Tax Training Notes - September 2018

www. bwslawyers.com.au Brown Wright Stein tax partners: Andrew Noolan E: [email protected] P: 02 9394 1087 Chris Ardagna E: [email protected] P: 02 9394 1088 Geoff Stein E: [email protected] P: 02 9394 1021 Matthew McKee E: [email protected] P: 02 9394 1032 Michael Malanos E: [email protected] P: 02 9394 1024 TAX TRAINING NOTES Monthly tax training September 2018 Brown Wright Stein Lawyers Level 6, 179 Elizabeth Street Sydney NSW 2000 P 02 9394 1010 www. bwslawyers.com.au 1 Cases .....................................................................................................................................................4 1.1 Mangat – ESS interests and time of acquisition of options...............................................................4 1.2 Fox – ESS interests and deferred taxing point .................................................................................7 1.3 Narumon – binding death nomination ...............................................................................................9 1.4 McGlinn – non-commercial losses ..................................................................................................12 1.5 Ford – default assessment penalty .................................................................................................14 1.6 Canberra Cleaners – garnishee notice ...........................................................................................16 1.7 Fyna Projects – payroll tax liability and garnishee notices..............................................................18 1.8 Jensen – employee or contractor?..................................................................................................20 1.9 Appeal Update – Thomas................................................................................................................23 1.10 Appeal Update – Aussiegolfa..........................................................................................................24 2 Legislation...........................................................................................................................................26 2.1 Progress of legislation .....................................................................................................................26 2.2 DGR reforms ...................................................................................................................................26 2.3 Lower company tax rate..................................................................................................................27 3 Rulings.................................................................................................................................................28 3.1 Trust vesting....................................................................................................................................28 3.2 Base rate entity passive income .....................................................................................................28 3.3 First Home super saver scheme .....................................................................................................29 3.4 GST and supplies connected to indirect tax zone...........................................................................29 4 ATO and other materials....................................................................................................................31 4.1 Deceased estates and assessment on legal personal representative............................................31 4.2 Main residence exemption and deceased estates..........................................................................32 4.3 Image rights.....................................................................................................................................32 4.4 GST – inbound tour operators and agency.....................................................................................33 4.5 New rate for car expenses ..............................................................................................................33 4.6 Car sharing platforms ......................................................................................................................34 4.7 Peer to peer caravan and recreational vehicle sharing...................................................................34 3.5 Winding up SMSFs..........................................................................................................................35 Our tax training notes are edited by Matthew McKee and prepared by members of our team: Amanda Comelli Caroline Murray Gilliam Tam Helen Young Isabelle Marcarian Rachel Vijayaraj Taseen Rafi Sam Ayoubi Suzie Boulous Thomas McAuliffe Monthly tax training – September 2018 Liability limited by a scheme approved under Professional Standards Legislation 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 11 September 2018. Copyright © Brown Wright Stein Lawyers 2018. Monthly tax training – September 2018 Brown Wright Stein Lawyers © 2018 page 4 1 Cases 1.1 Mangat – ESS interests and time of acquisition of options Facts In 2010, Dr Mangat, a medical doctor, commenced a 3 year obstetrics and gynaecology training program to obtain a Certification in Reproductive Endocrinology and Infertility (CREI). In 2011, Dr Mangat was approached by IVF Australia Pty Ltd (IVFA), which was part of the Virtus Health group (VH). IVFA sought to engage Dr Mangat as an independent contractor for a 5 year term. In November 2011, Mr Moller, the Managing Director of IVFA, informed Dr Mangat that IVFA would offer equity incentives to specialists who agreed to a 5 year non-compete term. Dr Mangat claimed to have been provided a VH Health Share Offer Information Statement (2011 Share Offer) during this meeting in November 2011, however, the 2011 Share Offer was dated 16 December 2011. The 2011 Share Offer was for 150,000 shares in VH at $4.71 per share. Dr Mangat received an engagement letter from IVFA in November 2011. The 2011 Engagement Letter was silent as to any offer of shares to Dr Mangat, rather, it provided that Dr Mangat may be offered shares during the term of the engagement. Dr Mangat claimed the 2011 Share Offer was attached as 'Schedule A' to the 2011 Engagement Letter. The 2011 Engagement Letter did not refer to an Annexure A, and in fact only referred to 2 enclosures, being a 'Fees and Services Schedule' and 'Code of Conduct'. Dr Illingworth, who was involved in the negotiations with Dr Mangat on behalf of IVFA, testified that it was agreed in November 2011 that VH would offer Dr Mangat 150,000 shares as consideration for her agreeing to the 5 year non-compete clause. Ms Channon, the CEO of VH, also testified that she believed that on 16 December 2011, VH made an offer to Dr Mangat for 150,000 shares at an offer price of $4.71 per share, though this was subject to Dr Mangat meeting certain performance conditions. Dr Mangat's assertion was that the offer was not subject to performance conditions. In 2011 VH was in the process of generally offering shares to new doctors. However, the 2011 Share Offer was not accepted by the ASX and had to be withdrawn and replaced by a subsequent share offer (the 2012 Share Offer). On 23 January 2012, Dr Mangat commenced work with IVFA as a CREI fellow for a 1 year period, pursuant to an employment agreement signed on 2 February 2012 (2012 Employment Agreement), which was separate to the 2011 Engagement Letter. The 2012 Employment Agreement that provided Dr Mangat was entitled to wages of $117,810 plus super for the period, but was silent as to any offer of shares by VH. In January and February 2012, around the time Dr Mangat commenced work for IVFA, Mr Moller forwarded Dr Mangat an updated VH Share Offer Information Statement (2012 Share Offer). The email provided that to participate in the employee share scheme (ESS), Dr Mangat had to ‘sign the Share Purchase Application form on page 24 of the Offer Information Statement and return to Glenn Powers…. by 31 January 2012’. On 1 May 2012, Dr Quinn, a board representative of IVFA, emailed a group of 10 doctors, including Dr Mangat about a potential sale of VH and referred to the recipients as ‘ option holder[s]’ (the Doctor Group Email). On 8 May 2012, Dr Quinn emailed a larger group of people, including Dr Mangat, that they anticipated concluding the sale of VH between June and September 2012. This email noted that the share options would vest on the sale event. During this time, VH was receiving advice from PWC to ensure that sophisticated investors and unsophisticated investors received identical benefits under the ESS. On 17 May 2012, PWC wrote to the board members of an investor in VH, to outline the income tax consequences of the proposed sale and noted that ‘there are 26 New Doctors. The New Doctors do not currently hold any options, shares or rights…. 8 of these 26 New Doctors are Non-Sophisticated Investors… Virtus is unable to issue shares to Non- Monthly tax training – September 2018 Brown Wright Stein Lawyers © 2018 page 5 Sophisticated Investors under the method proposed in the Offer Information Statement. New Doctors who are Non-Sophisticated Investors will instead receive a cash bonus and options in the purchaser such that they should be in the same economic position as New Doctors who are Sophisticated Investors’. Dr Mangat claimed that she was not a ‘new doctor’ at that time. However, Mr Powers, the Chief Financial Officer of VH, subsequently emailed Dr Mangat with the subject heading ‘Virtus Health Liquidity Event – Binding Share Sale – Incentives for New Doctors’, noting ‘[f]urther to the letter you received on 18 May regarding the incentive arrangements for the new Doctors we wish to advise you…’. On 8 August 2012, Dr Mangat received a letter and a Share Offer form with the same subject heading, noting that VH's offer for ‘recently contracted Doctors’ would not disadvantage unsophisticated investors. On 17 August 2012, Dr Mangat returned the signed Share Purchase Application form for the purchase of 150,000 options in VH. The form tendered into evidence was the 2011 Share Offer form dated 17 August 2012, despite the 2011 Share Offer form stipulating that it must be returned no later than 31 January 2012. No other share offer form was put into evidence. The proposed sale of VH did not eventuate. In January 2013, VH decided to instead undertake an IPO. In March 2013, Dr Mangat received an email from VH notifying her that a shareholder resolution had been passed to list VH on the ASX. This was accompanied by an 'IPO Summary' document which provided that Dr Mangat could elect to receive an 'option offer' for 150,000 shares in VH in the 2013 year at an exercise price of $4.71, or cancel her share options and receive cash consideration of $271,500 and 39,206 shares in VH following its listing on the ASX. Dr Mangat elected to cancel her options, receiving $271,500 and 39,206 shares in VH. On 11 August 2015, the Commissioner sent a default assessment warning letter to Dr Mangat, noting she had failed to lodge her tax return for the 2013 financial year. The Commissioner ultimately issued Dr Mangat a default assessment of $217,511.60 and 75% penalty of $166,133.25. Dr Mangat objected against the assessment and the penalty, on the basis that she had received the right to acquire options in VH upon signing the 2011 Engagement Letter and therefore was entitled to the 50% general CGT discount. The Commissioner remitted the penalty to 50% of the tax shortfall, but disallowed Dr Mangat's application of the 50% general CGT discount. Dr Mangat appealed the Commissioner's decision to the Administrative Appeals Tribunal. Dr Mangat argued that it was clear from her subsequent conduct and actions that Dr Mangat intended in December 2011 to enter into binding relations premised on a right to receive 150,000 shares, which subsequently changed to options because she did not qualify as a sophisticated investor. That is, Dr Mangat acquired a beneficial interest in the shares, or options, at that time. Counsel submitted it was immaterial that the interest altered from a beneficial interest in a share in the Company, to a beneficial interest in an option, as both are ESS interests. Counsel noted that the issue of shares was not discretionary or dependent on Dr Mangat making an application. The completion and return of the application form in 17 August 2012 merely formalised the transaction. On the question of penalties, Dr Mangat submitted that prior to issuing the default assessments, the Commissioner was in possession of a document necessary to determine a tax-related liability, citing a printout of her tax agent portal, which recorded an entry under ‘2012-2013 Employee Share Schemes’ and therefore the Commissioner did not require her income tax return to determine her tax liability. Dr Mangat submitted her delay in lodging her income tax return was due to difficulty obtaining the relevant information from VH, to accurately complete her return. The Commissioner contended that Dr Mangat had a history of non-compliance with her tax obligations, spanning a period of more than a decade. Dr Mangat noted there had been no loss to revenue from her failure to lodge earlier tax returns, as her employers had remitted tax over the years and she was entitled to a tax refund overall. From around September 2014, Dr Mangat sought tax advice and, with the help of her accountant, took serious steps to lodge all her outstanding returns and bring her tax affairs into order. Monthly tax training – September 2018 Brown Wright Stein Lawyers © 2018 page 6 Issues 1. When did Dr Mangat acquire her ESS Interest? 