to each relevant tax year:

1. Who was the occupier of the land? 2. Did the occupier carry on the business of grazing on the land? 3. If so, did that constitute the whole or main use of the land?

Decision

Who was the occupier of the land?

Applying the Interpretation Act 1987 (NSW), the Tribunal found that a reference to `the occupier' in the Local Government Act should be read as a reference to all the occupiers of any part or parts of the land at a relevant time.

The occupiers of the land, therefore, were:

1. as at 30 June 2011, Mr Meharg, R&H Hancock, Bisvic and, arguably, Mr Pastrovic; and 2. as at 30 June 2012 and 2013, R&H Hancock, Bisvic, and, arguably, Mr Meharg and Mr Pastrovic.

Did the occupier carry on the business of grazing on the land?

The Tribunal referred to the meaning of `the business of grazing' in Hope v Bathurst City Council (1980) 144 CLR 1, where Mason J defined the business of grazing as `grazing activities undertaken as a commercial enterprise in the nature of a going concern, that is, activities engaged in for the purpose of profit on a continuous and repetitive basis.'

As to what might amount to `grazing activities', the Tribunal referred to Hope v Bathurst City Council (No 2) (1983) 52 LGRA, in which the court held that an arrangement under which the occupier of land, Mr Hope, accepted other people's stock on the land for a fee, where he grazed, watered and tended them under his control, amounted to a grazing activity for purposes of the definition. The Tribunal thought it uncontroversial that an occupier that keeps, waters and tends his own stock on the land, whether himself or through an agent, he also conducts a grazing activity.

The Tribunal found that Mr Meharg's agistment activities at 30 June 2011 were grazing activities that were conducted in a commercially systematic way. The commerciality of the activities was evidenced by the fact that the cost of maintaining agisted horses was passed back to their owners through agistment fees determined by reference to the number of horses maintained.

Therefore, the Tribunal was satisfied that Mr Meharg was carrying on the business of grazing on the land as at 30 June 2011.

The Tribunal found that after November 2011:

1. Bisvic undertook the activities of maintaining, buying and selling horses on the land, and that these constituted `grazing activities';

2. Bisvic undertook grazing activities for the purpose of profit on a continuous or repeated basis; but 3. Bisvic's equine activities did not constitute a commercial enterprise in the nature of a going concern.

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The Tribunal reached its conclusion because:

1. Bisvic's business model of horse-trading was commercially inconsistent. By granting an option to the former owners at an uplift of 10%, Bisvic significantly restricted its ability to sell the horses to third parties, and limited its maximum gross return to 10%;

2. the evidence showed that the directors of Bisvic were unconcerned by the costs of Bisvic's activities because their objective was to qualify for the primary production exemption under section 10AA of the LTM Act (this was also a factor used against them in former decisions);

3. Bisvic was never concerned with whether or not the 10% uplift actually covered its costs of holding the horses;

4. from November 2011 to 30 June 2012, Bisvic bought 26 horses and sold only 9. From 1 July 2012 to 30 June 2013 it bought 2 horses and sold 8, only one of which was sold for more than its purchase price, showing a lack of concern for quick turnover of horses; and

5. Bisvic made no enquiries of Mr Meharg as to the financial performance of the trading business and took no steps to ensure that its business model was implemented in a concerted way.

The Tribunal was not satisfied that Bisvic was conducting the business of grazing for the tax years 2013 and 2014. Therefore, the land was not `rural land' in those tax years.

What was the whole or main use of the land?

Due to the Tribunal's conclusion as to whether the land was `rural land', this question only needed to be answered in relation to the use of the land as at 30 June 2011.

The Tribunal noted that, although Bisvic leased most of the land to Mr Meharg and R&H Hancock, leasing is not properly considered as a separate use of the land following the decision in Chief Commissioner of State Revenue v Metricon Qld Pty Limited [2017] NSWCA 11).

The Tribunal noted that the proportion of land area used by Mr Meharg for his grazing business dwarfed the proportion used by all other occupiers combined but accepted the approach of Perrignon J in Hope v Bathurst City Council (No 2) that land area is not the only factor for determining what the `whole or main use' of the land is.

The Tribunal considered the various uses to which the land was put, including `the nature and intensity of such uses, the physical areas over which they extend, and the time and labour spent in conducting them.'

The Commissioner argued that R&H Hancock's use of the land was more intense than Mr Meharg's because the former engaged 3 employees to work on the land for 5 days a week, while the latter spent about 4 hours a day working on the land.

However, the Tribunal noted that R&H Hancock's use of the land was limited in application to a `minuscule portion' of the land. A hypothetical passerby would be unlikely to be aware of R&H Hancock's use, but would see evidence of Mr Meharg's work everywhere, with each fence, grazing horse, or feeding trough. The Tribunal considered, without making any conclusion, that the more intensive use of the land could be the use which impresses itself on the physical appearance of the land, not the use which had more people at work on a small part of the land.

The Tribunal found that:

1. Mr Pastrovic's occupation of his cottage was a minor use only; 2. the use of a small part of the land for truck parking was also a minor use; and 3. income from Mr Meharg's grazing business was used to fund the rent for his cottage, so his use of the

land for his grazing business was its primary use for him, rather than an adjunct to his use of the land for residential purposes.

As there were multiple occupiers of the land, each using and occupying a separate and distinct part of the land, the Tribunal found that factors such as economic value or intensity of the various uses were less helpful to determine the main use of the land than they would be in a case where a single occupier used land for various uses, where those uses physically overlap.

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The Tribunal found that there was no countervailing factor sufficient to outweigh the gross disparity in land area as the determining factor as to the whole or main use of the land.

Therefore, the Tribunal found that Mr Meharg's grazing business was the main use of the land as at 30 June 2011.

The Tribunal ultimately concluded that the land was `rural land' at 30 June 2011, but not on 30 June 2012 and 30 June 2013.

COMMENT the definition of `rural land' for the `unutilised value allowance' is different to the definition used

for the primary production exemption in section 10AA of the LTMA, which generally depends on whether the land is zoned rural. Therefore, where land is not zoned rural but is used for purposes that fall within the meaning of `rural land' in the Local Government Act 1993 (NSW) the unutilised value allowance may provide an alternative to the primary production exemption as, in such circumstances, to be eligible for the primary production exemption the use of the land must fall within the specified primary production categories and must have a `significant and substantial commercial purpose or character'. The conditions for the unutilised value allowance are not as strict.

It should be noted that it is not clear to what extent the land tax was reduced for Bisvic.

The concession for unitilised value would be more valuable in the other circumstances where it applies, which is where land is used or occupied as a single dwelling house, but subject to zoning or designation for industry, commerce, the erection of residential flat buildings, or residential subdivision.

TRAP in the year in which a property subject to an unutilised value allowance is sold, land tax is re-assessed

for the year of sale, and for up to four preceding years, as if the unutilised value allowance had not applied to the land.

Citation Bisvic Pty Limited v Chief Commissioner of State Revenue [2017] NSWCATAD 192 (A R Boxall, Senior Member) w http://www.austlii.edu.au/au/cases/nsw/NSWCATAD/2017/192.html

1.5 Alexander duty and deceased estates

Facts

Mrs Beryl Alexander died on 24 July 2015. Under her will, Mrs Alexander gave the residue of her estate to her three children in equal shares.

Mrs Alexander's estate consisted of her home, cash and a share portfolio with an estimated net value of $3.2million.

Following her death, the three children agreed to distribute the estate so that Mrs Alexander's son, Dennis, would receive the property and in exchange he would pay the difference between the agreed value of the property and his share of the estate to his two sisters in equal shares.

The consideration stated on the transfer for the property was $653,236 being the difference between the agreed value of the property ($1,640,000) and the agreed value of Dennis' share of the estate ($986,764).

On 5 May 2016, Dennis submitted the transfer to the Office of State Revenue together with a valuation by a registered valuer listing the market value of the property as $1,700,000 and a cheque for $50.00 (on the basis presumably that the property was coming from a deceased estate).

