TAX TRAINING NOTES Monthly tax training February 2017
Brown Wright Stein tax partners:
Andrew Noolan
E: ajn@bwslawyers.com.au
Chris Ardagna
E: cga@bwslawyers.com.au
Geoff Stein
E: gds@bwslawyers.com.au
Michael Malanos
E: mlm@bwslawyers.com.au
P: 02 9394 1087 P: 02 9394 1088 P: 02 9394 1021 P: 02 9394 1024
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Brown Wright Stein Lawyers Level 6, 179 Elizabeth Street Sydney NSW 2000 P 02 9394 1010
1 Cases .....................................................................................................................................................4 1.1 Smeaton Payroll tax grouping and trust disclaimers......................................................................4 1.2 TVKS disclaimer of trust entitlements ............................................................................................6 1.3 UNSW payroll tax and employment agents ...................................................................................9 1.4 Winday Payroll tax and medical practice arrangements ..............................................................13 1.5 McKinnon Holdings No `Consideration' for GST purposes ..........................................................15 1.6 HWZG Home office expenses and fair and reasonable apportionment ......................................16 1.7 Binetter fraud or evasion ..............................................................................................................18 1.8 Nguyen fraud or evasion ..............................................................................................................19 1.9 Balcaskie transfer duty and a change of trustee ..........................................................................21 1.10 Tan residency tiebreaker under Australia/Malaysia DTA.............................................................24 1.11 McEwans GST clause in contract ................................................................................................26 1.12 Doutch SBC and aggregated turnover .........................................................................................28 1.13 BCI Finances and Binetter directors' duties and tax returns........................................................30 1.14 ElecNet unit trust ..........................................................................................................................31 2 Legislation...........................................................................................................................................33 2.1 Progress of legislation .....................................................................................................................33 2.2 Fair and Sustainable Superannuation.............................................................................................33 2.3 Superannuation reforms..................................................................................................................33 2.4 Increasing Penalties for Significant Global Entities.........................................................................35 3 Rulings.................................................................................................................................................36 3.1 GST cross border supplies determining if a recipient is an Australian consumer........................36 3.2 Total superannuation balance.........................................................................................................36 4 Determinations ...................................................................................................................................38 4.1 CGT: intangible capital improvements as separate assets.............................................................38 4.2 UPEs and bad debt deductions.......................................................................................................38 5 ATO materials .....................................................................................................................................39 5.1 Diversion of personal services ........................................................................................................39 5.2 GST reverse charging in precious metal industry ...........................................................................39 5.3 Incorrect PAYG instalment variations and GIC ...............................................................................39 5.4 Easier GST reporting for new small businesses .............................................................................40 5.5 ATO Industry focus..........................................................................................................................40 5.6 R&D Tax Incentive taxpayer alerts..................................................................................................40 6 Other materials ...................................................................................................................................42 6.1 ACNC Interpretation Statement on PBIs.........................................................................................42 6.2 Mid-Year Economic and Fiscal Outlook 2016-17 (MYEFO) ...........................................................42
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1 Cases
1.1 Smeaton Payroll tax grouping and trust disclaimers
Facts
Michael and Ralph, brothers, had a number of entities which the Chief Commissioner of State Revenue treated as being grouped for payroll tax purposes as a result of Michael being a person who was in the class of beneficiaries for two discretionary trusts, the Smeaton Trust and the Gerace Family Trust.
Ralph had established the Smeaton Trust. Michael had not been aware of its existence. No distributions had been made from the Smeaton Trust to Michael.
Michael and Ralph's parents had established the Gerace Family Trust many years ago. More recently Michael and Ralph has been appointed directors of the corporate trustee of the trust due to their parents ailing health. However, as directors they acted on their parents directions and they considered the assets of the trust to belong to their parents. In some earlier year, the trustee of the Gerace Family Trust had distributed an amount to a company in which Michael and Ralph were directors and Michael was the sole shareholder.
Michael owned more than 50% of the shares in a company called Tri City Trucks Pty Ltd. Tri City Trucks went into liquidation with outstanding payroll tax liabilities for the payroll tax years ended 30 June 2005 to 30 June 2012 (inclusive).