2. Is Dr Mangat liable to pay an administrative penalty at the rate of 50% or are there factors that warrant further remission of the penalty? Decision Timing of acquisition of ESS Interest The Tribunal noted the case law in relation to the timing of granting of options including:  Federal Commissioner of Taxation v McWilliam [2012] FCAFC 105 where the Full Federal Court found an employee under an employee share scheme acquires a ‘right’ within the meaning of former Division 13A of the ITAA 1936 upon acquiring a right to require the employer to issue options to purchase shares, and does not acquire that right only upon the issue of the options themselves;  Fowler v Federal Commissioner of Taxation [2013] FCAFC 69 Mr Fowler had acquired a conditional right to insist that the company put the issue of options to him to the shareholders for approval. The Full Federal Court held that a conditional right to acquire options is not properly characterised as a right to acquires shares in the company for the purposes of former Division 13A;  Davies v Deputy Commissioner of Taxation [2015] FCA 773 where Perram J considered when certain shares and options were brought to tax in circumstances where the taxpayer acquired the right to have shares and options issued to him on a date under the terms of a deed entitled ‘Share Subscription and Offer Deed’, but where that right was contingent on shareholder approval being obtained in respect of the shares and in the case of the options, their exercise. His Honour held that the obligation to issue shares and options, although contingent, came into existence on the execution of the deed. The Tribunal concluded that VH had not made an offer of 150,000 shares at a price of $4.71 per share when the 2011 Engagement Letter was executed in 30 December 2011 and, therefore, Dr Mangat was not eligible for the 50% general CGT discount. The Tribunal was not persuaded, on the evidence presented, that Dr Mangat had acquired a beneficial right more than 12 months before the options were cancelled in June 2013, considering that the evidence fell well short of establishing that Dr Mangat had been made a specific offer of 150,000 shares in VH at a price of $4.71 in or about November 2011, noting that the testimonies were at odds with contemporaneous documents. The Tribunal considered the contemporaneous documents to be the most reliable sources of evidence, given the discrepancies. The Tribunal noted that the 2011 Engagement Letter did not reference terms of any equity incentive and was not satisfied that 'Schedule A' was part of the Engagement Letter, or that it was executed at the same time. The email exchange between Dr Mangat and Mr Moller in January and February 2013 further contradicted Dr Mangat's contention that she had already been offered the shares and suggested Dr Mangat was a ‘new Doctor’, notwithstanding the fact that she was a recipient of the Doctor Group email. The Tribunal also noted that the emails showed that VH and PWC were working to alter the share offer for new doctors, to ensure doctors who did not qualify as sophisticated investors were not disadvantaged, as a result of which, the Senior Member was not convinced the offer was open for acceptance in 2011. Remission of penalties In relation to penalties, the Senior Member considered the argument that Dr Mangat was waiting for VH to provide her information to be misplaced, noting that the self-assessment regime is premised on taxpayers taking responsibility for completing their returns. Where this was not possible, there were mitigating arrangements available to taxpayers, such as seeking an extension of time for lodgement, which Dr Mangat did not do. However, having regard to all the factors, particularly the fact that from late 2014, Dr Mangat had taken active steps to organise her taxation affairs, the Tribunal did not consider that Dr Mangat was completely indifferent to her taxation affairs. Rather, her behaviour was somewhere between acting recklessly (which would attract a 50% penalty) and a failure to take reasonable care (which would attract a 25% penalty). The Tribunal concluded that the penalty should be remitted to 40% of the shortfall amount. Monthly tax training – September 2018 Brown Wright Stein Lawyers © 2018 page 7 Citation Mangat v Commissioner of Taxation [2018] AATA 3012 (Lazanas SM, Sydney) w http://classic.austlii.edu.au/au/cases/cth/AATA/2018/3012.html 1.2 Fox – ESS interests and deferred taxing point Facts Alicia Fox was an executive assistant to the CEO, Adam Shapiro, of NewSat Limited from May 2010 until May 2015. NewSat was an Australian specialist satellite communications company that delivered internet, voice, data and video to customers via third party satellites using its ground-based teleports. NewSat had ambitions to build and own its own satellite called Jabiru-1. As part of the planned financing and launch of the Jabiru-1 project, NewSat offered certain directors and employees, including Alicia, the opportunity to enter into an employee share plan. Under the employee share plan, participants were granted Performance Rights which entitled the participant to convert the Performance Rights into NewSat ordinary shares on a 1-for-1 basis and at the participant's election, subject to certain vesting events. For the first half of the Performance Rights, the vesting events were: 1. the participant remaining an employee; and 2. NewSat publicly announcing that it had reached financial close on financing for Jabiru-1 (that is, the attainment of the necessary debt and equity to fund the construction and launch of Jabiru-1). These conditions were met in February 2014. The remaining half of the Performance Rights were to vest when NewSat publicly announced that it had successfully launched Jabiru-1 into orbit. Ultimately, this never occurred because NewSat was wound up before this occurred. Paragraph 4 of the documentation accompanying the 2011 offer provided: You should note that the taxation laws covering Performance Rights plans are complex and change from time to time. You should seek professional advice on the tax implications for you and your particular circumstances. Further, any advice given on behalf of the Company is general advice only and you should consider obtaining your own financial product advice from an independent person who is licensed by the Australian Securities and Investments Commission to give such advice. Paragraph 5 of the 2011 offer provided: You should read this letter and the enclosed copy of the rules, which set out all the terms of the issue of the Performance Rights. If you apply for Performance Rights in the manner described above you should then retain your copy of this document in a safe place for future reference. You are not obliged to participate and there will be no advantages or disadvantages to your employment whatever your decision. However, this gives you the chance to become a prospective owner of equity in the Company and to share personally in the Company’s growth and success. The 2011 offer was received by Alicia on 25 October 2011 and, if Alicia wished to accept the 2011 offer, she was required to do so by 31 October 2011. On 31 October 2011 Alicia accepted the offer and received 200,000 Performance Rights at no cost. In December 2011, NewSat entered into contracts for the manufacture and commercial launch of Jabiru-1. In June 2012, Alicia was again offered, and accepted, a further 500,000 Performance Rights. On 17 February 2014, NewSat obtained the debt and equity necessary for the construction and launch of Jabiru-1 and Alicia received an email advising that she could convert 350,000 Performance Rights into NewSat shares. Monthly tax training – September 2018 Brown Wright Stein Lawyers © 2018 page 8 On 13 June 2014, Alicia converted 350,000 Performance Rights into NewSat shares. By April 2015, NewSat was faltering and, unable to pay its contractors, was placed into administration. In May 2015, Alicia lodged her 2014 income tax return which included $106,058 in assessable income relating to the employee share scheme. This was the difference between the amount she paid ($0) and the market value of the employee share scheme interest. Several days later, the administrators made various employees of the company, including Alicia, redundant. On 12 October 2015, the liquidators made a declaration that there was no reasonable likelihood that NewSat shareholders would receive any distribution in the course of the winding up. At this point, Alicia's shares were effectively worthless. On 27 November 2015, Alicia lodged a request for an amendment to her income tax assessment for the 2014 income year to no longer include the $106,058 for her ESS interests. A notice of amended assessment was issued by the ATO in December 2015 on this basis. On 14 April 2016 ATO sent a letter to Alicia stating that the information that it had received information from NewSat in relation to the employee share scheme which did not match what Alicia had included in her assessable income. The letter proposed to amend Alicia’s assessment by including the ESS discount amount of $106,058. On 25 May 2016 Alicia’s husband wrote to the ATO on her behalf and stated that Alicia was not aware that the tax event occurred on issue not on sale of shares and that she was not given a reasonable opportunity to get independent financial advice. On 22 July 2016, the Commissioner issued a further notice of amended assessment which re-included the $106,058 relating to the employee share scheme in Alicia’s assessable income. On 22 August 2016 Alicia lodged an objection to the notice of amended assessment. The Commissioner disallowed Alicia's objection. On 7 February 2017, Alicia applied to the Tribunal for review of the objection decision stating in the reasons for the application that ‘the tax liability does not consider whether the shares were issued legally’. Alicia argued that she was not given reasonable opportunity to seek independent legal and financial advice prior to signing the 2011 offer and thus lacked capacity. In addition to this, Alicia submitted that she was coerced or pressured by the company secretary to sign the 2011 offer because of the company secretary's statement to her that ‘if you don’t sign this now you will miss out on your opportunity to receive these’ as she rushed to attend a board meeting. Alicia claimed the lack of capacity and coercion affected the legal validity of the 2011 offer and 2012 offer and this meant that the shares were not validly issued to her. As a result, the $106,058 ought never to have been included in her assessable income for the 2014 financial year. The Commissioner contended that the Tribunal did not have the capacity to determine whether Alicia's entry into the employee share scheme was void or voidable because to do so would involve an exercise by the Tribunal of judicial power. Issues 1. Whether the Tribunal had jurisdiction to determine that entry into the employee share plan was void or voidable? 2. Whether Alicia entered into the employee share plan as a result of coercion or undue influence? Decision Tribunal’s jurisdiction to determine Alicia’s claim Senior Member Pintos-Lopez rejected the Commissioner's argument that the Tribunal did not have the power to determine Alicia's application, citing Brandy v Human Rights & Equal Opportunity Commission (1995) 183 CLR 245, where Deane, Dawson, Gaudron and McHugh JJ stated: Monthly tax training – September 2018 Brown Wright Stein Lawyers © 2018 page 9 Difficulty arises in attempting to formulate a comprehensive definition of judicial power not so much because it consists of a number of factors as because the combination is not always the same. It is hard to point to any essential or constant characteristic. Moreover, there are functions which, when performed by a court, constitute the exercise of judicial power but, when performed by some other body, do not…. Thus, although the finding of facts and the making of value judgments, even the formation of an opinion as to the legal rights and obligations of parties, are common ingredients in the exercise of judicial power, they may also be elements in the exercise of administrative and legislative power. For the purposes of reviewing a decision, the Tribunal is empowered under section 43(1) of the Taxation Administration Act 1953 (Cth) to ‘… exercise all the powers and discretions that are conferred by any relevant enactment on the person who made the decision’. Thus the Tribunal has the power to determine the question raised by Alicia's application. Whether entry in employee share plan was void or voidable Senior Member Pintos-Lopez considered that Alicia was not coerced into signing the 2011 offer. In examining the circumstances surrounding Alicia's signing of the 2011 offer, the Senior Member noted that Alicia had had six days to consider the offer and obtain independent legal advice and this was a sufficient period of time, that the 2011 offer document stated that participants should obtain independent legal advice, that the pressure was created from Alicia's failure to act upon the 2011 offer's direction to obtain independent advice and also that there was no evidence that, if Mr Shapiro had not said those words to her, Alicia would have sought independent advice. As Alicia had failed to establish she was coerced into signing the 2011 offer, there was no evidence to establish that the assessment was excessive or otherwise incorrect. The objection decision was upheld. Citation Fox and Commissioner of Taxation [2018] AATA 2791 (Lopez SM, Melbourne) w http://classic.austlii.edu.au/au/cases/cth/AATA/2018/2791.html 1.3 Narumon – binding death nomination Facts Narumon Pty Ltd is the trustee of the John Giles Superannuation Fund. The Fund was established in 1992 and at that time the sole member was John Giles. John was married to Narumon Giles and had been for 19 years. John and Narumon had one son, Nicholas. John also have four children from a previous marriage, Patricia, Gregory, Anthony and Kelly. The trust deed for the Fund was varied in 1995 and 1999. The trust deed for the Fund