The Chief Commissioner assessed the transfer as dutiable and on 28 May 2016 issued a Notice of Assessment of duty of $47,827 less the $50.00 already paid (a balance of $47,777). The calculation was based on the dutiable value of the property being $1,700,000 (as per the valuation) and the one third reduction available pursuant s63(2) of the Duties Act. Section 63 relevantly provides:

(1) Duty of $50 is chargeable in respect of:

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(a) a transfer of dutiable property by the legal personal representative of a deceased person to a beneficiary, being: (i) a transfer made under and in conformity with the trusts contained in the will of the deceased person or arising on an intestacy, or (ii) a transfer of property the subject of a trust for sale contained in the will of the deceased person, or (iii) an appropriation of the property of the deceased person (as referred to in section 46 of the Trustee Act 1925 ) in or towards satisfaction of the beneficiary's entitlement under the trusts contained in the will of the deceased person or arising on intestacy, and

(c) a transmission application by a devisee who is also the sole legal personal representative, and (d) a declaration by an executor of a will under section 11 of the Trustee Act 1925 if the Chief

Commissioner is satisfied that the declaration is consistent with the entitlements of beneficiaries under the trusts contained in the will. (2) If a transfer of dutiable property is made by a legal personal representative of a deceased person to a beneficiary under an agreement (whether or not in writing) between the beneficiary and one or more other beneficiaries to vary the trusts contained in a will of the deceased person or arising on intestacy, the dutiable value of the dutiable property is to be reduced by the portion of the dutiable value that is referable to the dutiable property to which the beneficiary had an entitlement arising under the trusts contained in the will or arising on intestacy. [emphasis added]...

Dennis objected to the above assessment. On 26 August 2016, the Chief Commissioner issued an objection decision disallowing Dennis' objection. Dennis then applied to the NSW Civil and Administrative Tribunal for an review of the assessment under section 96 of the Taxation Administration Act.

Dennis argued that the amount assessed was incorrect for the following reasons:

1. the transaction was of a `non-commercial/family' nature; 2. the transfer was `in accordance with my mother's will and the powers given to the executors'; 3. the effect of the Chief Commissioner's assessment is to impose death duty on Mrs Alexander's estate and

death duty has been abolished in NSW; 4. the value of the estate as a whole should be included in the calculation; 5. that a proper assessment should take into account the provisions of subsections 63(1)(a)(i) and 63(2) of

the Duties Act as well as the Chief Commissioner's ruling or interpretations.

Issue

Whether section 63(2) of the Duties Act applied to reduce the dutiable value of the property by the value of Dennis' proportionate entitlement to the dutiable property or by their proportionate entitlement to the estate as a whole?

Decision

Senior Member Currie responded to Dennis' submissions as follows:

1. there is nothing in section 63(2) to support the contention that the private, family or `not-for-profit' nature of a transfer affects the assessment of duty;

2. it is correct for Dennis to note that it is within the power granted to executors to make an agreement with the beneficiaries as to the distribution of the estate but that is the very situation contemplated by section 63(2);

3. this submission was not supported by any evidence and otherwise had no basis. The statute is to be construed according to its terms;

4. section 62(3) is concerned with `dutiable property' subject of the transfer (which in this case was the property). There is no reason why the total estate value should be included in the calculation of duty; and

5. after considering the effect of subsections 63(1)(a)(i) and 63(2), the Chief Commissioner's assessment was correct.

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Senior Member Currie was satisfied with the methodology adopted by the Chief Commissioner in formulating the assessment issued on 28 May 2016 and ordered that the assessment of duty (for $47,740) and the Chief Commissioner's decision be confirmed.

COMMENT this decision may seem to be contrary to the Supreme Court decision in Tay v Chief

Commissioner of State Revenue [2017] NSWSC 338 (see our May 2017 training notes) where White J found that the beneficiaries under a will did not, by executing a Deed of Family Agreement, agree to a variation of the trusts of the will, but rather they consented to the trustee appropriating specific assets towards the entitlements of the beneficiaries under the will where the transfer then occurred in accordance with a power of sale. The difference in approach may be that in Tay the other beneficiaries received other assets of the estate, in greater proportion, in substitution for the assets that they had agreed that the single beneficiary could receive. By contrast, in this case, Dennis received the home and paid the difference between the agreed value of the home and his entitlement to it under the will to his sisters. If it had been the case that Dennis had, instead, foregone other estate assets, it may have been that section 63(2) would not have applied.

Citation Alexander v Chief Commissioner of State Revenue [2017] NSWCATAD 180 (Currie SM, Sydney) w https://www.caselaw.nsw.gov.au/decision/59378150e4b058596cba75cc

1.6 Fordyce discretionary trusts and asset protection

Facts

The Fairdinks Discretionary Trust specified two classes of beneficiaries. The first class included only Sean Quinn as the `principal beneficiary'. The second class included `general beneficiaries', an expression defined to include separate subclasses, being Sean Quinn's family members. Importantly, the second class included Sean Quinn's father, Michael Quinn, who was legally bankrupt. Michael Quinn was also the director and sole shareholder of the trustee company of the Fairdinks Discretionary Trust.

The trust deed for the Fairdinks Discretionary Trust specified that any distributions for the benefit of the beneficiaries were at the absolute discretion of the trustee in other words, it was a purely discretionary trust.

Additionally, the Fairdinks Discretionary Trust held units in the following unit trusts:

1. 2/3 of the units in the 99 George Street Unit Trust; and

2. all the units in the Shore Street Unit Trust.

Michael Quinn was also the director and sole shareholder of the trustee companies of both the 99 George Street Unit Trust and Shore Street Unit Trust. Following Michael Quinn's bankruptcy, the trustee companies were deregistered.

Ann Fordyce was the trustee in bankruptcy of Michael Quinn's estate. Ms Fordyce sought an order that the property held in the trusts above fell within the definition of `property' in sections 5 and 58 of the Bankruptcy Act 1966 (Cth). If the property of the trusts were `property' as defined in the Bankruptcy Act, such property could be distributed to the creditors of Michael Quinn's bankrupt estate. Ms Fordyce noted that all distributions made by the Fairdinks Discretionary Trust were made in favour of Michael Quinn, contending that a trust validly created can become a sham.

Usually, a beneficiary under a purely discretionary trust does not hold a proprietary interest in the trust property. Ms Fordyce submitted that the law is otherwise where a beneficiary controls the trust to a requisite degree, citing the decision of Australian Securities and Investments Commission v Carey (No 6) (2006) 153 FCR 509 (Richstar) and Kennon v Spry (2008) 238 CLR 366.

In Richstar French CJ considered that where a beneficiary effectively controls the trustee's power of selection or is the alter ego of the trustee, the beneficiary may have an interest `akin to a proprietary interest in the beneficiary', which would at the very least be a contingent interest. Importantly, the Bankruptcy Act defines `property' to include contingent interests. Although Richstar was not decided in the bankruptcy context, Ms Fordyce contended French CJ's reasoning was applicable in a bankruptcy context. Ms Fordyce cited evidence showing that all distributions made by the Fairdinks Discretionary Trust were made in favour of Michael Quinn.

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This alongside the fact that Michael Quinn controlled the trustee companies, Ms Fordyce submitted, meant that Michael Quinn effectively controlled the trustee's power of selection and, therefore, had a contingent interest in the trust which satisfied the definition of `property' in the Bankruptcy Act.

Kennon was a decision in the context of family law and involved a marriage breakdown. The Court held that the right to due administration and the equitable entitlement of the beneficiary of a non-exhaustive discretionary trust in relation to income and capital of the trust constitutes part of the property of the beneficiary as a party to a marriage for the purposes of section 79 of the Family Law Act.

Issue

Whether effective control of a trustee's power of selection can transform the interest of a beneficiary of a discretionary trust into property of the bankrupt.

Decision

Jackson J distinguished the position in relation to bankruptcy from that in Richstar and Kennon. His Honour noted it was difficult to accept the existence of a general principle that a beneficiary's legal or de facto control of the trustee of a discretionary trust alters the character of the interest of a beneficiary so that it will constitute property of the bankrupt in the event of a beneficiary's bankruptcy.

While Richstar may support a principle, his Honour noted that it has not been followed or applied since and has been criticised academically. His Honour similarly dismissed Kennon as irrelevant because the context of a marriage breakdown is not comparable to bankruptcy.

His Honour concluded it was not open to Ms Fordyce to contend that the interests of the Michael Quinn as a beneficiary were altered because of his actions in causing the trustee to make distributions to himself.

Michael Quinn's right as a general beneficiary under the Fairdinks Discretionary Trust did not vest in Ms Fordyce as property of his bankrupt estate. All that would occur if he received a distribution was that it would become `after acquired' property that would fall into the bankrupt's estate.