The Chief Commissioner treated the following entities as grouped for payroll tax purposes for the payroll tax years ended 30 June 2005 to 30 June 2012 (inclusive):
the Smeaton Trust, Tri City Trucks and the Gerace Family Trust, as Michael had a controlling interest in each of the entities; and
the Smeaton Trust, Tri City Repairs, a company in which Ralph owned more than 50% of the shares, and the Gerace Family Trust, as Ralph had a controlling interest in each of the entities.
As the Smeaton Trust that was a member of both groups, the groups were treated as one single group under section 74 of the Payroll Tax Act 2007 (NSW) which provides broadly that where there is a common member of two groups they form one larger group. The effect of grouping was that all the other entities of the group could be held liable for Tri City Trucks' payroll tax liabilities.
It was accepted unless Michael had a `controlling interest' (where a controlling interest means an interest greater than 50%) in the Smeaton Trust and the Gerace Family Trust there would not be a single group of all the entities for payroll tax. Michael was considered to have a `controlling interest' in those trusts by the Chief Commissioner due to him being in the class of beneficiaries of the two trusts in accordance with section 72(6) of the PTA which provides as follows
(6) A person who may benefit from a discretionary trust as a result of the trustee or another person, or the trustee and another person, exercising or failing to exercise a power or discretion, is taken, for the purposes of this Part, to be a beneficiary in respect of more than 50% of the value of the interests in the trust.
Within two weeks of the Chief Commissioner notifying the entities of this decision, Michael retrospectively disclaimed any rights he had under the Smeaton Trust and the Gerace Family Trust. The Chief Commissioner did not accept that this prevented Michael from having a `controlling interest' in the two trusts in the relevant years. Michael appealed to the Supreme Court of New South Wales.
Issues
1. Whether Michael could disclaim his rights as a discretionary object of the two trusts. 2. Whether a disclaimer can be made by deed poll, with no consideration being paid. 3. Whether Michael had accepted his interest as discretionary object of the two trusts, meaning it
was too late for him to disclaim that interest. 4. Whether the disclaimers operated retrospectively.
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Decision
Capacity to disclaim?
White J in the Supreme Court held, relying upon the decision in In re Gulbenkian's Settlements (No. 2) [1970] Ch 408, that a person `cannot be compelled to accept a gift of personal rights against his or her wishes' and therefore could disclaim their rights a discretionary object of a trust.
Consideration required for disclaimer?
White J did not answer the question as to whether there is a requirement for consideration to be paid in order for there to be a valid disclaimer. As a deed or a deed poll binds parties or a parties without consideration however, and as the disclaimer here had been made by way of deed poll, there was no need for consideration in this instance.
Acceptance
White J noted that once a person has accepted a gift with `full knowledge and intention of the nature and any conditions attached to the gift, it is too late for the person to disclaim.' Michael was never aware that he was a potential beneficiary of the Smeaton Trust and therefore had not accepted that gift and could still validly disclaim.
Whilst Michael was aware of the Gerace Family Trust, he had always treated it as being for his parents and had never turned his mind to whether he was entitled to benefit from the trust. White J considered that this did not amount to `full knowledge and intention'. White J did not consider the fact that a distribution had been made to a company in which Michael was the sole shareholder was relevant to the question of whether Michael had accepted his gift.
As he had not accepted the gift it was not too late to disclaim.
Retrospective operation of the disclaimers?
White J noted that the issue was not whether the disclaimer operated retrospectively it did as between the parties to the transaction but rather whether it had that effect for the purpose of the statute. White J considered that this required considering the statutory context.
White J noted that retrospective disclaimers had been considered as effecting tax liabilities in other revenue law contexts, such as income tax: FCT v Ramsden [2005] FCAFC 3. White J did not consider there to be any reason to adopt a different position for payroll tax grouping. His Honour noted that there would be numerous trusts in which people could be beneficiaries without their knowledge, and this could lead to oppressive operation of the payroll tax grouping provisions if a disclaimer could not be made to operate retrospectively.
Accordingly, White J held that Michael did not have a `controlling interest' in the Smeaton Trust and the Gerace Family Trust in the relevant years as a result of the disclaimers. Therefore, there entities were not treated as a single group for payroll tax.
COMMENT the payroll tax grouping provisions are extensive and can result in unintended entities
forming part of a group, the result being that the taxable wages of the entities are combined in working out whether the threshold is breached and each entity being liable for each other entity's tax debts on a joint and several basis. The Chief Commissioner has discretion to exclude entities from a group but such discretion is sparingly exercised.