was again varied in 2004 and then in 2007. The 2004 amendment permitted the payment of pensions to members The variation in 2007 was signed by John as an "authorised representative" of Narumon Pty Ltd. This was considered to not be an effective exercise of the power to amend the trust deed for the Fund. On 18 December 2012 John made a binding death benefit nomination under which he directed 40% of his benefits to be paid to each of Narumon and Nicholas and 20% to be divided equally between John's former wife, Patricia, Gregory and John’s sister, Roslyn. On 25 January 2013 John appointed Narumon and Roslyn as his attorneys under an enduring power of attorney and again under an enduring power of attorney made on 5 June 2013. The powers of Narumon and Roslyn in relation to financial matters were stated to begin from when John was assessed to be incapable of being able to make his own decisions by a medical professional with at least 10 years' experience. On 31 February 2013 (sic) John made a binding death benefit nomination under which he directed 44% of his benefits to be paid to each of Narumon and Nicholas with the remaining 12% paid to his legal personal representative. Monthly tax training – September 2018 Brown Wright Stein Lawyers © 2018 page 10 On 5 June 2013 John made a binding death benefit nomination under which he directed 47.5% of his benefits to be paid to each of Narumon and Nicholas with the remaining 5% paid to Roslyn. Clauses 12.2 and 12.5 of the trust deed for the Fund provided as follows: 12.2 The notice shall be binding on the Trustee provided the following conditions are satisfied: (i) each person nominated in the deceased Member’s binding death benefit nomination [sic]; (ii) the allocation of Benefits is clear; (iii) the nomination is in writing; (iv) the nomination is signed and dated by the Member in the presence of two witnesses over age 18 and who are not nominated as Dependants or a legal personal representative; (v) the notice contains a statement that the notice was signed by the Member in the presence of the witnesses; (vi) the notice was signed by the Member within three years of the Member’s death. … 12.5 A binding death benefit notice may be in the form set out in Schedule E to this Deed or some other form that complies with the Superannuation Law. The binding nomination made on 5 June 2013 was not in accordance with Schedule E but complied with the requirements of regulation 6.17A of the SIS Regulations. In June 2013 John's health began to deteriorate and his memory worsened. On 29 August 2013 John made a will appointing Narumon and Roslyn as his executors in the event of his death. In August 2013 John met with a geriatric psychiatrist, Dr Chau. In November 2013 Dr Chau assessed John as being totally incapable of making financial, health and lifestyle decisions. On 22 August 2014 the trust deed for the Fund was varied again by a Deed of Ratification and Variation, with one of the reasons for the document to be to fix the error with the 2007 deed amendment. The Deed of Ratification and Variation sought to set out all the terms of Fund. On 16 March 2016 Narumon and Roslyn executed a document as John's attorneys confirming an extension of the binding nomination 5 June 2013. Narumon and Roslyn, as John's attorneys, separately made a binding nomination under which John's benefits would go to Narumon and Nicholas as to 50% each. John died on 14 June 2017. At the time of his death, John's benefits in the Fund comprised of approximately $4 million, with $1 million in accumulation phase and $3 million in a pension account. A dispute arose under John's estate and as to who was entitled to his superannuation death benefits. The assets in John's estate were valued at approximately $200,000. Narumon and Roslyn renounced their right and title to probate and execution of the will. A limited grant of administration was issued to a lawyer with a speciality in succession law. The reversionary beneficiary for the pension account was Narumon. The documentation for the commencement of the pension and the nomination of Narumon as reversionary beneficiary could not be located, although a copy of advice recommending such a course of action could be located. Other materials, including adequacy statements of opinion for the Fund, indicated that a pension had been commenced by John on 1 December 2005. Narumon and Roslyn were also members of the Fund, although it is not clear when they became members. Monthly tax training – September 2018 Brown Wright Stein Lawyers © 2018 page 11 In order to obtain certainty in relation to a number of issues given the dispute between the family members, Narumon Pty Ltd applied to the court for declarations and orders. Issues 1. whether the Deed of Ratification and Variation made in 2014 was effective to amend the terms of the Fund? 2. whether John had commenced a lifetime pension in respect of which Narumon was the reversionary beneficiary? 3. whether the binding nomination made by John in 2013 had been validly extended by Narumon and Roslyn? Decision Terms of the Fund The Court was satisfied that the Deed of Ratification and Variation had been validly made and that it set out all of the terms of the Fund from that date. The assets of the Fund were declared to be held on the terms set out in the Deed of Ratification and Variation. Lifetime pension validly commenced The Court was satisfied that there was sufficient evidence that on 1 December 2005 John had commenced a lifetime pension and had nominated Narumon as the reversionary beneficiary in respect of the pension despite the fact that the original documentation could not be located. The Court made declarations consistent with that finding. Binding death benefit nomination The Court noted that the first issue to consider was whether the 2013 binding death benefit nomination had been validly made. The Court noted clause 12.5 of the trust deed for the Fund provided that a nomination 'may be in the form set out in Schedule E to this Deed or some other form that complies with the Superannuation Law’. The Court considered that the nomination was not in accordance with Schedule E and, further, that it could not be said that it ‘complies with the Superannuation Law’. The reason for the latter finding was that only Regulation 6.17A of the SIS Regulations prescribes the form of binding nominations and that regulation does not apply to self-managed superannuation funds. However, the Court noted that clause 12.5 used the word "may" and, accordingly, it did not exclusively set out the form by which a binding nomination could be made. The Court considered the requirement set out in clause 12.2 of the trust deed for the Fund. It was noted words were missing from clause 12.2(i). The Court considered it appropriate to read words into that clause as follows: (i) each person nominated in the deceased Member’s binding death benefit nomination is either the legal personal representative or a dependant of the Member”.[ The Court noted that Roslyn was not a dependant of John and, therefore, the binding nomination did not comply with clause 12.2. The Court considered that the effect of this was that the notice was only invalid to the extent that it did not comply and but that it is otherwise binding on the trustee. The Court accepted that on one view, if any person nominated in the binding nomination was not a dependant or legal personal representative, then the whole of the notice was invalid under clause 12.2. However, it preferred a construction that adopted a practical and purposive approach of giving effect to the deceased's intention, to the extent possible. The Court then considered whether the 2016 extension had been validly made by Narumon and Roslyn. This involved two questions. Firstly, whether the power to make the extension was conferred under the enduring Monthly tax training – September 2018 Brown Wright Stein Lawyers © 2018 page 12 power of attorney. Secondly, whether the conflict rule for attorneys meant that the power had not been validly exercised given that Narumon benefited under the binding nomination. The Court was satisfied that the making of the binding nomination was a 'financial matter' as defined the relevant section of the Powers of Attorney Act and that, therefore, Narumon and Roslyn had the power to enter into the extension pursuant to the enduring power of attorney made by John. In relation to the conflict, the Court noted that Narumon's duty to avoid a conflict required Narumon to avoid a duty between herself (or a relative) and John's interest. In making the extension, Narumon was acting in accordance with John's wishes, as had been set by him in making the binding nomination in June 2013. Accordingly, the Court considered that the extension was not a conflict transaction. The Court made orders providing that Narumon Pty Ltd is required to act in accordance with the binding nomination apart from the 5% directed to Roslyn. In relation to that amount, Narumon Pty Ltd would be required to deal with it in accordance with its discretion under clause 31.1 of the trust deed for the Fund, which presumably conferred a discretion on the trustee to pay the benefits to dependants of John. Citation Narumon Pty Ltd, Re [2018] QSC 185 (Bowskill J, Brisbane) w http://classic.austlii.edu.au/au/cases/qld/QSC/2018/185.html 1.4 McGlinn – non-commercial losses Facts Ms McGlinn commenced a business of breeding Australian bloodline Arabian horses in the 1998 income year. Ms McGlinn's business was not a success and in the 2008 income year changes were made to the business. Instead of breeding Australian bloodline Arabian horses, Ms McGlinn began to purchase Arabian horses from overseas and commenced breeding from those animals. The imported horses cost considerably more than domestic Arabian horses and were considered to be greatly superior. This change resulted in Ms McGlinn acquiring additional land and equipment, the adoption of a new breeding method and involved the development of a new customer base. For the income year ending 30 June 2012, the business made a tax loss. Ms McGlinn applied this loss to reduce her other taxable income in that year to nil. On 6 December 2013, the Commissioner issued her a notice of amended assessment deferring the loss in accordance with the non-commercial business rules. The rules (section 35-10) relevantly provide as follows: (2) If the amounts attributable to the business activity for that income year that you could otherwise deduct under this Act for that year exceed your assessable income (if any) from the business activity for that year, or your share of it, this Act applies to you as if the excess: (a) were not incurred in that income year; and (b) were an amount attributable to the activity that you can deduct from assessable income from the activity for the next income year in which the activity is carried on. (3) In applying this Division, you may group together business activities of a similar kind. Ms McGlinn objected to the amended assessment on the basis that the Commissioner should have exercised his discretion under section 35-55 of ITAA1997. That section allows the Commissioner to suspend the noncommercial loss rules in respect of a ‘business activity’ for one or more income years (referred to as the excluded years) if, among other tests, he is satisfied that it would be unreasonable to apply those rules because the ‘business activity’ has started to be carried on and, for the excluded years: 1. because of its nature, it has not produced, or will not produce, assessable income greater than the deductions attributable to it; and Monthly tax training – September 2018 Brown Wright Stein Lawyers © 2018 page 13 2. there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will produce assessable income for an income year greater than the deductions attributable to it for that year. Ms McGlinn contended that she had commenced a new and distinct business activity in the 2008 income year, namely the breeding of international bloodline Arabian horses and: 1. because of the nature of that activity, it would take between 10 to 15 years of breeding before a profit could be earned; and 2. that there was an objective expectation that the business would become profitable within that time, which for that industry was a commercially viable period, such that the Commissioner should exercise his discretion. The Commissioner disallowed the objection. In doing so, the Commissioner considered that determining the objection involved answering the following questions: The question is therefore whether the change in bloodlines constituted a new business activity for the purposes of the [non-commercial business losses (NCL)] legislation and thus reset the lead time as established above. (the First Question) … The question then is whether your business activities pre and post 2007/08 are of a similar kind and would be grouped together such that they would be considered the same business activity for the purposes of determining the lead time. (the Second Question) In the objection decision, the Commissioner considered his tax ruling TR 2001/14, which sets out when the Commissioner considers that business activities are sufficiently similar to be grouped under section 35-10, upon an application by the taxpayer. The Commissioner's objection decision concluded that the ‘… activities are much more than related. They are in fact the same business activity that has been carried on continuously from 1998 to today.’ Ms McGlinn appealed the objection decision to the Federal Court of Australia. Before the Federal Court, it was accepted that the Court could not review a decision by the Commissioner that the activities were the same business activity as an appeal to the Federal Court was limited to a question of law. However, Ms McGlinn contended that the Commissioner had made an error of law in that the Second Question involved a misapplication of section 35-55 of the ITAA 1997 as she had not made an application to be grouped and, therefore, the similarity of the business activities was not sufficient to preclude the exercise of the Commissioner's discretion under section 35-55 of the ITAA 1997. The Commissioner accepted that the Second Question involved an error of law but contended that it did not affect the decision. The Commissioner had asked the proper question, being the First Question, and answered that question in coming to his conclusion. Issue Whether the Commissioner had made an error of law in reaching his decision that the business activities of Ms McGlinn from 2008 were not new business activities? Monthly tax training – September 2018 Brown Wright Stein Lawyers © 2018 page 14 Decision Steward J observed that Division 35 of ITAA1997 is concerned with amounts that are 'attributable to the business activity' rather than with amounts attributable to a 'business' and noted that it will often be the case, as a matter of fact, that what might be described as a business activity might also constitute an entire business. However, in particular cases, the concept of 'business activity' may be apt to describe a part only of one business. The fact that an individual may carry on distinct operations or pursuits that are 'similar' or of a 'similar kind' will not necessarily compel a conclusion that they form part of one singular 'business activity'. Steward J regarded this as a strong indication that even similar activities may be treated as distinct business activities unless the taxpayer agrees to group them. Notably, the Commissioner has no similar power to group similar business activities. Steward J considered that the Second Question was undoubtedly misconceived as Ms McGlinn had not sought to group her pre-2008 activities with her post-2008 activities. Accordingly, the decision maker had asked the wrong question. Although the objection decision had concluded that the post-2008 and pre-2008 activities were the same activities, Steward J was not satisfied that asking the wrong question did not 'play a relevant or material part' in the decision-making process. Steward J was of the view that asking the wrong question could have affected the determination of Ms McGlinn's objection in some way. Consequently, the Court ordered that the objection decision should be set aside and the matter remitted to the Commissioner for re-determination in accordance with law. Citation McGlinn v Commissioner of Taxation [2018] FCA 1275 (Steward J, Melbourne) w http://classic.austlii.edu.au/au/cases/cth/FCA/2018/1275.html 1.5 Ford – default assessment penalty Facts The 2015 income tax return for Vicki Ford was due to be lodged by 28 April 2016. Vicki did not lodge her tax return by the due date. Since 2003 Vicki had lodged every tax return late and had failure to lodge penalties imposed on her as a result. On 28 October 2016, the ATO wrote to Vicki through her accountants requiring her to lodge her 2015 tax return by 25 November 2016. Vicki did not respond and the ATO wrote again on 20 January 2017 informing her that: 1. if the 2015 tax return was not lodged by 20 February 2017, she would be liable to pay an administrative penalty of 75% of any tax assessed on a default assessment made by the Commissioner; 2. she may be liable for a penalty for failure to lodge her income tax return on time. By 24 March 2017, Vicki did not lodge her 2015 income tax return or make any contact with the ATO. The Commissioner issued a default assessment determining that Vicki had taxable income of $306,392 for the income year ended 30 June 2015. On 31 March 2017 the Commissioner issued Vicki with a notice of assessment for the year ended 30 June 2015. The assessed tax payable was $111,095.28 and the balance of tax owing to the ATO, after deducting PAYGW tax credits, was $48,292.80. In addition, the ATO issued: 1. a penalty of $900 for her failure to lodge her income tax return on time; and 2. an administrative penalty of $36,219, being a base penalty amount of 75% of the tax related liability, under s 284-75(3) of Schedule 1 of the TAA1953 for failure to provide a document to the Commissioner necessary to determine her tax related liability. On 3 April 2017, Vicki lodged her 2015 income tax return. Monthly tax training – September 2018 Brown Wright Stein Lawyers © 2018 page 15 Vicki lodged an objection to the imposition of penalties and interest on the grounds she had not received the letters of 28 October 2016 or 20 January 2017, and was therefore unaware that a default assessment would be issued, or the date she needed to lodge her tax return in order to avoid being issued with a default assessment. Vicki’s accountants stated they did not receive the 2015 default assessment for Vicki until 4 April 2017, the day after they lodged Vicki’s 2015 tax return, and that the return lodged by Vicki resulted in a greater tax liability than the amount assessed under the default assessment. On 1 November 2017, the Commissioner allowed the objection in part, reducing the penalty from 75% of the tax shortfall to 50%, on the basis that the return lodged by Vicki increased the tax payable by Vicki. Vicki applied to the AAT for a review of the Commissioner's decision. Vicki contended that none of the warning letters were received by her accountant, being the address for service for Vicki, and the ATO portal did not list any of the warning letters that had been sent. In the Tribunal, Vicki's accountant (who represented her before the Tribunal) noted that he had been Vicki's accountant for the last 20 years and that, as part of his practice, he sent reminders each year to Vicki to lodge her tax returns by the due date. The accountant also noted that Vicki was fully aware of her obligations to lodge her tax returns. The Commissioner submitted that it was reasonable to expect that Vicki would have been aware of her requirement to lodge an income tax return by the required due date regardless of the non-receipt of any warning letter from the ATO. The Commissioner further submitted that Vicki did not notify the ATO of any circumstances preventing her from lodging her return, and noted that in previous income years, Vicki failed to lodge her tax return by the due date, in some cases being overdue by more than several years, exhibiting a behaviour of disregard for her tax obligations and responsibilities. On that basis, no further remission was appropriate. Issues 1. Whether the default assessment penalty was correctly imposed? 2. Whether the Commissioner should exercise his discretion to further remit the default assessment penalty? Decision Was penalty correctly imposed? The Tribunal found that the administrative penalty for failure to provide a document was correctly imposed. There was no evidence that any of the notices sent by the ATO was returned as undeliverable. The Tribunal also found that Vicki had at least received the notice imposing the penalty, as she had objected to the notice. Further, although there is a requirement that a notice imposing a penalty be served on a party, there is no legal requirement that the Commissioner must warn a person that a penalty may be imposed. Even if Vicki had not received the warning letters that an administrative penalty may be imposed, that in itself did not invalidate the imposed penalty. Should penalty be further remitted? In determining whether the penalty should be remitted in part or in full, the Tribunal considered there were no grounds to remit the penalty due to any extenuating circumstances or due to any mistaken belief that the lodgement was not required. The Tribunal found the penalty imposed was not unjust or disproportionate to Vicki's ‘tardy behaviour’, demonstrating a complete disregard for her legal tax obligation. Vicki was fully aware of her obligations to lodge her tax return by the due date, given she had received yearly reminders from her accountant. Citation Ford and Commissioner of Taxation [2018] AATA 3039 (Grigg D, Brisbane) w http://classic.austlii.edu.au/au/cases/cth/AATA/2018/3039.html Monthly tax training – September 2018 Brown Wright Stein Lawyers © 2018 page 16 1.6 Canberra Cleaners – garnishee notice Facts On 29 November 2016, the Commissioner for ACT Revenue assessed Phillip Arcidiacono, trading as Rose Cleaning Services for a payroll tax liability of $4,612,887. Following further investigations, the Commissioner concluded that Phillip, Canberra Cleaners Pty Ltd and Rose Cleaning Asset Services Pty Ltd formed a payroll group, as a result of which, they became jointly and severally liable for the group's payroll tax debt pursuant to section 50 of the Tax Administration Act 1999 (ACT) (TAA). On 13 February 2017 and 28 March 2017 the Commissioner issued garnishee notices to a number of debtors of entities the payroll group requiring those persons to pay any amount owed to the members of the group to the Commissioner. On 9 August 2017, the Commissioner issued Canberra Cleaners a notice of assessment for the debt owing under the assessment issued to Phillip, less $702,147 which the Commissioner had recovered through garnishee processes. On 17 October 2017 the garnishee notices issued by the Commissioner on 13 February 2017 and 28 March 2017 were set aside by the ACT Supreme Court. On 18, 19 and 31 October, the Commissioner issued garnishee notices to businesses the Commissioner believed had contracted with the payroll group. The effect of the notices was that any monies the businesses owed to the payroll group, were instead required to be paid directly to the Commissioner. The garnishee notices issued on 18 October 2017 referred to the full debt owed by Phillip and discussed the invalidity of the notices issued on 13 February 2017 and 28 March 2017 requiring the recipient to pay any money owed to the members of the group to the Commissioner, ‘including any monies which you may be required to pay to the entities as a result of the invalidity of the 13 February 2017 and 28 March 2017 garnishee notice, until the entities’ outstanding tax liability is discharged.’ The garnishee notices issued on 19 October 2017 and 31 October 2017 did not contain such wording and instead required the recipients to pay the unpaid tax liabilities of the group with accrued interest after allowing for the amounts collected under the previously issued garnishee notices, notwithstanding that those notices were set aside on 17 October 2017. On 26 October 2017, the payroll group commenced judicial review proceedings to have ten of the garnishee notices set aside. On 16 November 2017, the Commissioner issued compliance notices pursuant to section 56B of the TAA to 6 individuals who were directors or former directors of the entities in the payroll group. The compliance notices provided that if the directors did not cause the assessed tax liability to be paid or effectively take steps to put the companies into administration for the purposes of being wound up within 21 days of the notice being given, the directors would become personally liable for the debt. On 4 December 2017, the directors commenced judicial review proceedings and obtained a stay of the operation of the compliance notices. The court also granted an interim stay order in respect of the operation of 6 of the garnishee notices, while no monies were payable under the remaining 4 notices. In the current proceedings, the payroll group challenged the validity of the garnishee notices on the following grounds: 1. the Commissioner failed to take into account a relevant consideration, namely that issuing the garnishee notices, which seized the entirety of the payroll group's gross income, did not allow for the payment of operating expenses (Issue 1); 2. the Commissioner took into account irrelevant considerations, namely that the directors and shareholders had the financial capacity to meet the tax liability and/or fund the continued operation of the businesses in the payroll group (Issue 2); Monthly tax training – September 2018 Brown Wright Stein Lawyers © 2018 page 17 3. the garnishee notices were not authorised by section 54 of the TAA, because their terms were ambiguous, misleading or uncertain, noting that in previous proceedings commenced by the payroll group, Canberra Cleaners Pty Ltd v Commissioner for ACT Revenue (No. 2) [2017] ACTSC 303, the Court declared that a number of the garnishee notices the subject of the proceedings were invalid (Issue 3); 4. a number of the garnishee notices were not authorised by section 54 of the TAA because they contained an error (Issue 4); 5. the exercise of the power to issue the garnishee notices was unreasonable, as the notices garnished 100% of the plaintiffs’ gross income and an amount far exceeding the payroll group's historical income, being a manner which would force the plaintiffs into insolvent trading (Issue 5); 6. the garnishee notices were issued based on assessments under the Payroll Tax Act 2011 (ACT) applying for the 2009-2010 and 2010-2011 years, when the applicable legislation was the Payroll Tax Act 1987 (ACT), which was no longer in force (Issue 6); and 7. the Commissioner had breached an implied 'Harman undertaking', pursuant to Harman v Secretary of State for the Home Department [1983] 1 AC 280 (Issue 7). Under the implied undertaking, parties are obliged not to use documents or information obtained under compulsory processes for any purpose outside the scope of the proceedings in which they were produced. The payroll group also contended that if the garnishee notices were invalid, the $702,147 which the Commissioner had recovered through garnishee processes, should be returned to reach respective entity. In relation to the compliance notices, the payroll group submitted they were not authorised by section 56B of the TAA, or involved an error of law by reason of Issue 6 above. Alternatively, the payroll group argued that the compliance notices were invalidly issued because they were inconsistent with the directors duties in sections 181 and 182 of the Corporations Act 2001 (Cth), as the notices put each director into a conflict with the interests of the companies of which they were directors because it was in the interests of the directors to wind up the companies to avoid becoming personally liable for any debt owed by the payroll group (Issue 8). Issues 1. Are the garnishee issues invalid? 