Beneficiaries beware! Option to purchase property of an estate may attract duty
On 6 November 2017, in Watts v Chief Commissioner of State Revenue  NSWCATAD 320, the NSW Civil and Administrative Tribunal (Tribunal) determined that the Taxpayer failed to satisfy the Tribunal that nominal duty of $50, rather than duty at normal rates, should be imposed on a transfer of land made pursuant to an option contained in the Will of a deceased person. Broadly, nominal duty is available for transfers of dutiable property made under or in conformity with a Will of a deceased person, or where the property is the subject of a trust for sale contained in a Will, and the transferee is a beneficiary under the Will.
The Taxpayer was entitled to one-third of his father’s residuary estate and his father’s Will contained an option for the Taxpayer to purchase a property of the estate (Property) at market value if he so wished. The Taxpayer exercised this option and the transfer was assessed for stamp duty for the full dutiable value.
Due primarily to a lack of evidence as to the liabilities of the estate, any claims made by creditors and whether the Property needed to be sold to satisfy debts of the estate, the Tribunal was not satisfied that concessional duty should be applied to the transfer.
Following his father’s death, in 2016 the Taxpayer acquired the Property from his father’s estate. The Taxpayer executed a contract for sale and purchase of land dated 30 May 2016 (Contract) and an undated transfer of land. The Commissioner subsequently assessed the transfer for stamp duty on the full dutiable value of the Property (Assessment). The Taxpayer objected to the Assessment but the objection was disallowed. The Taxpayer then applied to the Tribunal for a review of the Assessment.
Section 63 of the Duties Act 1997 (NSW) (Duties Act) imposes duty of $50 for transfers of dutiable property made under or in conformity with a Will of a deceased person, or where the property is the subject of a trust for sale contained in a Will, where the transferor is the legal personal representative of the deceased and the transferee is a beneficiary under the Will. The Taxpayer submitted that the sale of the Property came within the ambit of this provision.
Having regard to the onus on the Taxpayer and his failure to provide evidence as to the extent of the liabilities of his father’s estate and the use to which the proceeds of the sale of the Property were put, the Tribunal was not satisfied that the sale of the Property was made as trustee under and in conformity with the trusts contained in the Will or where the Property was the subject of a trust for sale contained in the Will, rather than as an executor disposing of an estate asset in order to pay debts of the estate.
Sent and received? Failure to notify Commissioner leads to penalty tax
In Samani & Anor v Commissioner for ACT Revenue (Administrative Review)  ACAT 93 the ACT Civil and Administrative Tribunal (Tribunal) found that the Taxpayers failed to establish any legitimate reason that penalty tax imposed in respect of the Taxpayers’ outstanding land tax obligations for a rental property should be withdrawn.
The Taxpayers asserted that they sent the Commissioner notice of the rental status of the property though the Commissioner denied the letters were ever sent or received.
The witness statement of one of the Taxpayers, being the key piece of evidence in the proceeding, was not accepted by the Tribunal and was given no weight by the Tribunal in coming to its decision. This was due to the Taxpayer choosing not to make himself available for cross-examination, which meant that this evidence could not be tested. In its decision the Tribunal noted the importance of the right to cross-examine when the proceedings are conducted on witness statements, especially where the witness is a party to the proceeding.
The Taxpayers were a married couple who acquired a property in Bonner, ACT (Bonner Property) in 2011 and sold it in 2016. During this period, the Taxpayers started renting out the property and as a result, land tax should have been imposed in respect of the Bonner Property. The Taxpayers asserted that they sent the Commissioner notice of the rental status of the Bonner Property and a direct debit request. However, the Commissioner denies the letters were ever sent or received.
Upon sale of the Bonner Property, the Commissioner launched an enquiry into the rental status of the Bonner Property, which led to assessments of land tax for the years it was rented and the imposition of penalty tax for those years. The Taxpayers’ objection was disallowed and they appealed to the Tribunal in respect of this decision.
Section 14 of the Land Tax Act 2004 (ACT) (Land Tax Act) requires the owner of a residential property to notify the Commissioner in writing within 30 days of the property being rented, notifying the Commissioner of this date.
Under section 19(5)(a) of the Land Tax Act where the owner fails to notify the Commissioner, the failure is treated as a tax default and the owner is liable to be assessed for penalty land tax, which may be increased where the Commissioner is satisfied that the default was caused by a failure of the owner to take reasonable care to fulfil their taxation obligations.
Under section 31(6) of the Land Tax Act the Commissioner has the discretion to not impose penalty tax where he is satisfied that the taxpayer took reasonable care to comply with their obligations, or the default arose due to circumstances outside the taxpayer’s control. The Taxpayers argued that their circumstances were such that penalty tax should not be imposed.