TIP a disclaimer of rights in a trust may provide a possible solution in other statutory contexts where there is
an adverse impact as a result of a person's interest in a discretionary trust. An example of such an adverse impact is the duty and land tax surcharges that are imposed on a trust where a foreign person may benefit under the trust.
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Citation Smeaton Grange Holdings Pty Ltd v Chief Commissioner of State Revenue [2016] NSWSC 1594 (White J, Sydney) w http://www.austlii.edu.au/au/cases/nsw/NSWSC/2016/1594.html
1.2 TVKS disclaimer of trust entitlements
Facts
TVKS was the beneficiary of two discretionary trusts, the Woodchester No. 4 Trust and the Bristol Trading Trust.
Woodchester No. 4 Trust
On 30 June 2006, Archer Property as trustee for the Woodchester No. 4 Trust made a series of resolutions. The first resolution related to income of the trust fund:
`In accordance with the trust deed it was resolved to determine that for the year ended 30 June 2006 income of the trust includes all amounts (including capital gains) taken into account in calculating the net income of the trust.'
The second resolved to distribute the income as follows:
`It was resolved to pay, apply and set aside the income of the trust, as defined in the deed, for the year ending 30 June 2006 to or for the benefit of the beneficiaries in the manner and of the type as allowed under the deed such that the assessable income for taxation purposes of each beneficiary (and the class of assessable income from which their respective entitlements are appointed) is: TVKS 100% of income.'
The third related to the variation of income:
`It was resolved that should the Commissioner of Taxation disallow any amount as a deduction or include any amount in the assessable income of the trust, and not distribute that amount so disallowed as a deduction, or so include in the assessable income in accordance with the above appropriation, such amount or amounts are to be deemed to be distributed on 30 June 2006 in the following manner: Carson Underwriting Pty Ltd 100% of income'.
On 20 December 2006 (stated to be 2016 in the Tribunal decision but presumably an error), TVKS lodged her return for the income year ending 30 June 2006 declaring an assessable income of $9,000 but did not return any amount as a distribution from a trust.
On 16 May 2007 Archer Property as trustee for Woodchester No.4 Trust lodged an income tax return for the 2006 year on the basis that it had a net income of $676,209 and carried forward losses of $11,053,152 but on 14 October 2009, requested that amendments be made to this return to show net income of $5,346,209 and carried forward losses of $1,620,740 (due to an inadvertent error).
Bristol Trading Trust
On 30 June 2007 Shee Investments as trustee for the Bristol Trading Trust made a series of resolutions. The first resolution was similar to that listed above for Woodchester No. 4 Trust.
The second resolution resolved to distribute the income of the Trust as follows:
`It was resolved to pay, apply and set aside the income of the trust, as defined in the deed, for the year ending 30 June 2007 to or for the benefit of the beneficiaries in the manner and of the type as allowed under the deed such that the assessable income for taxation purposes of each beneficiary (and the class of assessable income from which their respective entitlements are appointed) is: Isaacs Investments P/L as to the first $3,500,000 and TVKS as to the balance'
The third resolution was similar to that above, but provided that amounts in relation to the Commissioner amending the taxable income was to go to Isaacs Investments P/L.
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As at 30 June 2007, the balance sheet for the Bristol Trading Trust showed a profit of $6,643,498. That profit was also shown in the balance sheet as a distribution to the beneficiaries.
On 30 January 2008, TVKS lodged her tax return for the year of income ended 30 June 2007. She returned assessable income as $9,500 and did not return any trust distribution.
On 27 March 2008, TVKS lodged an amended return for the 2007 Year, declaring an additional amount of $40,083 as assessable income from franked dividends with franked credits of $12,000 so a total assessable income of $61,832 and no trust distribution.
Shee Investments, in its capacity as trustee of the Bristol Trading Trust, lodged its income tax return for the 2007 Year on 12 March 2008 on the basis that it had a net income of $6,643,498 and carried forward losses of $2,143,060.
On 18 August 2009, the Commissioner wrote to TVKS's husband advising that it intended to conduct an audit of his income taxation affairs and those of his controlled entities, which ultimately included adjustments to TVKS's income.