2. Are the compliance notices invalid? Decision Issue 1 and 5 The Court rejected the Payroll Group's submissions on Issues 1 and 5 on two grounds. Firstly, the Court rejected the premise that a company that does not receive income for a period necessarily becomes insolvent, noting a question of insolvency is far more complex. Secondly, the Court found that the impact of seizing the gross income on the business and whether this was unreasonable, were not considerations that the decision maker is bound to have regard to under the TAA. They were merely considerations which the decision maker could have regard to. Issue 2 The Court considered that the ultimate question was not whether the Commissioner should or should not have taken the payroll group's external resources (such as the financial capacity of directors) into account, but rather, whether the Commissioner was prohibited from taking those matters into account under the TAA. The Court concluded that the decision-maker was not prohibited from taking into account the broader context of the payroll group's financial capacity under the TAA. Issues 3 and 4 The Court however accepted that the garnishee notices issued on 18 October 2017 were confusing, embarrassing, ambiguous and misleading, because they were ambiguously worded such that the recipient was left with no understanding as to the correct amount to be paid to the Commissioner. Monthly tax training – September 2018 Brown Wright Stein Lawyers © 2018 page 18 In respect of the garnishee notice issued on 19 October 2017 and 31 October 2017, the Court noted that the amounts of $702,147 recovered on 19 October 2017 and the $918,581 recovered on 31 October were validly collected as, at the time of collection, there was no judicial declaration of invalidity. The Court noted that invalidity was required to be established by judicial, not administrative determination, as otherwise the system would be unworkable, given the vast number of administration decisions made daily that would be compromised. Issue 6 The Court noted that while the payroll group's arguments may have merits, section 134 of the TAA provides that challenges to garnishee notices and compliance notices are not appeal proceedings of the assessments. Accordingly, a collateral challenge in the current proceedings was not available to the payroll group. The Court concluded it did not have the power to declare the assessment to have been invalid in the present proceedings. Issue 7 The Court declined to rule on this, as it did not affect any reasons as to the validity or otherwise of the compliance notices under consideration. Issue 8 The Court considered this argument was misconceived, noting that the directors were obliged to ensure their companies complied with the law. The fact that the TAA permits the imposition of a personal obligation on the director of a company where a company fails to meet its statutory obligations has no bearing on the Corporations Act 2001 (Cth). COMMENT – the decision of the Court that the amounts collected by the Commissioner under the notices issued on 13 February 2017 and 28 March 2017 prior to the notices being set aside were still validly collected demonstrates that it is necessary in resisting an invalid garnishee notice that the notice be set aside prior to any payment being made to the Commissioner. Canberra Cleaners Pty Ltd v Commissioner for ACT Revenue [2018] ACTSC 208 (McWilliam AsJ, Canberra) w http://classic.austlii.edu.au/au/cases/act/ACTSC/2018/208.html 1.7 Fyna Projects – payroll tax liability and garnishee notices Facts In September 2015 and February 2016, Banfirn Pty Ltd and Fyna Projects Pty Ltd entered into separate management labour agreements, labour hire and sub-contract agreements with Pladmira Pty Ltd. Pladmira, Banfirn and Fyna are companies involved in the building industry. In May 2017 and February 2018, the Chief Commissioner of State Revenue investigated the obligations of Pladmira, Banfirn and Fyna under the PTA2007 (NSW). By way of letter dated 28 February 2018, the Chief Commissioner expressed certain views about the relationship between Pladmira, Fyna and Banfirn, namely that Pladmira operated as an employment agent, and whilst neither Fyna or Banfirn were employers for the purposes of the PTA2007 all three were in the same group for purpose of the PTA2007. Payroll tax assessment notices were subsequently issued to Banfirn and Fyna on the basis that they were jointly liable for the payroll tax liability of Pladmira under section 81 of the PTA2007, which provides as follows Joint and several liability (1) If a member of a group fails to pay an amount that the member is required to pay under this Act in respect of any period, every member of the group is liable jointly and severally to pay that amount to the Chief Commissioner. Monthly tax training – September 2018 Brown Wright Stein Lawyers © 2018 page 19 (2) If 2 or more persons are jointly or severally liable to pay an amount under this section, the Chief Commissioner may recover the whole of the amount from them, or any of them, or any one of them. … (5) This section applies whether or not the person was an employer during the relevant period. Some weeks thereafter, the Commissioner issued third party notices (commonly known as garnishee notices) to three banks of Fyna and Banfirn pursuant to section 46 of the Tax Administration Act 1996 (NSW), which provides the Commissioner with the power to require debtors of a taxpayer to pay to the Commissioner the amount owed to taxpayer. The payroll tax assessment notices and third party notices were subsequently withdrawn. However, on 12 April the Chief Commissioner issued two further payroll tax assessment notices to Fyna and Banfirn, for respectively $346,317 and $131,534 payable on 26 April 2018. On 23 April 2018 Banfirn and Fyna wrote to the Commissioner requesting that the assessments be withdrawn and that the Commissioner undertake not to commence recovery action. On 24 April 2018 the Commissioner advised that he would not be withdrawing the assessments and refused to make any undertakings. Banfirn and Fyna sought urgent injunctive relief ex parte and this was granted until 30 April 2018. An interim injunction was granted by the Court and extended as the parties agreed to certain undertakings, namely, the Chief Commissioner undertook not to issue any third party notice under section 46 of the TAA1996. Fyna and Banfirn undertook not to deal with their assets otherwise than in the ordinary course of business. Fyna and Banfirn argued that the power to collect tax from third party debtors of ‘the taxpayer’ in section 46 of the TAA was confined to those persons ‘primarily’ liable to pay tax, rather than those other persons who were jointly and severally liable, by reason of some other provision of a tax law, such as section 81 of the PTA2007. The Commissioner disagreed with this contention, noting that Banfim and Fyna fell within the definition of ‘taxpayer’ under the TAA1996 and that there was no special category of taxpayers who were not themselves an employer. The Chief Commissioner maintained that there was a single class of taxpayer, being all of the persons falling within the broadly framed definition of taxpayer in section 3 of the TAA1996, which provides as follows: taxpayer means a person who has been assessed as liable to pay an amount of tax, who has paid an amount as tax or who is liable or may be liable to pay tax. Issues Whether the Chief Commissioner could issue third party notices to clients and banks of Fyna and Banfirn under section 46 of the TAA? Decision Leeming JA rejected the construction propounded by Fyna and Banfirn. Leeming JA noted that the definition of ‘the taxpayer’ in the TAA1996 makes no distinction between primary taxpayers and other taxpayers, whose liability is generated by some other means. The concluding words ‘or who is liable or may be liable to pay tax’ contemplate that, contrary to the assessment and determination by a public officer, such as the Chief Commissioner, the person, as a matter of law, is not obliged to pay tax. The mere fact that a person is not ‘primarily’ liable for payroll tax, pursuant to sections 6, 7 and 8 of the PTA2007, being an employer, is no good reason to exclude that person from the conspicuously wider definition of ‘taxpayer’. Monthly tax training – September 2018 Brown Wright Stein Lawyers © 2018 page 20 Leeming JA also noted that the liability imposed by section 81 is a liability expressed to be joint and several and this is a conventional way to describe a primary liability. The liability imposed thereby, jointly and severally upon a member of a group, is a liability to pay the same amount that the employer had failed to pay. Leeming JA concluded that Fyna and Banfirn were ‘taxpayers’ for the purposes of the TAA and the Commissioner could issue third party notices to clients and banks of Banfim and Fyna. The Court refused the declaratory or injunctive relief sought by Banfim and Fyna and dismissed the proceedings Citation Fyna Projects Pty Ltd v Chief Commissioner of State Revenue [2018] NSWSC 1220 (Leeming JA, Sydney) w http://classic.austlii.edu.au/au/cases/nsw/NSWSC/2018/1220.html 1.8 Jensen – employee or contractor? Facts Soren Jensen, Chris Palframan and Jean Goodwin are professional actors. Soren, Chris and Jean were engaged by Cultural Infusion (Int) Pty Ltd to perform in a stage production called ANZAC Centenary Roadshow: Victoria's Journey of Remembrance, an initiative of the Victorian government. Cultural Infusion carried on a business of providing school and educational performances. The ANZAC Roadshow was different to all other productions of Cultural Infusions in that it went for 12 months as opposed to the usual 2-week duration. Soren, Chris and Jean were the entire cast of the ANZAC Roadshow. Soren, Chris and Jean were engaged as contractors, could undertake work elsewhere and invoiced Cultural Infusion under each actor's ABN. It was commonplace in the industry that actors in such productions would be engaged as contractors. Soren and Chris did not need to audition as the production manager Doug Montgomery already knew of their work. Rehearsals were conducted by Montgomery and overseen by script writer Sophia Suris. Midway through the 2-week rehearsal schedule, Soren, Chris and Jean were furnished written contracts, at separate meetings, and each claimed to sign under duress, feeling they had no choice if they wanted to continue in the production. Jean's agent agreed by email with Cultural Infusion that Jean would obtain her own public liability and workers compensation insurances. No party could locate a copy of the signed contract, and Soren, Chris and Jean each tendered an unsigned copy of their separate contract documents. The contract was a standard-form contract created by the actors representative organisation, the Media Entertainment and Arts Alliance (MEAA), for its members. It was expressly stipulated in the contract that the relationship between each of Soren, Chris and Jean and Cultural Infusion was "that of independent contractor and not that of employer and employee unless otherwise specified", and nowhere else was the relationship defined or explained; Under the contract: 1. Cultural Infusion could pass the acting work to another actor if Soren, Chris or Jean were unable to continue; 2. Soren, Chris or Jean could not subcontract their work without approval from Cultural Infusion; 3. Cultural Infusion could not guarantee the amount of work it would require of Soren, Chris or Jean; Monthly tax training – September 2018 Brown Wright Stein Lawyers © 2018 page 21 4. Soren, Chris and Jean were liable for their own public liability and workers compensation insurances; 5. Soren, Chris and Jean would be paid for rehearsals at the rate prescribed in the MEAA award; 6. Soren, Chris and Jean would have to invoice Cultural Infusion and fees paid by Cultural Infusion to them would be inclusive of GST; 7. Soren, Chris and Jean were paid a fixed amount per performance, plus travel allowance, a living away from home allowance, they were paid if a show was cancelled; and 8. there was no entitlement to holiday pay, sick pay or annual leave. The performances were to script, but the script would be developed with input from Soren, Chris and Jean, who brought their own artistic views and styles to their own performance, the development of the script and the performance dynamic. In March 2015, whilst negotiating a renewal of their contract with Cultural Infusions, Chris conducted research on the ATO website from which he formed the view that their relationship with Cultural Infusion was more properly an employment relationship rather than an independent contractor relationship. Soren and Jean also conducted their own research. Soren, Chris and Jean then engaged the MEAA to represent them in relation to whether they were more properly characterised as employees. On 16 August 2015 the MEAA wrote to Cultural Infusion giving notice of the exercise of a right of entry to its premises respecting suspected contraventions of the Fair Work Act. The contract negotiations broke down and Soren, Chris and Jean reported the matter to the Fair Work Ombudsman. On 3 January 2017 the Fair Work Ombudsman sent Cultural Infusions a letter of caution about suspect contraventions of the FWA, including that the arrangements were a sham contract arrangement under section 357 of the FWA. Section 357 of the FWA provides as