COMMENT when Richstar was first decided, there was considerable concern that it would herald a new

approach to asset protection and the use of discretionary trusts. However, the subsequent treatment of Richstar by both the courts and in academic commentary suggests that this initial concern was misplaced. It does not seem that Richster is being followed.

Citation Fordyce v Ryan & Anor; Fordyce v Quinn & Anor [2016] QSC 307 (Jackson J, Brisbane) w http://www.austlii.edu.au/au/cases/qld/QSC/2016/307.html

1.7 Happy Days duty and superannuation custodians

Facts

Happy Days Management Pty Ltd (HD Management) as trustee for a superannuation fund decided to purchase a property at Mosman in New South Wales. The sole member of the superannuation fund was Anthony Dickin.

HD Management needed to borrow from the bank to purchase the property and, accordingly, it needed to enter into a limited recourse borrowing arrangement. Anthony decided that FP Transitions Pty Ltd, a company of which he was sole director, secretary and shareholder, would be the custodian.

On 12 March 2015 HD Management and FP Transitions entered into a custody deed under which FP Transitions would purchase the property as custodian for HD Management.

On 17 March 2015 FP Transitions entered into a contract to purchase the property with a proposed settlement date of 28 April 2015. As the contract was an agreement for the transfer of dutiable property, it was dutiable.

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Sometime after 17 March 2015 the bank advised that FP Transitions was not a suitable custodian and required a non-trading corporate custodian as a condition of it providing the loan.

On 7 April 2015 Happy Days Property Pty Ltd (HD Property) was registered and a Deed of Discharge and Appointment was made between FP Transitions, HD Management and HD Property under which FP Transitions was replaced as custodian by HD Property

Due to unsatisfied requirements of the bank on 27 April 2015 between HD Management, HD Property and Anthony entered into a deed under which Anthony agreed to advance the required amount to permit the Fund to settle the purchase of the Property on 28 April 2015. It was envisaged that the loan would be re-financed by the bank within one month.

On 28 April 2015 the purchase of the property was completed.

On 30 April 2015, the contract was stamped with duty of $22,940 in respect of a dutiable amount of $610,000 and the Transfer was stamped at $10 pursuant to s 18(3) of the Duties Act 2001 (NSW). At the time, s 18(3) provided as follows:

(3) The duty chargeable in respect of a transfer of dutiable property that is not made in conformity with an agreement for the sale or transfer of the dutiable property is $10 if: (a) the duty chargeable in respect of the agreement has been paid, and (b) the transfer would be in conformity with the agreement if the transferee was the purchaser under the agreement, and (c) the transfer occurs at the same time as, or proximately with, the completion or settlement of the agreement, and (d) at the time the agreement was entered into, and at the completion or settlement of the agreement:

(i) the purchaser under the agreement and the transferee under the transfer are related persons, except as provided by subparagraph (ii), or (ii) if the purchaser purchased as a trustee, the transferee and the beneficiary are related persons. [Emphasis added]

On 8 May 2015 the loan by Anthony was refinanced by the bank.

On 19 June 2015 HD Management's accountants wrote to the OSR enclosing two copies of the declaration of the Custody Trust for stamping at $60 and outlining the history of the purchase as set out above.

On 7 July 2015 the NSW Civil and Administrative Tribunal handed down a decision in Rowntree Investments Pty Ltd v Chief Commissioner of State Revenue [2015] NSWCATAD 141. In that case, a transfer of a property to a custodian was determined to not be entitled to the concession under section 18(3) of the Duties Act as the custodian had not been in existence at the time the agreement was entered into and section 18(3) of the Duties Act required that the purchaser under the agreement and the transferee on completion or settlement be related parties both at the time the agreement was entered into and at the time of the completion or settlement of the agreement.

On 15 July 2015 the OSR responded advising that as HD Property was not registered until after the contract was exchanged, the transfer could not be stamped under section 18(3) and duty was payable at ad valorem rates. The letter enclosed a copy of the Rowntree decision. The letter also enclosed a Duties Notice of Assessment in the sum of $22,940. This duty was in addition to the $22,940 duty paid by FP Transitions on entering into the contract.

On 20 July 2015 HD Property objected to the assessment and, after the Chief Commissioner disallowed the objection, applied to the NSW Civil and Administrative Tribunal for administrative review of the objection decision.

HD Property contended as follows:

1. it was entitled to the section 18(3) concession as HD Property was the trustee of a trust of which Anthony was the sole beneficiary;

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2. the Chief Commissioner was required to properly assess duty and having stamped the transfer with $10 duty where the names of the purchaser on the contract and the transferee on the transfer were different, the Chief Commissioner was estopped from reassessing the transfer;

3. the Chief Commissioner had denied HD Property the opportunity to renegotiate the contract or minimise the impact of the additional duty; and

4. the Chief Commissioner had improperly relied upon the Rowntree decision as that decision was made after the Chief Commissioner had accepted and stamped the transfer with $10 duty.

Issues

1. Whether the transfer to HD Property was entitled to the duty concession under s 18(3) of the Duties Act. 2. Whether the Commissioner was estopped from re-assessing HD Property for duty. 3. Whether the Chief Commissioner had denied HD Property the benefit to renegotiate the contract. 4. Whether the Chief Commissioner had improperly relied upon the Rowntree decision.

Decision

Entitlement to section 18(3) concession?

The Tribunal agreed that, as HD Property was not registered at the date the contract to acquire the property was entered into, the conditions for the section 18(3) concession were not satisfied.

Was the Chief Commissioner estopped?

The Tribunal held that there was no basis for the Chief Commissioner to be estopped. The Tribunal noted the comments of Gzell J in BBLT Pty Ltd v Chief Commissioner of the Office for State Revenue [2003] NSWSC 1003, as follows:

It should be noted, however, that with few exceptions the courts have concluded that estoppel does not lie against a fiscal authority on the basis that the authority cannot be prevented from carrying out the public duties cast upon it by the legislation.

Denial of opportunity to re-negotiate contract

The Tribunal noted that the contract and transfer were not submitted to the Chief Commissioner until after completion of the purchase property and that `by that point of time it was too late'. In any event, the Tribunal considered that the only legal basis for such a submission was estoppel and that this had already been dealt with, as referred to above.

Improper reliance on Rowntree decision

The Tribunal rejected the contention that there had been improper reliance on the Rowntree decision noting that the relevant law applies by the terms of the statute, not because of the Rowntree decision.

COMMENT section 18(3) of the Duties Act has been amended since this decision (see State Revenue

Legislation Amendment Bill 2017) was handed down. However, under the current version of section 18(3) of the Duties Act it remains the case that the custodian must be in existence both at the time the agreement is entered into and at the time of completion or settlement of the agreement, as the custodian must have been, at both of those times, the custodian of the trustee.

Citation Happy Days Property Pty Ltd v Chief Commissioner of State Revenue [2016] NSWCATAD 289 (Isenberg SM, Sydney) w http://www.austlii.edu.au/au/cases/nsw/NSWCATAD/2016/289.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 (2017

25/5

15/6

22/6

Measures No 2) 2017

Treasury Laws Amendment (2017 Measures No 4) 2017

22/6

Treasury Laws Amendment (Accelerated Depreciation For Small Business Entities) 2017

25/5

31/5

13/6

15/6

22/6

Treasury Laws Amendment (Enterprise Tax Plan No. 2) 2017

11/5

Treasury Laws Amendment (Foreign Resident Capital Gains Withholding Payments) 2017

1/6

15/6 15/6 15/6 22/6

Treasury Laws Amendment (GST Integrity) 2017

1/6

15/6 19/6 20/6 26/6

Treasury Laws Amendment (GST

16/2

14/6

19/6

26/6

Low Value Goods) 2017

Treasury Laws Amendment (Major

30/5

19/6

23/6

Bank Levy) 2017

Treasury Laws Amendment (Medicare Levy and Medicare Levy Surcharge) 2017

24/5

15/6

22/6

Treasury Laws Amendment (Working Holiday Maker Employer Register) 2017

16/2

2.2 GST integrity measures bill

On 1 June 2017, the Government introduced Treasury Laws Amendment (GST Integrity) Bill 2017, to amend the A New Tax System (Goods and Services Tax) Act 1999 by introducing a reverse charge for business to business transactions of gold, silver and platinum. The stated purpose is `to remove the opportunity for a supplier to avoid paying goods and services tax (GST) by liquidating; and ensure that entities cannot exploit the special GST treatment for second-hand goods to claim input tax credits by changing the form of a precious metal.'

