ATO's compliance approach to exploration expenditure deductions

The Australian Taxation Office (ATO) issued Draft Practical Compliance Guidelines PCG 2016/D17, which sets out how the ATO will administer the law to assure deductions claimed for exploration expenditure. The draft Guidelines set out the factors the ATO will consider when assessing risk of non-compliance and therefore, how likely it is to review claims for exploration expenditure. It sets out three ways to check exploration expenditure deductions:

  • assess the quality of governance policies for projects and tax characterisation decisions
  • identify and keep adequate analysis and evidence so that exploration expenditure deductions can be substantiated, and
  • identify and explain any expenditure viewed as high risk by the ATO.

In relation to areas of risk in regards to claims for exploration expenditure, it indicates that from a practical perspective, the closer a project is to being developed or constructed, the greater the degree of complexity in characterising exploration expenditure deductions in keeping with the law. Specifically listed areas that it considers to be at higher risk include:

  • cost of long lead assets and early works activities
  • expenditure that is incurred `too soon' or goes `too far', and
  • certain costs in relation to economic feasibility study.

Comments on the draft Guideline can be made until 9 December 2016.

ATO's guidance on contractual rights and beneficial interests for ESS purposes

The ATO released Taxation Determination TD 2016/17, which discusses the circumstances in which a contractual right, subject to the satisfaction of a condition, becomes a right to acquire a beneficial interest in a share for the purposes of the employee share scheme (ESS) rules according to subsection 83A-340(1) of the Income Tax Assessment Act 1997.

High Court dismisses taxpayers' appeals on corporate residency

The High Court dismissed the appeals by the taxpayers in Bywater Investments Limited and Ors v Commissioner of Taxation and the related matter in Hua Wang Bank Berhad v Commissioner of Taxation, which considered whether the relevant companies were resident of Australia for income tax purposes. The dispute between the Commissioner and the taxpayers centred on the question as to whether each relevant corporate taxpayer (each company being incorporated in an overseas jurisdiction) had its place of central management and control in Australia. The High Court held the appellants were Australian residents for income tax purposes during the relevant years and were thus liable to tax in Australia.

The Court found, as a matter of long-established principle, the residence of a company is a question of fact and degree to be answered according to where the central management and control of the company actually abides, and that is to be determined by reference to the course of the company's business and trading, rather than by reference to the documents establishing its formal structure.

Specifically, the High Court held the fact that the board of directors were located abroad was insufficient to locate the residence of the appellants abroad in circumstances where the boards of directors had abrogated their decision-making in favour of an Australian resident and only met to mechanically implement or rubber-stamp decisions made in Australia.

Importantly, the Court rejected the appellant's submission that the decision in Esquire Nominees Ltd v Federal Commissioner of Taxation mandated that the `real business' or `superior or directing authority' of a company is to be found where the board holds its meetings, even if the only thing done at those meetings is to record decisions actually made elsewhere. In the Court's view, none of the established judicial authorities including De Beers v Howe, Koitaki Para Rubber Estates Ltd v Commissioner of Taxation, North Australian Pastoral v Federal Commissioner of Taxation and Bullock v Unit Construction Co Ltd, "supports the idea that a company is taken to be resident for tax purposes where its board meetings are held even if the meetings are mere window dressing comprised of rubber-stamping decisions actually made elsewhere by others and held in that place in the hope of avoiding tax liability in the place where the decisions are actually made."

High Court finds amount originating under incentive agreement assessable

The High Court dismissed the taxpayer's appeal in Blank v Commissioner of Taxation. In a unanimous decision, the Court held a lump sum paid to the taxpayer in instalments pursuant to an incentive profit participation agreement after termination of his employment was income according to ordinary concepts and was not assessable as a capital gain.