Interestingly, this hearing turned on a lack of sufficient evidence. The Tribunal determined that it could not accept a witness statement provided by only one of the Taxpayers and that it must be given no weight. The other Taxpayer was in custody at the time on an unrelated matter and did not want to give evidence in the proceeding. The Tribunal determined that the witness statement ‘cannot be accepted as the taxpayer chose not to be available for cross examination and so the taxpayer’s recollections or credit could be tested’.
Due to a lack of sufficient evidence, the Tribunal could not be satisfied that the Taxpayers sent the direct debit request and accompanying letter to the Commissioner. As a result, the Commissioner’s decision to disallow the Taxpayers’ objection was affirmed and the liability for penalty tax remained.
Further petroleum resource rent tax guidance
On 8 November 2017, the ATO released Practical Compliance Guideline PCG 2016/13 (PCG 2016/13) which sets out the ATO’s risk-based approach to the allocation of compliance resources in relation to deductions claimed in accordance with section 38 of the Petroleum Rent Tax Assessment Act 1987 (PRT Act).
A payment is generally deductible under section 38 of the PRT Act as general project expenditure where it has a close or quite direct connection with the physical activities of the petroleum project, it can either be traced or reasonably allocated to the operations or facilities of a project, and it is not excluded, exploration, or closing down expenditure.
Payments will generally not be deductible where they are too remote from the physical activities of the petroleum project (or future project), or they only have an incidental connection with such activities.
PCG 2016/13 states that the ATO will not generally apply significant compliance resources to examining whether certain low-risk categories of expenditure are deductible under section 38 of the PRT Act, provided that the taxpayer maintains proper records and the payment does not include a cost relating to a downstream asset or activity. Low-risk categories include technical labour costs allocated by acceptable methods, cost relating to insurance of an upstream project asset and non-technical labour costs relating to items including human resource, legal, commercial, finance and IT.
Expenditure that doesn’t have the requisite connection to the operations, facilities and other things comprising a petroleum project or is not liable to be made in a year of tax but are provisions or contingent liabilities may be considered high risk and are more likely to attract more significant compliance resources. These high risk categories include enterprise or corporate shell costs, joint venture audit costs, costs relating to the preparation of an income tax return and certain social infrastructure costs.
State Taxes update (NSW)
On 14 November the State Revenue Legislation Amendment (Surcharge) Bill 2017 (NSW) was passed by the Legislative Assembly. As explained in its Explanatory memorandum, this Bill amends the Duties Act 1997 (NSW), the Land Tax Act 1956 (NSW) and the Land Tax Management Act 1956 (NSW).
As previously mentioned in Talking Tax – Issue 100, the purposes of the amendments are as follows:
- To provide for exemption from and refunds of, surcharge purchaser duty and surcharge land tax payable in respect of residential land by a foreign person that is an Australian corporation when the land is used for the construction of new homes or is subdivided and sold for the purposes of the construction of new homes.
- To provide that the small business declaration required for the purposes of the small business exemption from duty on an insurance policy is to be provided in a manner approved by the Chief Commissioner (replacing the current requirement that it be provided in writing).
- To enact consequential savings and transitional provisions.
The bill now awaits introduction to the NSW Legislative Council.
Board of Taxation – stocktake of reports
The Board of Taxation has recently compiled a list of their reports completed between 2002 and 2017 and their status in terms of released/not released to public, recommendations partly or fully implemented, recommendations pending implementation, no response from Government reports abandoned or superseded before implementation.
Based on this stocktake, the Board is seeking feedback to understand which of its reports and recommendations continue to be a priority for reform and the reasons why stakeholders believe they should be progressed.
The Board also wishes to:
- understand what consequences arise from the delay or inactivity on the identified priority reports and recommendations, and
- identify whether any specific reports and recommendations could be progressed as a discrete drafting package.
We intend to make a submission to the Board by Friday 15 December 2017.
If your firm and/or clients would like access to the list or have any particular issues or comments, please contact us.
Digital economy update
OECD action 1 tax challenges of digitalisation
In October 2015, the OECD released its Report on BEPS Action 1 Tax Challenges of Digitalisation and requested public input on potential options to address these challenges. The Report emphasises that it would not be feasible to ring-fence the digital economy from the rest of the economy for tax purposes. However, there are features of certain business models and of the digital economy that increase the risk of profit-shifting.
Submissions were due on 13 October 2017.
Ahead of the consultation meeting on 1 November 2017, the OECD released non-confidential submissions received.
We will provide a summary of the submissions in the coming weeks. Please contact Joni Pirovich for further information in the meantime.
National Digital Economy Strategy to be developed – impacts and opportunities for the accounting and tax profession
On 19 September 2017, the Australian Government announced that it will develop a national Digital Economy Strategy. The digital economy is not separate to the economy and impacts all industries and business types, especially the accounting and tax profession.
As part of the strategy development process, a consultation paper has been released to encourage interested parties to make a submission on any or all of the government’s current digital agenda, the scope for the national strategy and your views on key issues.
We intend to make a submission by Friday 29 November 2017. Submissions close on 30 November 2017.