follows: Misrepresenting employment as independent contracting arrangement (1) A person (the employer ) that employs, or proposes to employ, an individual must not represent to the individual that the contract of employment under which the individual is, or would be, employed by the employer is a contract for services under which the individual performs, or would perform, work as an independent contractor. In its letter, the Fair Work Ombudsman outlined factors that it considered were indicative of an employment relationship. On 5 January 2017 the Fair Work Ombudsman wrote to Soren, Chris and Jean stating that any claim should be pursued by them as a small claim under the FWA. On 11 December 2017 Soren, Chris and Jean lodged applications with the Federal Circuit Court of Australia contending that Cultural Infusion had failed to pay them minimum entitlement in respect of wages, loading, rehearsal hours and the cancellation of performances in breach of the Live Performance Award 2010. This claim was dependent on the contention that Soren, Chris and Jean were employees of Cultural Infusion. Issues Were Soren, Chris and Jean employees of Cultural Infusion under the FWA? Decision The Court noted that the approach to determining whether a person is an employee or independent contractor, in accordance with Hollis v Vabu Pty Ltd [2001] HCA 44, requires a consideration of the totality of the circumstances. The Court noted that in ACE Insurance Pty Ltd v Trifunovski. Perram J stated as follows concerning the distinction between an employee and employer: With that in mind one can at least say this: first, the distinction between an employee and an independent contractor is ‘rooted fundamentally in the difference between a person who serves his Monthly tax training – September 2018 Brown Wright Stein Lawyers © 2018 page 22 employer in his, the employer’s, business, and a person who carries on a trade or business of his own’; secondly, the answers to that question are to be determined by reference to the ‘totality’ of the relationship; thirdly, a number of indicia have accreted over time in the authorities which are thought to throw light to varying degrees on the outcome without being determinative: the terms of the contract; the intention of the parties; whether tax is deducted; whether sub-contracting is permitted; whether uniforms are worn; whether tools are supplied; whether holidays permitted; the extent of control of, or the right to control, the putative employee whether actual or de jure; whether wages are paid or instead whether there exists a commission structure; what is disclosed in the tax returns; whether one party ‘represents’ the other; for the benefit of whom does the goodwill in the business inure; how ‘business-like’ is the alleged business of the putative employee – are there systems, manuals and invoices; and so on – the list is neither exhaustive nor short. It will be necessary to refer to some of these factors later in these reasons and the authorities upon which they rest. (citations omitted) The Court noted that Soren, Chris and Jean were providing professional services and such services can be readily accommodated within a relationship of employee and employer as a relationship of independent contractor. Accordingly, the nature of the services provided were a neutral factor in the Court's consideration. The Court noted that the arrangements were in the context of a Government initiative to stage the Anzac Roadshow. The Court accepted that the contracts signed provided the terms of the agreement of the parties and did not accept that they had been signed by Soren, Chris and Jean under duress. The Court then considered the indicia referred to by Perram J in ACE Insurance as follows: 1. Control – as the rehearsals and script development "process was iterative", the Soren, Chris and Jean exercised some control in the manner in which they delivered their services; for this reason, it could not be said that Cultural Infusion exerted complete control over the work of Soren, Chris and Jean, as they had contended. 2. Terms of the contract – the Court noted the following: (a) the contract was in writing; (b) the absence of an express reservation of a right to terminate by Cultural Infusion was contrary to the suggestion that Cultural Infusion had a high degree of control. The Court considered that the right to dismiss is a significant factor in favour of the relationship being of employee and employer and the absence of such a right indicates an independent contractor relationship; (c) the contracts did not prohibit delegation and so Soren, Chris and Jean were not fixed with an obligation to render their services personally; (d) the contracts contained an express declaration that the relationship was of independent contractor and principal; (e) Soren, Chris and Jean would render invoices for their services together with an ABN and not subject to withholding tax; (f) liability for insurance rested with Soren, Chris and Jean; (g) Cultural Infusion did not have the exclusive right to the services of Soren, Chris and Jean, each maintained other engagements; and (h) Cultural Infusion did not reserve the goodwill which inhered in either the ANZAC Roadshow or the actors’ personal reputations. 3. Express declaration of intent – the Court noted that a declaration of intent in a contract document "may be particularly useful as 'an important and contemporary insight into what the parties intended and understood about [their] relationship' and, therefore, it was 'of significance that the parties’ contract expressly recorded that the nature of their relationship was that of independent contractors and principal.' 4. Business on own account – Soren, Chris and Jean provided their services to other organisations as independent contractors and they did so during the term of their contracts with Cultural Infusion. The Court observed that 'while goodwill may have attached to Cultural Infusion as a producer of performances such as the ANZAC Roadshow, so too, the opportunity existed for the reputation of the individual actors to grow depending upon the quality of the performances which they provided.' 5. Delegation – the Court noted that, whilst not determinative, a right of a delegation is inconsistent with an employment relationship. Soren, Chris and Jean had a right of delegation here. 6. Basis of remuneration – the Court noted that Soren, Chris and Jean would invoice Cultural Infusion for their services, and this was "foreign" to employment relationships. The fact that Cultural Infusion did not Monthly tax training – September 2018 Brown Wright Stein Lawyers © 2018 page 23 pay Soren, Chris and Jean periodically, but rather upon being invoiced, was indicative of a contractor rather than an employee. 7. Taxation – the Court noted that taxation is “an important and contemporaneous insight into what the parties’ intended and understood about this relationship”: ACE Insurance [2011] FCA 1204. The taxation and invoicing arrangements suggest the parties related as contractors, not employer and employee. 8. Holiday, sick leave and other entitlements – although no entitlements to such leave were provided for in this case, the Court regarded this "as being of lesser significance than the matters addressed above". 9. Provision of equipment - the Court noted that all equipment was provided by Cultural Infusion but consider this factor to be of lesser significance. 10. Expenditure – given the nature of the services, the Court considered that this factor was of limited relevance. 11. Assumption of risk – the Court considered that the risk assumed by Soren, Chris and Jean, and recognition of that risk in requiring their own insurances, was indicative of a contractor relationship rather than employment relationship. 12. Autonomy – the Court noted that Soren, Chris and Jean were not simply carrying out work as directed but retained a degree of autonomy. This was indicative of an independent contractor relationship. 13. Economic benefit – the Court noted that the benefit of the production economically was for Cultural Infusion. but that "each of the actors was distinctly identifiable as the actor of a particular part" and any enhancement in the professional reputation of an individual actor did not vest in Cultural Infusion. The Court concluded that Soren, Chris and Jean were independent contractors noting that their work was inherently freelance in nature and that they 'brought their individual skill and expertise to the ANZAC Roadshow performance.' Citation Jensen v Cultural Infusion (Int) Pty Ltd [2018] FCCA 2137 (Kelly J, Melbourne) w http://www8.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/FCCA/2018/2137.html 1.9 Appeal Update – Thomas The High Court has determined the appeal from the decision of the Full Federal Court in Thomas v Commissioner of Taxation [2017] FCAFC 57 (see our May 2017 tax training notes for a full summary of the facts and decision). In brief, the facts of the case were as follows: 1. in 2006-2008, Thomas Nominees Pty Ltd, as trustee of the Thomas Investment Trust, passed resolutions which purported to stream franking credits to the trust’s beneficiaries separately from, and in different proportions to, the income that comprised the franked distributions; 2. in 2010, the Queensland Supreme Court issued directions to the trustee that the resolutions made by the trustee were legally effective under imputation provisions set out in Division 207 of the ITAA 1997 and that the resolutions were effective to make such distributions. The Full Federal Court held that the Queensland Supreme Court had no jurisdiction to make orders concerning the application of the ITAA 1997 in the manner that it did but it interpreted the orders of the Queensland Supreme Court as providing that the trustee had effectively made distribution resolutions in the way required for Division 207 to operate the way that the taxpayers intended for it to operate. In respect of the order as to the making of the distribution resolutions, the Full Court considered that it was bound by the decision of the Queensland Supreme Court in accordance with section 96 of the Trusts Act 1973 (Qld). Both parties appealed the decision of the Full Court to the High Court. The High Court determined that an order of the Queensland Supreme Court could not bind the Commissioner contrary to the operation of the tax laws. The High Court considered that the Full Court's attempt to cure the resolutions of the trustee, and the orders of the Queensland Supreme Court, by interpreting the orders as providing that the trustee had effectively made distribution resolutions in the way required for Division 207 to operate the way that the trustee intended for it to operate was misconceived as this was contrary to the express terms of the resolutions. Accordingly, the High Court allowed the Commissioner's appeal and set aside the orders of the Full Court. Monthly tax training – September 2018 Brown Wright Stein Lawyers © 2018 page 24 The lower court had considered itself bound to give effect to the orders of the Queensland Supreme Court because of the decision in Executor Trustee and Agency Co of South Australia Ltd v Deputy Federal Commissioner of Taxes (SA) [1939] HCA 35. The majority of the High Court stated ‘Executor Trustee is authority for the proposition that the general law rights of trustee and beneficiary inter se, to the extent that they are defined by a decision made in duly constituted proceedings, are defined as against the Commissioner unless the decision is set aside’. TIP – the importance of this decision is that the Commissioner will be bound to accept the facts as determined by a court in relation to the position between a trustee and beneficiary, even if he is not party to the proceedings. Citation Federal Commissioner of Taxation v Thomas [2018] HCA 31 (Kiefel CJ, Bell, Keane, Nettle, Gordon and Edelman JJ, and Gageler J) w http://classic.austlii.edu.au/au/cases/cth/HCA/2018/31.html 1.10 Appeal Update – Aussiegolfa The Full Federal Court has delivered its decision on the appeal from the decision in Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation [2017] FCA 1525. In the first instance decision, Pagone J had upheld the decision of the Commissioner that an investment made by Aussiegolfa as trustee for the Benson Family Superannuation Fund in the DomaCom Fund was an in-house asset and breached the sole purpose test. The detailed facts and reasoning in support of Pagone J's decision are set out in our February 2018 tax training notes. In summary, the pertinent facts are as follows: 1. the DomaCom Fund is a widely held trust and the trustee created various sub-funds within the DomaCom Fund; 2. Aussiegolfa subscribed for units in the DomaCom Fund in a sub-fund in its capacity as trustee for the Benson Family Superannuation Fund. The other unitholders of the sub-fund were the mother and sister of a member of the superannuation fund; 3. the assets of the sub-fund were applied to acquire student accommodation units in Burwood, Victoria; 4. the custodian of the DomaCom Fund entered into a leasing and management arrangement with Student Housing Australia Pty Ltd who placed tenants into the units located at the Burwood property; 5. the first two tenants were unrelated to the members of the Benson Family Superannuation Fund, however, the third tenant was the daughter of a member; 6. the units in the sub-fund represented 7.83% of the assets of the Benson Family Superannuation Fund. The Commissioner determined that the units were in-house assets and the investment in the DomaFund caused Aussiegolfa to breach the sole purpose test. These decisions were upheld by Pagone J. The Full Court agreed that the investment in the DomaCom Fund was an in-house asset as, in applying the definition of ‘related trust’, it was the sub-fund that was the applicable trust and not the whole of the