The new law has the following differences from the previous law:

1. Reverse charge system: The recipient (that is, the purchaser) of the supply of `valuable metal' will pay the GST thereon (10% of the acquisition price) directly to the ATO and not to the vendor/supplier for remitting via the BAS. Reverse charging will not be required: a. where the market value of goods supplied exceeds the value of the `valuable metal' included by at least 10%, but can still be available voluntarily; or b. the Commissioner has determined by legislative instrument that a reverse charge does not apply for the class of supply.

2. Second-hand goods exclusion: the definition of `second hand goods' has been amended to exclude any goods containing any valuable metal (gold, silver or platinum, or any other substance which, if it were of the require fineness, would be precious metal); and

3. Exceptions to `second-hand goods' exclusion: The new exclusion of `valuable metals' from the `secondhand goods' definition will itself have an exception for `incidental valuable metal goods'. These are goods which contain valuable metal but are properly characterised as consisting of the value-added product, rather than the constituent metal. Examples of such goods may include a piece of electronic equipment,

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antique jewellery, a prestige brand gold watch or a collector's edition proof coin. The two classes of `incidental valuable metals' are as follows: a. goods where the total value of the good exceeds the total value of the valuable metals contained in

the good supplied by at least 10%; or b. goods that are collectables or antiques. Goods that meet the definition of `precious metal' within the

meaning of the GST Act cannot qualify as `collectables or antiques'

The Minister also has the power to determine prospectively that a class of goods is not excluded from the definition of `second hand goods.'

The Bill was passed by both houses of Parliament on 20 June 2017 and received Royal Assent on 26 June 2017. The new law applies to supplies made on or after 1 April 2017.

Reference Treasury Laws Amendment (GST Integrity) Bill 2017 w http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fbillhome%2Fr58 90%22

2.3 Withholding tax foreign residents

On 1 June 2017 the Treasury Laws Amendment (Foreign Resident Capital Gains Withholding Payments) Bill 2017 was introduced to increase the rate of withholding for the sale of taxable Australian real property from 10% to 12.5%.

The Bill also reduced the exemption from withholding from $2 million to $750,000. The exemption applies where the asset being disposed of/acquired is:

taxable Australian real property; or an indirect taxable Australian real property interest, the holding of which causes a company title

interest to arise.

The other changes to impact on foreign investors, the changes to the main residence exemption and the aggregation of interests to identify whether an indirect TARP interest is being disposed of are to be included in a later bill.

The change in the rate and exemption will apply to contracts entered into on or after 1 July 2017.

Reference Treasury Laws Amendment (Foreign Resident Capital Gains Withholding Payments) Bill 2017 w http://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r5891

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3 Rulings

3.1 Employee remuneration trusts

Draft Taxation Ruling TR 2017/D5 was published on 8 June 2017, replacing TR 2014/D1 (Income tax: employee remuneration trust arrangements) which was withdrawn on the same date.

The Draft Ruling sets out the Commissioner's view on the taxation laws that apply to an employee remuneration trust (ERT) arrangement that operates outside of the employee share scheme provisions in Division 83A of the ITAA 1997.

The Draft Ruling applies to all Australian resident employers, employees and trustees who participate in an ERT arrangement. An ERT arrangement is described as an arrangement involving a trust established to facilitate the provision of payments and/or other benefits to employees of an employer.

The Draft Ruling considers a number of income tax, CGT and FBT issues in respect of an ERT arrangement, including:

1. when an employer can deduct a contribution; 2. circumstances in which a contribution is not deductible; 3. when a contribution is a fringe benefit; 4. when a contribution is assessable to the employee; 5. consequences of investing the contribution and providing benefits to employees from the ERT; 6. when loans and other benefits provided by a trustee are a fringe benefit; 7. when a loan by a trustee is taken to be a deemed dividend for the employee; 8. how benefits are assessed to the employee; 9. whether an employee is entitled to tax offsets for franking credits; and 10. when a gain derived by the trustee is ordinary income.

The Draft Ruling does not consider:

1. the circumstances in which contributions to or benefits from an ERT are statutory income under s 15-2 (in respect of allowances) or Part 2-40 (about employment termination payments) and Part 2-42 (about personal services income) of the ITAA 1997;

2. the application of section 40-880 of the ITAA 1997 (about business capital expenditure) to a capital contribution;

3. contributions to an Australian resident ERT in a consolidated group; or 4. the application of Part IVA.

Consequences of contribution to ERT

Deductions for employer?

A contribution to an ERT will be deductible to an employer where all of the following apply:

1. an irrevocable payment of cash is made when the employer is carrying on a business for the purpose of gaining or producing assessable income;

2. the employer reasonably expects the contribution to benefit their business as a result of improved employee performance, and

3. the contribution is intended to be permanently and entirely dissipated in remunerating employees within a relatively short period of time (less than five years).

A contribution is not deductible to the extent that:

1. the contribution is intended to be applied for the benefit of the owners, controllers or shareholders of the employer, or their associates; or

2. it secures a capital advantage for the employer, unless that advantage is small or trifling.

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Contribution a fringe benefit?

A contribution may be a fringe benefit to the extent that the payment is not salary and wages for employees, provided the identity of the employee(s) who will take a share of the benefit is known with sufficient certainty. Both the employee, and the share of the benefit the employee will take, need to be known at the time of the contribution for it to be a fringe benefit.

Assessable to the employee?

A contribution to an ERT will be assessable income of an employee where it has the character of ordinary income. An example providing in the Draft Ruling is where an employee agrees to forego a portion of their future salary for a contribution to the ERT.

Deemed dividend for ERT trustee?

Unless an exception applies, a contribution made by a private company is deemed be a dividend if, at the time the contribution is made, the trustee is a shareholder (or associate of a shareholder) or a former shareholder (or former associate of a shareholder) of the private company (section 109C of the ITAA 1936).

Where a contribution is provided by a private company to the trustee in its capacity as an associate of a particular employee, the contribution is not a deemed dividend to the trustee under Division 7A (pursuant to s109ZB(3) ITAA36).

A contribution will also not be deemed to be a dividend where the contribution itself is an actual dividend to the trustee (pursuant to s109L ITAA36).

When loans and other benefits provided by a trustee are a fringe benefit

Where a trustee of an ERT applies the contribution to make loans to employees under an arrangement with the employer, the employer will be taken to have provided a loan fringe benefit.

When a loan by a trustee is taken to be a deemed dividend for the employee

A private company is taken to pay a dividend directly to an employee where a reasonable person would conclude that a contribution to the trustee is made solely or mainly as part of an arrangement that involves a loan by the trustee to the employee who is a current or former shareholder (or an associate of that shareholder) of the private company (s109D of the ITAA 1997).

How benefits are assessed to the employee

Benefits paid by the ERT trustee to an employee (excluding benefits which are exempt income or non-assessable non-exempt income) may be taxable under more than one provision of the tax laws, and are taxed in the order of the ordering rules so that those amounts are only taxed once.

Whether an employee is entitled to tax offsets for franking credits

An employee who is entitled to a relevant share of the franked distributions of an ERT will not be entitled to a tax offset for their share of any franking credits attached to those distributions if any of the circumstances set out in section 207-150 of the ITAA 1997 apply (including where a trustee or the employee is not a `qualified person').

When a gain derived by the trustee is ordinary income.

A gain made by an ERT trustee on the realisation of assets of the ERT is included in the trust's section 95 net income as ordinary income if the gain is made:

in the course of carrying on a business of investment or an extraordinary operation of that business entered into with the intention of making a profit or gain, or

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as a one-off or isolated transaction where the asset was acquired in a business operation or commercial transaction for the purpose of profit-making.

Date of effect

The Ruling is proposed to apply both before and after its date of issue. However, the Commissioner will not undertake compliance activities to apply the draft ruling to taxpayers who received a private ruling taking a more favourable approach to the deductibility of contributions made before 5 March 2014 (when TR 2014/D1 was issued).

The closing date for comments on the Draft Ruling is 21 July 2017.

ATO reference Draft Taxation Ruling TR 2017/D5 w https://www.ato.gov.au/law/view/document?docid=DTR/TR2017D5/NAT/ATO/00001

3.2 Deductions for work related travel expenses

The ATO has released a Draft Taxation Ruling TR 2017/D6 setting out general principles for determining whether an employee can deduct work related travel expenses under section 8-1 of the ITAA 1997.