DomaCom Fund. The sub-fund was a related trust as Aussiegolfa as trustee for the Benson Family Superannuation Fund, the mother of the member and the sister of the member, all of whom were related, controlled more than 50% of the units in the sub-fund. However, the Full Court did not agree that the investment caused Aussiegolfa to breach the sole purpose test. The Court noted as follows in coming to its conclusion: 1. there was no evidence to support the position that the original investment by Aussiegolfa in the DomaCom Fund was to lease a property to daughter of the member; 2. the property was leased to member's daughter at market rent; 3. the member and his daughter did not receive any financial or other non-incidental benefit from the leasing arrangement; 4. the member's daughter was a student and was a suitable tenant; 5. the property was first leased to other arm's-length tenants before it was leased to the member's daughter; 6. the tenancies were arranged through DomaCom's property department with no involvement from Mr Benson. Monthly tax training – September 2018 Brown Wright Stein Lawyers © 2018 page 25 Citation Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation [2018] FCAFC 122 (Besanko, Moshinsky, Steward JJ, Melbourne) w http://classic.austlii.edu.au/au/cases/cth/FCAFC/2018/122.html Monthly tax training – September 2018 Brown Wright Stein Lawyers © 2018 page 26 2 Legislation 2.1 Progress of legislation Title Introduced House Passed House Introduced Senate Passed Senate Assented Income Tax Rates Amendment (Working Holiday Maker Reform) 2016 12/10 17/10 7/11 Superannuation (Objective) 2016 9/11 22/11 23/11 Treasury Laws Amendment (Enterprise Tax Plan No. 2) 2017 11/5 8/2 12/2 Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 2) 2017 14/9 23/10 13/11 Treasury Laws Amendment (2018 Measures No. 2) 2018 8/2 25/6 26/6 Treasury Laws Amendment (2018 Measures No. 3) 2018 15/2 27/6 27/6 23/8 31/8 Treasury Laws Amendment (2018 Measures No. 4) 2018 28/3 25/6 25/6 Treasury Laws Amendment (2018 Superannuation Measures No. 1) 2018 24/5 19/6 25/6 Treasury Laws Amendment (Accelerated Depreciation for Small Business Entities) 2018 24/5 19/6 25/6 Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) 2018 18/10 8/2 12/2 Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) 2018 8/2 1/3 19/3 Treasury Laws Amendment (Tax Integrity and Other Measures) 2018 28/3 10/5 18/6 Treasury Laws Amendment (Tax Integrity and Other Measures No. 2) 2018 24/5 25/6 27/6 Treasury Laws Amendment (Working Holiday Maker Employer Register) 2017 16/2 9/5 10/5 2.2 DGR reforms Treasury has published a consultation package in relation to the reforms announced on 5 December 2017 for the deductible gift recipient regime. The reforms announced were as follows:  a requirement for non-government organisations with DGR status to register as a charity with the ACNC from 1 July 2019;  transition arrangements to support existing organisations with DGR status to register as a charity with the ACNC;  the introduction of discretion for Commissioner of Taxation to exempt organisations with DGR status from the requirement to register as a charity in limited circumstances; and  the abolition of certain public fund requirements. The package published by Treasury includes a detailed consultation paper setting out who is affected by the reforms, the process for a DGR to be registered as a charity and proposed transition arrangements. w https://treasury.gov.au/consultation/c2018-t321162/ Monthly tax training – September 2018 Brown Wright Stein Lawyers © 2018 page 27 2.3 Lower company tax rate The Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2018 was passed by the Senate without amendment on 23 August 2018. The proposed law will apply from the 2017/18 year. The ATO have released a draft Law Companion Ruling on the topic that is covered at point 3.2 of these notes. The bill makes changes, effective from the start of the 2017/18 year to the eligibility rules for an entity to be a base rate entity, and eligible for the 27.5% tax rate: 1. The requirement to be carrying on business has been removed. 2. The base rate entity passive income 80% test has been introduced. The bill also changes the franking rate provisions so that an entity’s franking rate is based on its prior year aggregated income, assessable income, and base rate entity passive income. If a company did not exist in the prior year, its franking rate will be 27.5%. w http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fbillhome%2Fr5997 %22 Monthly tax training – September 2018 Brown Wright Stein Lawyers © 2018 page 28 3 Rulings 3.1 Trust vesting The ATO has finalised its Taxation Ruling (TR 2018/6) on the tax consequences of the vesting of a trust. The draft ruling was discussed in our February 2018 tax training notes. In the final ruling, the ATO has inserted a paragraph to confirm that a valid extension of the vesting date does not cause CGT event E1 to happen. The ATO has also included the following additional example: Example 6 - discretion as to takers on vesting not exercised 41. The trust deed for the Turner Family Trust provided that the trust would vest on 1 January 2015. It also provided that, unless the trustee resolved to distribute the trust capital to particular beneficiaries before the vesting date, the trustee would hold the trust property absolutely for one or more persons chosen at the discretion of the trustee from a class of listed beneficiaries prior to the trust vesting. In the absence of the exercise of that discretion, the trustee would hold the trust property absolutely and solely for Jim. 42. On 1 January 2015 (the vesting date), the trustee had not exercised their discretion to nominate any taker on vesting from the class of listed beneficiaries. Accordingly, the trustee would hold the trust property absolutely and solely for Jim. Outside of the Taxation Ruling, the Commissioner has also provided additional guidance on trust vesting on its website at the following link https://www.ato.gov.au/general/trusts/trust-vesting/. ATO reference Taxation Ruling TR 2018/6 w https://www.ato.gov.au/law/view/document?docid=TXR/TR20186/NAT/ATO/00001 3.2 Base rate entity passive income The Commissioner has released draft Law Companion Ruling LCR 2018/D7 providing guidance on when amounts will fall within a type of base rate entity passive income for the purpose of determining eligibility for the lower company tax rate. The Draft Ruling notes that the following are BREPI: 1. corporate distributions (excluding non-portfolio dividends) and franking credits on the distributions; 2. non-share dividends; 3. interest or payments in the nature of interest, but not interest that is a return on an equity interest in the company (there are some other limited exceptions such as where the entity is a financial institution); 4. royalties; 5. rent; 6. a gain on a qualifying security; 7. net capital gains; 8. a share of the income of a trust or partnership, to the extent that income of the trust or partnership is BREPI. The Draft Ruling provides a number of different examples where a company is assessed on a share of net income from a trust or partnership and examples on how to apply the corporate tax rates for imputation purposes in different years. We have extracted one of these examples below. Example 1.3 - how to characterise income received by a trust Top Floor Co is wholly owned by the Mezanine Trust, which has two beneficiaries: Freddy and Basement Co. Top Floor Co derives only rental income. Top Floor Co pays a franked dividend to the MezanineTrust. Monthly tax training – September 2018 Brown Wright Stein Lawyers © 2018 page 29 The Mezanine Trust also derives interest from a bank account. The trustee streams the franked dividend to Basement Co for tax purposes under Subdivision 207-B of the ITAA 1997. Basement Co has no other income. The trustee makes Freddy entitled to the interest. Basement Co needs to determine whether its share of the net income of the Mezanine Trust is attributable to BREPI. The franked dividend received by Mezanine Trust from Top Floor Co is not a non-portfolio dividend, as it is not paid to a company.[33] The franked dividend received by Mezanine Trust is BREPI.] Basement Co's share of the net income of the Mezanine Trust is entirely referable to BREPI. ATO reference Draft Law Companion Ruling LCR 2018/D7 w https://www.ato.gov.au/law/view/document?docid=COD/LCR2018D7/NAT/ATO/00001 3.3 First Home super saver scheme The ATO has published a Law Companion Ruling (LCR 2018/5) on the first home super saver scheme (FHSS). The FHSS enables to individuals who have made voluntary contributions to their superannuation fund after 1 July 2017 to withdraw those contributions and associated earnings to purchase a first home. Applications to access the FHSS can be made from 1 July 2018. The released amount is included in the person's assessable income in the year in which they request the ATO to issue a release authority even if the amount is not released until the following income year. The person will be entitled to a non-refundable tax offset equal to 30% of the FHSS released amount in the same income year. The released amount is paid to the ATO and the ATO will withhold a PAYG amount from the released amount before paying the balance to the individual. The maximum amount that can be released is $15,000 in eligible contributions made in a particular year and a total of $30,000 across all years plus associated earnings. In relation to concessional contributions, only 85% of the contributions are releasable. The Ruling provides the following example: For example, if you contribute $20,000 of eligible concessional contributions in a financial year, you only have $12,750 of FHSS releasable concessional contributions (85% of $15,000). You can also withdraw associated earnings in respect of each of these contributions. The associated earnings are not counted towards the eligible contribution limits. There are obligations that must be met after the release of the contributions. Importantly, a contract to purchase residential premises must be entered into within 12 months of the release. The condition will not be met if the contract is entered into prior to the release. An application can be made to the Commissioner for additional time to enter into the contract of up to a further 12 months. Where the post-release obligations are not satisfied, the individual will be subject to FHSS tax of 20% of the released amount unless they make non-concessional contributions equal to the amount released within 12 months of the release and notify the Commissioner of the making of the contributions within the 12 month period. ATO reference Law Companion Ruling LCR 2018/5 w http://law.ato.gov.au/pdf/pbr/lcr2018-005.pdf 3.4 GST and supplies connected to indirect tax zone The ATO issued a Goods and Services Tax Ruling GSTR 2018/1 concerning when a supply of real property will be connected with the indirect tax zone under subsection 9-25(4) of the A New Tax System (Goods and Services Tax) Act 1999. The Ruling was previously issued as draft GSTR 2017/D2. It replaces GSTR 2000/31 Goods and services tax: supplies connected with Australia and GSTD 2004/3 Goods and services tax: Is a supply of rights to Monthly tax training – September 2018 Brown Wright Stein Lawyers © 2018 page 30 accommodation a supply of real property for the purposes of the A New Tax System (Goods and Services Tax) Act 1999?. The Ruling applies from 22 August 2018. The Ruling notes that section 9-25(4) of the GST Act provides that: A supply of real property is connected with the indirect tax zone if the real property, or the land to which the real property relates, is in the indirect tax zone. The test of whether supply of the real property is connected with Australia focuses on where the land is located, and not where the right over the land is located. 'Land' in this context means the physical land. 'Real property' is defined to include: 1. any interest in or right over land; 2. a personal right to call for or be granted any interest in or right over land; or 3. a licence to occupy land or any other contractual right exercisable over or in relation to land. The Ruling gave examples or when a supply of real property will be connected to Australia. This includes: 1. the sale of land situated in Australia; 2. the grant, assignment or surrender of a lease or licence of land situated in Australia; 3. a personal right to call for or be granted any interest or right over land in Australia; 4. the grant of a put or call option over land situated in Australia; 5. a licence to occupy land in Australia; or 6. the grant of contractual rights to occupy or stay at accommodation in Australia, such as a stay at a hotel or motel on presentation of a voucher or travel document, whether or not the supplier is the operator of the accommodation. ATO reference Goods and Services Tax Ruling GSTR 2018/1 w https://www.ato.gov.au/law/view/document?docid=GST/GSTR20181/NAT/ATO/00001 Monthly tax training – September 2018 Brown Wright Stein Lawyers © 2018 page 31 4 ATO and other materials 4.1 Deceased estates and assessment on legal personal representative The ATO has finalised Practical Compliance Guideline PCG 2018/4 outlining the circumstances when it will hold legal personal representatives of small and less complex estates personally liable for the tax liabilities of the deceased relating to the period prior to death. The Guideline does not deal with liabilities that an LPR may have in relation to the deceased estate (i.e. for the period after the death of the deceased person). The Guideline applies to an LPR who has obtained probate of a deceased persons’ will or letters of administration of a deceased estate provided that: 1. in the four years before the person’s death: (a) the deceased did not carry on a business; (b) the deceased was not assessable on a share of the net income of a discretionary trust; and (c) the deceased was not a member of a self-managed superannuation fund; 2. the estate assets consist only of: (a) public company shares or other interests in widely held entities; (b) superannuation death benefits; (c) Australian real property; and (d) cash and personal assets such as cars and jewellery; and 3. the total market value of the estate at the date of death was less than $5million and none of the estate assets are intended to pass to a foreign resident, a tax exempt entity or a complying superannuation entity. The Guideline provides that LPRs may be personally liable where they have distributed the deceased’s assets and are on notice of a claim by the ATO. The situations where the ATO will consider the LPR has notice of a claim by the ATO include: 1. where the deceased owed an amount to the ATO at the date of their death; 2. there are any liabilities arising under outstanding assessments on tax returns lodged at the time of deceased's death; 3. there are any liabilities arising under assessments from outstanding tax returns; 4. where the LPR has been notified of a decision by the ATO to review or examine the tax affairs of the deceased, it will have notice of any liabilities arising from amended assessments or other changes resulting from the review. The situations where the ATO will consider that the LPR does not have notice of a claim include: 1. where the LPR lodged returns or advised the ATO that a return was not required to be lodged if: (a) the LPR acted reasonably in lodging all outstanding returns or in advising that no return was required to be lodged; and (b) the ATO has not given the LPR notice that it intends to examine the deceased’s taxation affairs within 6 months from lodgment (or the advice that lodgment is not necessary) of the last of the outstanding returns by the LPR 2. where the deceased lodged returns or advised the ATO that a return was not necessary, and the LPR becomes aware of an irregularity – and the LPR gives ATO notice of the irregularity in writing and the ATO does not issue an amended assessment or indicate that it intends to review the matter within 6 months of the notice from the LPR. The Guideline applies from 22 August 2018. ATO Reference Practice Compliance Guideline PCG 2018/4 w https://www.ato.gov.au/law/view/document?docid=COG/PCG20184/NAT/ATO/00001 Monthly tax training – September 2018 Brown Wright Stein Lawyers © 2018 page 32 4.2 Main residence exemption and deceased estates The ATO has issued draft Practical Compliance Guideline PCG 2018/D6 which sets out the approach taken by the ATO in relation to extending the two year period for beneficiaries to dispose of dwellings acquired from a deceased estate without incurring capital gains tax liability. The Draft Guideline outlines a safe harbour compliance approach which includes relevant conditions that must be satisfied in order for a beneficiary to qualify for the safe harbour. If the relevant conditions are satisfied, the ATO will allow the beneficiary up to 12 additional months to sell the dwelling without the need to apply to the Commissioner for a formal extension. You will need to be able to prove on review or audit however that the safe harbour conditions are met. The safe harbour conditions are as follows (all must be satisfied): 1. during the first two years after the interest in the dwelling passed to the beneficiary, more than 12 months was spent addressing one or more of the following factors (this list is not exhaustive): (c) the ownership of the dwelling, or the will, is challenged; (d) a life or other equitable interest given in the will delays the disposal of the dwelling; (e) the complexity of the deceased estate delays the completion of administration of the estate; (f) settlement of the contract of sale of the dwelling is delayed or falls through for reasons outside the taxpayer’s control; 2. the dwelling was listed for sale as soon as practically possible after those circumstances were resolved (and the sale is actively managed to completion); 3. the sale of the dwelling completed within six months of the dwelling being listed for sale; 4. the following circumstances were immaterial to any delay in selling the property: (a) waiting for the property market to pick up before selling the dwelling; (b) delay due to refurbishment of the house to improve the sale price; (c) inconvenience on the part of the trustee or beneficiary to organise the sale of the house; or (d) unexplained periods of inactivity by the executor in attending to the administration of the estate. 5. the longer period for which the taxpayer would otherwise need the discretion of the ATO to be exercised is not more than 12 months. The Draft Guideline notes the following factors may be relevant to the exercise of the Commissioner’s discretion (but are not relevant for the safe harbour): 1. the sensitivity of the taxpayer’s personal circumstances and/or of other surviving relatives of the deceased; 2. the degree of difficulty in locating all beneficiaries required to prove the will; 3. any period the dwelling was used to produce assessable income; 4. the length of time the taxpayer held the ownership interest in the dwelling. Comments on the Draft Guideline are due by 21 September 2018. It is intended that the Draft Guideline, when finalised, will apply before and after its date of issue. ATO Ref Practical Compliance Guideline PCG 2018/D6 w https://www.ato.gov.au/law/view/document?docid=DPC/PCG2018D6/NAT/ATO/00001 4.3 Image rights On 19 July 2017 the ATO released a draft Practical Compliance Guideline PCG 2017/D11 concerning the tax treatment of payment for use and exploitation of a professional sportsperson's 'public fame' or 'image' (Draft Guideline). On 24 August 2018 the ATO withdrew the Draft Guideline over concerns about the tax effectiveness of at least some of the arrangements that were observing. The Draft Guideline will not be finalised. For the period up to 1 July 2019, the ATO state they will not seek to apply compliance resources to review an arrangement entered into prior to 24 August 2018, where that arrangement complies with the terms of the Draft Monthly tax training – September 2018 Brown Wright Stein Lawyers © 2018 page 33 Guideline, provided that the arrangement was entered into and carried out as a consequence of the taxpayer relying on the Draft Guideline in good faith. ATO Reference Practical Compliance Guideline PCG 2017/D11 (Withdrawn) w https://www.ato.gov.au/law/view/document?docid=DPC/PCG2017D11/NAT/ATO/00001 4.4 GST – inbound tour operators and agency On 23 August 2018 the ATO released a draft Practical Compliance Guideline PCG 2018/D7, relating to inbound tour operators and agency, for comments until 21 September 2018. The draft Guideline sets out the circumstances in which the ATO will not apply its compliance resources to examine if an inbound tour operator is acting as an agent for non-resident clients. It is proposed that the draft Guideline will be finalised and effective from its date of issue. An inbound tour operator is defined in the draft Guideline as an Australian entity that enters into agreements with non-residents to arrange the supply of an Australian tour package including accommodation and nonaccommodation components on behalf of non-residents. If an inbound tour operator is acting as an agent for a non-resident who is located outside of Australia, any commission payable by the non-resident to the inbound tour operator is GST-free. However, where an inbound tour operator is acting as a principal, the entire supply, including the inbound tour operator's profit margin, may be subject to GST. Where the inbound tour operator: 1. does not adopt a position for GST purposes that is inconsistent with its position for income tax purposes; 2. does not also purport to be an agent of an Australian Product Provider and charge the Australian Product Provider a fee for agency services; and 3. meets all of the following requirements as set out in the table in the guideline, the ATO will not apply its compliance resources to examine if the inbound tour operator is an agent for the nonresident for GST purposes. The ATO considers that if an inbound tour operator provides other services while the non-resident tourist is in Australia, which may include meeting and greeting tourists on arrival in Australia, providing costumer assistance and conducting guided tours while the non-resident tourist is in Australia, the inbound tour operator is acting as a principal when providing these services. As such, the provision of these other services or products may be subject to GST. In circumstances where an inbound tour operator provides a mix of agency services and other services in its capacity as a principal, it may need to apportion its commission to taxable and non-taxable parts. ATO reference Practical Compliance Guideline PCG 2018/D7 w https://www.ato.gov.au/law/view/document?docid=DPC/PCG2018D7/NAT/ATO/00001 4.5 New rate for car expenses Commencing from 1 July 2018, taxpayers who have chosen to use the cents per kilometre method for calculating work-related car expenses can claim an increased rate of 68 cents per kilometre. Employers providing a car allowance in excess of 68 centre per kilometre will need to withhold tax on the amount paid over 68 cents. w https://www.ato.gov.au/Newsroom/smallbusiness/General/New-rate-for-car-expenses/ Monthly tax training – September 2018 Brown Wright Stein Lawyers © 2018 page 34 4.6 Car sharing platforms The ATO have announced it will focus its compliance activities on car owners who earn income through car sharing platforms. The ATO has reiterated in its media release that the tax treatment of earning income through a car sharing platform is no different to renting out any other type of asset and must be declared. Car owners will likely be entitled to deductions directly related to earning the rental income, such as platform membership fees, availability fees, car running expenses and cleaning fees. The ATO note that you can only claim deductions for the business portion where there is a mixture of business and personal use, and records must be maintained to prove the claim. w https://www.ato.gov.au/Media-centre/Media-releases/Attention-all-car-owners---you-must-declare-what-youshare---television-grabs/ 4.7 Peer to peer caravan and recreational vehicle sharing As well as the car sharing guidance released, the ATO have also released guidance on peer to peer caravan and recreational vehicle sharing setting out that you: 1. must declare all income received in their income tax returns, noting the amounts are assessable income even if you are not carrying on a business of sharing caravans or RV's. 2. may be entitled to claim eligible expenses as deductions, where those expenses directly relate to the renting, hiring or sharing of the caravan or RV, are appropriately apportioned for private use, and records are maintained to back up the claims. 3. can claim 100% of expenses incurred under the terms of a contract with a peer to peer sharing platform, such as membership or listing fees and commissions, but must apportion all other expenses for private use, such as insurance, registration and cleaning. 4. may be liable to pay GST on payments received if registered, or required to be registered, for GST and found to be carrying on an enterprise of caravan or RV sharing. 5. may be eligible to claim GST credits for GST inclusive amounts paid for eligible expenses, though this will need to be apportioned where the expenses also relate to private use. When apportioning expenses the ATO note: 1. renting to friends or relatives free of charge constitutes private use; 2. renting to friends or family below market rates means that the deductions for that period are limited to the amount of income received; 3. where a caravan or RV purchased mainly for private use, you must count the period the caravan or RV is not rented, even if it was available for rent or hire, as private use; 4. if you have purchased the caravan or RV mainly for income producing use, you are entitled to claim a deduction for periods when the caravan or RV is rented or genuinely available for rent. For the caravan or RV to be genuinely available for rent, you must: (a) advertise it widely so it will attract users and respond to enquiries in a reasonable period; (b) make it available during peak periods when people want to rent it; (c) ask for a fair rent that is comparable to other listings; (d) ensure it's in a location and condition that will make it likely to attract tenants; and (e) not refuse to rent it to interested people without adequate reasons; and 5. even where you have made the caravan or RV genuinely available for rent, you must nonetheless apportion expenses for periods of private use. w https://www.ato.gov.au/General/The-sharing-economy-and-tax/Peer-to-peer-caravan-and-recreational-vehiclesharing/ Monthly tax training – September 2018 Brown Wright Stein Lawyers © 2018 page 35 3.5 Winding up SMSFs The ATO has published a reminder on its website that, when a SMSF is to be wound up, an audit needs to be completed by an approved auditor before a final SMSF return can be lodged. The ATO notes that if a fund is not wound up properly, it may be subject to compliance activities and penalties. Where a member is in retirement phase, the trustee needs to consider whether it has any transfer balance reporting requirements when winding up the fund, including it the winding up of the fund involves partially or fulling commuting a member's retirement phase income stream. Where a fund is wound up and all reporting and tax responsibilities have been met, the ATO will send a letter confirming that it has cancelled the ABN for the fund and closed the fund's records on the ATO systems. w https://www.ato.gov.au/Super/Self-managed-super-funds/Winding-up/Arrange-a-final-audit-and-complete-yourreporting/