The Draft Ruling consolidates the views of the ATO that had been expressed in a number of Income Tax Rulings and Taxation Determinations, which have now been withdrawn by the ATO.

The Draft Ruling considers two general categories of travel expenses:

1. expenses relating to travel by airline, train, car, bus or other vehicle (transport expenses); and 2. expenses relating to accommodation, meal and incidental expenses of an employee when they travel away

from home for work (accommodation, meal and incidental expenses).

General principles

Among other things, the Draft Ruling sets out the following general principles:

1. an employee can deduct a travel expense to the extent that: (a) they incur the expense in gaining or producing their assessable income, and (b) the expense is not of a capital, private or domestic nature;

2. an employee is not entitled to deduct an expense simply because they receive an allowance; 3. an employee's ordinary costs of travelling between home and work, and maintaining a home and

consuming food and drink to go about their daily activities, are of a private or domestic nature and are not deductible. Such costs are 'preliminary to the work' and are not incurred in performing the work activities; 4. an employee's costs of relocating for work and living away from home to work are preliminary to the work and are not deductible; 5. where travel expenses are incurred in performing the employee's work activities and no part of them is of a private, domestic or capital nature, expenses are fully deductible. To the extent that any part of the expenses are of a private or domestic nature, the expenses must be apportioned, unless the private or domestic element is merely incidental to gaining or producing the employee's assessable employment income; and 6. it is necessary to consider transport expenses separately from accommodation, meal and incidental expenses.

Transport expenses: general principles

The Draft Ruling sets out the following general principles in relation to transport expenses:

1. a transport expense is not deductible where the travel is to start work or depart after work is completed. 2. a transport expense is deductible where the travel is undertaken in performing the employee's work

activities, which is to be determined as follows:

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(a) a transport expense is not deductible unless the work requires the employee to undertake the travel. Travel undertaken because of an employee's choice, such as where to live, is not usually deductible.

(b) a transport expense is not deductible unless the travel can be characterised as an incomeproducing activity for which the employee is paid. For example, a wage-earning employee might be paid wages for 'travel time', or, for a salaried employee, it might be evident from the terms of employment that the travel is undertaken in performing their work activities. It cannot be concluded that an employee is paid to undertake relevant travel merely because they receive a travel allowance;

(c) it is relevant to consider whether the employee is subject to the employer's direction and control during the period of the travel; and

(d) it is relevant to consider whether the above factors have been contrived to give a private journey the appearance of work travel.

3. These general principles apply to four categories of travel: (a) ordinary travel between home and a regular work location the costs of which are not deductible; (b) special demands travel, meaning travel between home and a regular work location where: (i) the journey is included in the activities for which the employee is paid under the terms of their employment; and (ii) this is reasonable because of the special demands of the work. Special demands include the remoteness of the work location, a requirement to move continuously between changing work locations, and a requirement to work away from home for an extended period; (c) co-existing work locations travel, which is travel which can be attributed to the employee having to work in more than one location; and (d) relocation travel, meaning travel undertaken in relocating for work the costs of which are not deductible.

Accommodation, meal and incidental expenses: general principles

The ruling sets out the following general principles in relation to accommodation, meal and incidental expenses:

1. The ordinary costs of maintaining a home and consuming food and drink to go about daily activities, such as to attend work, are of a private and domestic nature. Likewise, costs incurred by an employee in relocating to a place of work or in living away from home to work are preliminary to the work and not deductible.

2. Accommodation, meal and incidental expenses incurred by an employee in performing an employee's work activities, and are therefore deductible, only where: (a) the employee's work activities require them to undertake the travel; (b) the work requires the employee to sleep away from home overnight; (c) the employee has a permanent home elsewhere; and (d) the employee does not incur the expenses in the course of relocating or living away from home. Whether an employee is living away from home depends on the facts of each case. Relevant factors are: (i) the time spent working away from home. The longer an employee spends working away from home, the more likely that the employee is living away from home; (ii) whether the employee has a usual place of residence at a previous location; (iii) the nature of the accommodation (e.g. if the accommodation has an equipped kitchen and laundry, this supports the view that the employee is living away from home); and (iv) whether the employee is, or can be, accompanied by family or visited by family or friends. For example, an employee working away from home for an extended period who is accompanied by their family is likely to have relocated.

The Draft Ruling sets out eighteen example scenarios to which the above general principles are applied to conclude whether or not the travel expenses set out in those examples are deductible.

Comments on the Draft Ruling are due by 11 August 2017.

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COMMENT a number of recent cases have involved taxpayers who have wrongly claim deductions for

home to work travel and other expenses. The ATO has been vocal about its concerns with the treatment of work related travel, accommodation and meal expenses and that it is an area on which it is focusing.

ATO reference Draft Taxation Ruling TR 2017/D6 w https://www.ato.gov.au/law/view/document?DocID=DTR/TR2017D6/NAT/ATO/00001

3.3 GST redeliverers and low value imported goods

The Commissioner has published Draft Law Companion Guideline LCG 2017/D5, providing guidance on how to determine whether a redeliverer of a supply of low value imported goods is responsible for GST.

Relevant Supplies

The draft LCG applies to non-taxable importations made on or after 1 July 2017 of low value goods, being goods with a 'customs value' of $1,000 or less at the time consideration for the supply is agreed to. As set out in Treasury Laws Amendment (GST Low Value Goods) Bill 2017, such low-value importations are ordinarily nontaxable. These importations are made taxable by the operation of new section 84-77 of the GST Act.

When the Bill passed Parliament the start date for the Low Value Goods provisions was set as 1 July 2018.

Who is a Redeliverer?

The LCG notes that a redeliverer in relation to a supply is the entity does one or more of the following:

1. provides the use of an address outside Australia to which the goods are delivered, or 2. procures, arranges or facilitates the use of an address outside Australia to which the goods are delivered,

or 3. purchases the goods (as an agent of the recipient), or 4. procures, arranges, or facilitates purchase of the goods; and 5. the entity either:

a. delivers the goods into Australia, or b. procures, arranges or facilitates the delivery of the goods into Australia, and 6. the entity both: a. undertakes these activities as a result of an arrangement with the recipient (or an entity acting on

the recipient's behalf), and b. undertakes these activities in the course of carrying on an enterprise.

Who is not a Redeliverer?

Freight forwarders and transporters are not redeliverers, unless they:

1. provide an address outside Australia for delivery of the goods; 2. procure, arrange or facilitate the use of such an address outside Australia for taking delivery; 3. purchase the goods (as an agent of the customer); or 4. procure, arrange, or facilitate such a purchase.

When is a Redeliverer not responsible for GST?

Where the merchant or any 'electronic distribution platform' assists in bringing the goods into Australia, the Redeliverer is not responsible for the GST.

How does the Redeliverer calculate their GST obligation?

For goods that are taxable supplies, the GST will be the sum of:

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10% of the price the consumer paid for the goods initially (which would have excluded any GST); and 1/11th of any service charges of the Redeliverer.

The GST classification of the Redeliverer services is the same as the underlying goods.

GST deferral scheme

The GST payable cannot be deferred pursuant to section 105D(3) of the Customs Act 1901 (Cth), as the deferred GST scheme only applies to taxable importations: section 105D(2), Customs Act 1901 (Cth).

What if there are multiple Redeliverers?

How would this happen?

This may occur if an entity that meets the definition of a Redeliverer employs another entity to purchase the goods as agent for the Australian consumer (which makes the purchasing agent a Redeliverer as well).

Who is responsible for the GST?

The draft LCG (at [41]) refers to `hierarchy rules' in s 84-81(5) of the GST Act that stipulate that the Redeliverer who is responsible for GST will be:

1. the first to enter into an arrangement relating to the supply with the recipient; or 2. If no such agreement exists, the first to enter into an arrangement with an associate of the

recipient; or 3. if no such agreement exists, the first to enter into an arrangement with any other person

acting on the recipient's behalf.

Where no entity falls within any of the above order, the Commissioner may prescribe additional rules to make an entity responsible.

ATO reference Draft Law Companion Guideline LCG 2017/D5 w http://law.ato.gov.au/pdf/cog/lcg2017-005.pdf

3.4 GST on supplies made through electronic distribution platforms

The ATO have released a draft Law Companion Guide LCG 2017/D4 in respect of electronic distribution platforms.

The Draft LCG looks at when an electronic distribution platform will be responsible for the GST on the supply of digital products and services made through the platform. This is also extended to `offshore supplies of low value goods' once those measures start to apply from 1 July 2018.

Primarily, this determination is relevant for online platforms that distribute or facilitate the distribution of digital programming. If certain criteria are met, the EDP is liable for the GST, and not the merchant itself.

There a four parts to the guide:

1. whether a supply is made through an EDP; 2. whether a supply is subject to the EDP rules; 3. whether supply is excluded from the EDP rules; and 4. if multiple EDPs are involved, which EDP operator is responsible for the GST. If all four parts are satisfied, the EDP operator will be responsible for the GST (and the merchant will not be).

Even once it is determined that the EDP operator will be responsible for the GST, the general rules apply when determining whether an EDP operator will need to account for GST on a supply. That is:

1. the supply is connected with Australia; and

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2. the entity is registered or required to be registered for GST. Is the supply made through an EDP?

EDPs include, but are not limited to, websites, internet portals, gateways, stores or marketplaces.

An EDP must satisfy all of the following:

(a) the services allows entities to make supplies available to end users; The guideline makes it clear that this does not extend to business directories, but where an entity facilitates the supply on its platform. It is also not sufficient to be considered an EDP if an entity merely builds or maintains the infrastructure behind a service (i.e. building the website).

(b) it is delivered by electronic communication; and It is noted in the guideline that incidental communications or assistance to the end-user to use the service does not stop the service being delivered by electronic communication.

(c) if the supplies are `inbound intangible consumer supplies', the supplies are made by electronic communication. This is not relevant for offshore supplies of low value goods.

but is not considered an EDP if it only provides the following:

1. a carriage service; 2. a service to provide access to payment system or processing payments; or 3. a service of providing `face value vouchers' which is not a taxable supply. Is the supply subject to the EDP rules?

The supply must be:

1. an offshore supply of low value goods unless the supply is connected with Australia under other provisions; or

2. a supply of a digital service or product if it is an `inbound intangible consumer supply' it is automatically subject to the EDP rules.

The supply must be made electronically, but does not need to be made through the platform, and the supply itself must be digital (e.g. the supply of a digital voucher for a physical object is not considered to be a digital product).

An inbound intangible consumer supply exists when an Australian consumer is supplied anything other than goods or real property, unless:

(a) the thing supplied is done wholly in Australia; or

(b) the supply is made wholly through an enterprise the merchant carries on in Australia.

There is also provision in the Act for the EDP operator to treat all digital products and digital services made through its platform in the same way, irrespective of whether they are `inbound intangible consumer supply', if there is an agreement with the merchant and certain other conditions are met.

Is the supply excluded from the EDP rules?

There are a number of criteria, all of which must be met, for the EDP operator not to be responsible for the GST (and instead the merchant will be responsible). These criteria are summarised in the LCG as follows:

the EDP operator does not authorise the charge to the recipient of the supply; the EDP operator does not authorise the delivery of the supply; the EDP operator does not set (whether directly or indirectly) any of the terms and conditions under

which the supply is made; a document relating to the supply issued to the recipient identifies the supply and the merchant as the

supplier of that supply; and

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the merchant and the EDP operator have agreed in writing that the merchant is the entity liable for paying the GST for the supply. Alternatively, the merchant and the EDP operator have agreed in writing that the merchant is the entity liable for paying GST for a class of supplies that includes the supply concerned. The guideline indicates that this could include where the merchant agrees electronically when registering to use the platform.

If multiple EDPs are involved, which EDP operator is responsible for GST?

If there are multiple EDPs involved, there are three possible scenarios:

1. the EDPs enter into a written agreement; 2. there is a legislative instrument prescribing the order; or 3. the default rules apply, in that:

(a) the first of the EDP operators to receive or authorize the charging of any of the consideration for the supply; or

(b) if this is not relevant, the first of the operators to authorize the delivery of the supply, will be responsible for the GST.

ATO reference Draft Law Companion Guideline LCG 2017/D4 w https://www.ato.gov.au/law/view/document?DocID=COG/LCG20174/NAT/ATO/00001

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4 Determinations

4.1 Division 7A and interposed entities

The Commissioner has issued Draft Taxation Determination TD 2017/D3 setting out his view that s109T of the ITAA 1936 can apply to a payment or loan made by a private company to another entity (where that payment or loan is an ordinary commercial transaction).

Section 109T of the ITAA 1936 operates to treat a payment or a loan from a private company to another entity (the interposed entity) as a payment or loan to another entity (the target entity) where it is reasonable to conclude that the private company made the payment or loan as part of an arrangement involving a payment or loan to the target entity.

If the outcome of the arrangement is that the target entity would effectively receive a tax-free distribution from the private company, the Commissioner considers that the arrangement may be captured by s 109T, notwithstanding that the payment or the loan may be an ordinary commercial transaction.

The Commissioner considers that even if all, or some, of the amount of the payment made by the private company is included in the interposed entity's assessable income, this does not preclude subsection 109T(1) from applying such that a private company will be taken to have made a payment or loan to the target entity.

The Draft TD contains a number of examples, two of which are extracted below:

Example 1

7. Private Company A has a significant distributable surplus including accumulated profits of $100,000. 8. Private Company A has two classes of shares with the Class A shares being held by Mr A and the Class B shares being held by Private Company B. 9. Private Company B has no distributable surplus. 10. Private Company A pays a fully franked dividend of $100,000 to Private Company B. On the same day, Private Company B uses that dividend to make an interest-free loan of $100,000 to Mr A. 11. Mr A does not repay the loan made by Company B by Private Company A's lodgment day for the year of income and it is not put on section 109N complying terms. ...

Example 4

25. Private Company E has a significant distributable surplus including accumulated profits of $1,000,000. 26. The W Family Trust is the sole shareholder of Private Company E. 27. Mr W is the sole director of Private Company E and is also the trustee of the W Family Trust. 28. The beneficiaries of the W Family Trust include Mr W and Private Company F. 29. Private Company E pays a fully franked dividend of $1,000,000 to the W Family Trust and the W Family Trust uses $950,000 of that dividend to acquire a residential property. Prior to the end of the year of income, Mr W, as trustee for the W Family Trust, transfers the residential property to Mr W as an inspecie capital distribution. 30. Mr W cites a clause in the W Family Trust's deed to support a determination that the in-specie distribution causes a $950,000 loss in the trust that is to be made good out of income in the year of income in which the distribution is made and that the trust income is $50,000 for the year of income. 31. Mr W also resolves to make Private Company F presently entitled to all of the trust income of $50,000 and treats the transfer of the residential property as a tax-free distribution. Note: Whether or not a particular trust deed gives a trustee power to make a determination in the manner described would depend on a proper analysis of the deed in the context of a particular case.

When the final Determination is issued, it is proposed to apply both before and after its date of issue.

The closing date for comment on the Draft Determination is 26 July 2017.

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ATO reference Draft Taxation Determination TD 2017/D3 w https://www.ato.gov.au/law/view/view.htm?docid=%22DXT%2FTD2017D3%2FNAT%2FATO%2F00001%22

4.2 ESS trusts and dividend equivalent payments

The Commissioner has published Draft Taxation Determination TD 2017/D2 to provide guidance as to when a `dividend equivalent payment' from an employee share scheme trust will be assessable as ordinary income of the recipient.

A dividend equivalent payment is a `cash payment paid by a trustee of a trust to an employee participant of an employee share scheme (ESS) (who is also a beneficiary of the trust) and that cash payment is funded from dividends (or income from other sources) that the trustee has been assessed on in previous income years because no beneficiary of the trust was presently entitled to the income.'

A dividend equivalent payment will be assessable to the recipient where the payment is:

1. has the character of ordinary income; 2. is derived by the employee; 3. is in the form of money or money's worth; and 4. not excluded from the operation of section 6-5 of the ITAA 1997.

Payments that are remuneration of the employee will be assessable to the employee unless:

1. it has been assessed to the employee under the trust assessing provisions; 2. it is exempt income or non-assessable non-exempt income for the employee; or 3. the payment represents a contribution made by the employer to the ESS trust that was assessable to the

employee as remuneration at the time of the contribution.

A payment will be remuneration of the employee where the payment has a `sufficient connection' with the employee's employment.

Sufficient connection with employment

The Draft TD indicates that there will be a sufficient connection with employment where:

1. payment is consideration for services rendered by the employee and is a payment of salary, wage or bonus;

2. the payment arises from a contract, arrangement or plan to deliver employment benefit to employment; 3. the arrangement is such that the employment may make the payment in lieu of the ESS trustee; 4. the payment is tied to individual or specific performance targets; 5. the payment is conditional upon continued employment with the employer; 6. the payment is at the discretion of the employer or the ESS trustee, who takes directions or

recommendations from the employer.

Insufficient connection with employment

The Draft TD indicates that there will be an insufficient connection with employment where:

1. the payment is arm's-length consideration for the disposal of an asset by the beneficiary and was acquired for arm's-length consideration;

2. the recipient of the payment is a beneficiary of the ESS Trust other than solely to participate in the ESS, and the ESS Trustee's payment to the beneficiary is independent of any ESS arrangement;

3. the payment does not require continuing employment or any employment-related performance/conditions; and

4. the timing and amount of the payment is identical as between ESS participants and non-participants.

When finalised, this TD will apply to payments pursuant to ESS interests issued on or after 1 October 2017.

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Note: The ATO has provided a safe harbour in Draft Practical Compliance Guideline PCG 2017/D9 concerning dividend equivalent payments from ESS Trusts. See below in ATO materials.

ATO reference Draft Taxation Determination TD 2017/D2 w https://www.ato.gov.au/law/view/pdf/pbr/td2017-d002.pdf

4.3 Benchmark Division 7A interest rate 2017/18

The Commissioner has determined the benchmark interest rate for Division 7A purposes for 2017/18 to be 5.30%.

ATO reference Taxation Determination TD 2017/17 w https://www.ato.gov.au/law/view/document?DocID=TXD/TD201717/NAT/ATO/00001

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5 ATO materials

5.1 Companies carrying on a business

In order for the reduced company tax rate, a company must be carrying on a business. The ATO has previously provided comments on when a company would be carrying on a business in footnote 3 in draft tax ruling TR 2017/D2 where the following statement was made:

However, generally, where a company is established or maintained to make profit or gain for its shareholders it is likely to carry on business. (Brookton Co-operative Society Ltd v FCT (1981) 147 CLR 441 per Aicken J at 469; American Leaf Blending Co Sdn Bhd v D-G of IR [1978] 3 All ER 1185 Per Lord Diplock at 1189; Inland Revenue Commissioners v Westleigh Estates Company Ltd; South Behar Railway Company Ltd; Eccentric Club Ltd [1924] 1 KB 390). This is so even if the company only holds passive investments, and its activities consist of receiving rents or returns on its investments and distributing them to shareholders.'

On 4 July 2017 Kelly O'Dwyer the Minister for Revenue and Financial Services issued a press release expressing concern about this view and that it had not been the Government's intention for the reduced tax rate to apply to companies making passive investments.

The ATO has issued guidance on its website confirming the view set out in TR 2017/D2 as follows:

What is the ATO's view as to when a company will carry on a business?

It is not possible to definitively state whether a particular company is carrying on a business. This is always question of fact. Based on the overall impression of the activities of a company and the relevant indicia of whether a business is carried on. However, where a company is established and maintained to make profit for its shareholders, and invests its assets in gainful activities that have a prospect of profit, then it is likely to be carrying on business. This is so even if the company's activities are relatively passive, and its activities consist of receiving rents or returns on its investments and distributing them to shareholders.

While most companies will carry on a business in a general sense, this does not mean that every gain made by a company will be ordinary income and assessable under section 6-5 of the ITAA 1997. It is still necessary to determine the scope and nature of that business, in order to determine whether a gain will be an ordinary incident of that business and therefore assessable as ordinary income rather than a capital gain.

CAUTION the issue of whether a company that engages in passive activity is entitled to the lower corporate

tax rate is at present unresolved.

w https://www.ato.gov.au/General/New-legislation/In-detail/Direct-taxes/Income-tax-for-businesses/Reducing-thecorporate-tax-rate/

5.2 ESS trusts and dividend equivalent payments

The ATO has issued Draft Practical Compliance Guideline PCG 2017/D9. The Draft PCG sets out the safe harbour terms on which the Commissioner will accept that a dividend equivalent payment made to an employee participant of an employee share scheme (ESS) trust is not connected with that employee's employment and therefore not assessable under section 6-5 of the ITAA 1997.

The Draft PCG notes that just because a dividend equivalent payment does not meet all the safe harbour terms does not necessarily mean that the payment will be deemed to be connected to the employee's employment. Employees can otherwise adduce evidence to demonstrate that the dividend equivalent payment was not connected to their employment.

The Commissioner will accept that a payment is not connected to an employee's employment if all of the following conditions are satisfied:

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1. the trustee of the ESS trust is not an associate of the employer; 2. the payment is consideration for an arm's length surrender, exercise or disposal of an asset and that

asset was acquired by the employee for valuable and arm's length consideration; 3. the payment arises because the employee is the beneficiary of a trust and the payment is made to the

employee independent of an arrangement or understanding between with the employer; 4. the payment does not rely on the employee's continuing employment with their employer nor is it tied to

employment related performance conditions; 5. the timing and amount of the payment is identical for all beneficiaries who hold the same asset,

regardless of their employee-employer relationship; and 6. the trustee paid tax on the dividends that the payment is calculated on in the income year the dividends

were received.

ATO reference Practical Compliance Guideline PCG 2017/D9 w https://www.ato.gov.au/law/view/pdf/cog/pcg2017-009.pdf

5.3 Liability of legal personal representatives

The ATO has issued draft Practical Compliance Guideline PCG 2017/D12 concerning the liability of a legal personal representative (LPR) of a deceased person.

The Draft PCG aims to provide LPRs with certainty of the extent of the deceased's outstanding tax liabilities for the period up until the date of death. The Draft PCG notes that an LPR may be personally liable if they distribute the estate assets with notice of a claim or a potential claim by the ATO. The Draft PCG deals with when an LPR will be regarded as having notice of a claim or a potential claim by the ATO.

The Draft PCG applies to LPRs who have obtained probate or letters of administration where:

1. in the four years before their death: (a) the deceased did not carry on a business; and (b) the deceased was not assessable on a share of the net income of a discretionary trust.

2. the estate assets consist only of: (a) public company shares or other interests in widely held entities, death benefit superannuation, Australian real property, cash and personal assets such as cars and jewellery, and (b) the total market value of the estate assets at the date of death was less than $5 million.

The Draft PCG indicates that the ATO will regard LPRs of having notice of the following liabilities:

1. any amount that the deceased owed to the ATO at the date of their death plus charges accruing in respect of those amounts such as interest;

2. any liabilities arising in relation returns lodged by the deceased but not yet assessed the date of their death; and

3. any liabilities arising in relation to outstanding returns.

The ATO will treat an LPR as having notice of a further potential ATO claim relating to returns the deceased lodged (or advised were not necessary) where:

1. within 6 months from the lodgment (or advice of non-lodgment) of the last of the deceased's outstanding returns, the ATO gives the LPR notice that it intends to examine the deceased person's taxation affairs; or

2. in the course of administering the deceased estate (including the preparation and lodgment of outstanding tax returns), an LPR becomes aware (or should reasonably have become aware) of a material irregularity (or irregularities) in a prior year return.

The Draft PCG indicates that the ATO will not regard LPRs as having notice of a potential claim where:

1. in relation to returns not lodged at death: (a) the LPR acted reasonably in lodging all of the deceased person's outstanding returns (or advising the ATO that they were not necessary); and

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(b) the ATO has not given the LPR notice that it intends to examine the deceased person's taxation affairs within 6 months from the lodgment (or advice of non-lodgment) of the last of the outstanding return; or

2. in relation to returns lodged by the deceased for which the LPR becomes aware (or should reasonably have become aware) of a material irregularity: (a) THE LPR brings any irregularity promptly to the attention of the ATO in writing; and (b) the ATO does not, within 6 months, issue an amended assessment or indicate that it intends to review the issue.

ATO reference Practical Compliance Guideline PCG 2017/D12 w https://www.ato.gov.au/law/view/document?docid=COG/PCG201712/NAT/ATO/00001

5.4 UPE unitisation arrangements

The ATO has updated its commentary on what attracts its attention in relation to unpaid present entitlement (UPE) unitisation arrangement.

The ATO notes that is has concerns where a private group, to overcome the operation of Division 7A, seeks to extinguish UPEs by an arrangement where a private company subscribes for units in a unit trust with the unit trust then providing payments or loans to other entities within the private group.

The ATO considers that this may give rise to various income tax consequences, such as the application of:

1. Division 7A ITAA 1936; 2. section 100A of the ITAA 1936; or 3. Part IVA of the ITAA 1936.

w https://www.ato.gov.au/Business/Privately-owned-and-wealthy-groups/What-you-shouldknow/Transparency/what-attracts-our-attention/

5.5 ESS Statements

The ATO has published a reminder on its website of employers' reporting obligations in relation to ESS interests. The ATO notes that ESS statements are due by 14 July 2017 if during the income year ended 30 June 2017:

1. an employee acquired ESS interests to be taxed up-front; 2. a deferred taxing point occurs/occurred; or 3. a start-up concession acquisition event occurred.

The ATO notes that the ESS statement issued to the employee must contain information specifying:

1. the discount for each type of ESS taxed-upfront scheme; 2. the discount for any ESS tax-deferred scheme if a taxing point happened during the financial year; 3. the discount for interests acquired before 1 July 2009 if a cessation time occurred during the financial year; 4. the total TFN amount withheld from discounts during the financial year.

In addition to the ESS statement obligation, employers must also lodge an annual statement with the ATO by 14 August 2017.

w https://www.ato.gov.au/general/employee-share-schemes/in-detail/employer-reporting-requirements/ess--reporting-requirements-for-employers/

5.6 No ABN withholding

The ATO has published a fact sheet concerning the need to quote an ABN. Ordinarily under the GST rules, a supplier (vendor) must quote their ABN to the recipient (purchaser). However, there are some situations where this may either be impractical or impossible, and the ATO have provided some guidance on when suppliers who

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Monthly tax training July 2017

are unable to quote an ABN can, instead of having 47% withheld from their sale price for 'no ABN withholding', provide the recipient with a 'Statement by supplier'.

To be eligible to provide this statement in lieu of an ABN, the supplier must satisfy at least one of the following:

1. not carrying on an enterprise in Australia; 2. they are an individual under 18 years and the payment does not exceed $350 per week; 3. the payment does not exceed $75, excluding GST; 4. the supply is wholly input taxed; 5. the supply is not done in the course or furtherance of an enterprise they carry on in Australia; or 6. the whole of the payment is exempt income.

A supplier cannot use the form in lieu of quoting a valid ABN if the:

1. payment relates to a supply made as an employee; 2. activity is not wholly of a private or domestic nature; 3. payments are for a supply made as a company director or office holder; 4. payment is received for a supply under a labour hire arrangement or specified payment; 5. payment is for a supply as a religious practitioner; or 6. supplier is entitled to an ABN for the relevant activity.

The ATO has provided a sample form that may be used by suppliers who do not quote their ABNs. Suppliers who do not use the form are instructed by the ATO to, as a minimum, ensure that the statement contains the following details:

1. the supplier's name and address; 2. why it was not necessary to withhold; and 3. the supplier's signature.

w https://www.ato.gov.au/forms/statement-by-a-supplier-not-quoting-an-abn/ https://www.ato.gov.au/uploadedFiles/Content/MEI/downloads/Statement%20by%20a%20supplier.pdf

5.7 TFN withholding for closely held trusts

The ATO has published an update on its website reminding trustees and beneficiaries of their obligations in relation to TFN collection for closely held trusts.

A closely held trust is trust either:

1. has up to 20 individuals who between them, directly or indirectly, and for their own benefit, have fixed entitlements to at least 75% of all of the income or capital of the trust; or

2. is a discretionary trust.

Some trusts are excluded, including:

1. complying superannuation funds; 2. deceased estates; 3. fixed trusts; and 4. employee share trusts established for employee share schemes.

All beneficiaries of any entity type, including individuals, must quote their TFN, except:

1. non-residents; 2. tax exempt entities; and 3. beneficiaries under a legal disability.

The ATO recommends that trustees should advise any beneficiaries that have not quoted their TFN that they have not done so.

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The ATO notes that, if trustees wish to make a payment to a beneficiary that has not quoted their TFN, the trustee(s) must:

1. confirm whether TFN withholding applies to the payment or entitlement; 2. if required, register for PAYG withholding for closely held trusts; 3. to the extent the payment/entitlement relates to a share of net (taxable) income of the trust, withhold from

the payments/entitlements at the top rate of tax as at the time the payment or entitlement occurs; 4. lodge an annual TFN withholding report; 5. provide a payment summary to each beneficiary that had amounts withheld; and 6. lodge an annual activity statement with the ATO and pay the withheld amounts to the ATO.

The ATO notes that there are penalties for trustees who fail to withhold, are late remitting the amounts withheld to the ATO, or fail to lodge the requisite reports on time.

w https://www.ato.gov.au/General/Trusts/In-detail/Closely-held-trusts/TFN-withholding-for-closely-held-trusts/

5.8 Plutus payroll arrangements guidance

The ATO has updated the guidance on its website in relation to people affected by the Plutus payroll arrangements (see our June 2017 tax training notes). Importantly, the ATO's updated guidance makes it clear that, where the employer did not make the payments of salary to its employees, but rather the payroll provider made such payments, the employer did not have an obligation to withhold and remit an amount for tax.

The following example provided by the ATO clarifies the position:

Scenario 1 you used Plutus for payroll services

You engaged Plutus (or an associated company) to provide payroll services for your employees. The service included making salary payments, paying PAYG withholding to the ATO and super guarantee payments to super funds.

We have assumed that all workers are employees of your business and you engaged a third party for payroll services.

As an employer you will have no obligation to withhold as you didn't make payments of salary of wages to your employees. You also don't have any reporting obligations in respect of PAYG at the end of the financial year.

If you have subsequently taken over the administration of your own payroll, you will have reporting obligations for these payments.

w https://www.ato.gov.au/General/Gen/FAQs-for-those-affected-by-recent-payroll-companyissues/?=redirectedhttps://www.ato.gov.au/General/Gen/FAQs-for-those-affected-by-recent-payroll-companyissues/?=redirected

5.9 GST and scrap metal: code of compliance

The ATO has published a code of compliance to assist scrap metal dealers (buyers and sellers) comply with their GST obligations. The code is focused more on the buyer, and whether they have an obligation or the ability to do such things as may be required to comply with the GST rules, such as:

1. withhold 47% from the acquisition consideration if they are not quoted a valid ABN by the seller; or 2. issue a recipient-created tax invoice.

CAUTION purchasers/recipients of supplies are not automatically authorised to issue recipient-created tax

invoices. There are various requirements to be satisfied by both recipients and suppliers to enable the issue of a valid recipient-created tax invoice: see Goods and Services Tax Ruling GSTR 2000/10 'Goods and services tax: recipient created tax invoices', at [13].

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w https://www.ato.gov.au/business/gst/in-detail/your-industry/scrap-metal/gst-and-scrap-metal--code-ofcompliance/

5.10 Foreign resident capital gains withholding

The ATO has publishing a detailed guide for conveyancers on its website on the foreign residents capital gains withholding regime.

w https://www.ato.gov.au/General/Capital-gains-tax/In-detail/Calculating-a-capital-gain-or-loss/Capital-gainswithholding---a-guide-for-conveyancers/\

5.11 Changes for DASPs for working holiday makers

The ATO has provided guidance on its website on the changes to DASPs for working holiday makers. The guidance notes that the tax rates for DAPSs now depend upon whether the temporary resident departing Australia was a working holiday maker - a person who hold or held a visa of class 417 (working holiday) or 462 (work and holiday).

The tax rate applicable to DASPs in relation to working holiday makers is 65% and applies to both taxed and untaxed elements of DASPs from 1 July 2017.

The ATO has published a comparison table for DASPs to former temporary residents that were working holiday makers and those who were not:

DASP tax rates that apply from 1 July 2017

Super components

DASP tax rate (nonWHM)

DASP tax rate (for WHM)

Tax free component

Taxed element

35%

65%

Untaxed element

45%

65%

Because the new tax regime distinguishes between certain visa classes, DASP requests must now include the information required to satisfy the fund trustee of their tax compliance obligations. Therefore, any DASP requests received by superannuation fund in respect of DASPs to be paid on or after 1 July 2017 must contain sufficient information to properly classify the payment and determine the withholding obligations.

w https://www.ato.gov.au/super/apra-regulated-funds/super-changes-for-apra-regulated-funds/changes-to-the taxation-of-the-departing-australia-superannuation-payment-(dasp)-for-working-holiday-makers/

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Brown Wright Stein Lawyers - Andrew Noolan, Chris Ardagna, Geoff Stein and Michael Malanos

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