The Commissioner issued notices of amended assessment to TVKS on 14 May 2013 in respect of both the 2006 and 2007 Years as follows:
1. TVKS's taxable income was $10,117,621 (not $9,000) for the 2006 Year because: (a) The net income of the Woodchester No.4 Trust for the 2006 Year was $10,108,621; (b) TVKS was presently entitled to 100% of the income of the Woodchester No.4 Trust;
2. TVKS's taxable income was $3,204,593 (not $9,500 nor $61,832) for the 2007 Year because: (a) The net income of the Bristol Trust for the 2007 Year was $3,143,510; (b) TVKS was presently entitled to 100% of the net income of the Bristol Trading Trust.
On 5 July 2013, TVKS objected to the amended assessments.
On 26 May 2014, TVKS signed a document authorising her husband (and tax agent) to act on her behalf in respect of the dealings with the ATO.
On 9 July 2015, the Commissioner gave notice that he had allowed her objection in part to the 2006 Year relating to the calculation of the net income of Archer Property but disallowed her objection in full to the 2007 Year.
Sometime after 9 July 2015 TVKS commenced proceedings in the Tribunal for review of the Commissioner's objection decision. TVKS' evidence was that before this time she was not aware of the two trusts. Her evidence suggested that she first became aware of the two trusts on 28 October 2015 in a meeting with her lawyers.
On 15 December 2015, TVKS executed two deeds titled `Disclaimer of Entitlement to Income' (one for the Woodchester No.4 Trust and one for the Bristol Trusting Trust) disclaiming and rejecting absolutely any entitlement she had to any interest whatsoever now or in the future or have at any time had since 1 July 2005 to any income, capital or gift at all from each of the trusts.
During the Tribunal proceeding TVKS contended that she was not assessable on the income of the two trusts for a number of reasons. However, for the purpose of these tax training notes, the three key reasons were as follows
1. that she had effectively disclaimed her entitlement to the income from the trusts; 2. that the resolution by Archer Property by which TVKS became entitled to the income of the Woodchester
No.4 Trust was not effective because it referred to `income' and not `net income', being the relevant term in the trust deed; and 3. that the each of the third resolutions by Archer Property and Shee Investments had the effect that TVKS was not entitled to any additional income of the trusts identified by the Commissioner.
Issues
1. Whether TVKS had effectively disclaimed her entitlements?
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2. Whether:
(a) TVKS be given leave to expand the grounds of objection to include the ground that the first Archer Property resolution was ineffective to distribute income to TVKS? and
(b) the resolution was ineffective to distribute income to TVKS?
3. Whether the third resolutions made by each of Archer Property and Shee Investments were effective in preventing TVKS from being presently entitled to a share of the income of the Woodchester No.4 Trust for the 2006 Year and Bristol Trading Trust for the 2007 Year?
Decision
Effectiveness of disclaimer
The Tribunal referred to the decision of Spender J in Ramsden v Federal Commissioner of Taxation [2004] FCA 632 as to the disclaimer of trust entitlements. The Tribunal noted that Spender J accepted the following propositions:
1. `... [A] beneficiary of a discretionary trust may disclaim for each exercise of the discretion, that is to say, the fact that the beneficiary has accepted benefits previously does not bar a disclaimer in respect of later exercises of discretion ...'
2. `... [A] beneficiary has entitlement to income under a trust for the purposes of s 97 of the ITAA36 from the moment it arises, notwithstanding that the beneficiary has no knowledge of it and might be able later to disclaim entitlement.'
3. A person is entitled to disclaim an appointment of income whether as a discretionary beneficiary or whether taking in default of appointment by the trustee.
4. A beneficiary may not disclaim if he or she has accepted the distribution.
DP Forgie found that TVKS' husband had an unfettered authority to handle all of her financial affairs and acted as her agent with such authority having been granted shortly after their marriage. Even though she claimed not to know about the distributions when they were made, her husband's knowledge of them (by way of the ATO's 2012 and 2013 position papers) was, given his unfettered authority to act on her behalf, attributed to her.
Given that the knowledge of TVKS's husband was attributed to her, DP Forgie considered that TVKS had not disclaimed her entitlements within a sufficient period of time. DP Forgie stated as follows:
'Only on 15 December 2015 did TVKS disclaim both distributions. By then, seven or eight years had passed since the distributions had been made and at least two or three years since Martin, and so she, had knowledge. Neither did anything to disclaim the distributions whether in the objections lodged in her name against the amended assessments for the 2006 and 2007 Years or in the subsequent applications for review of the reviewable decisions or by any other means. I am satisfied that the passage of such a period of time is consistent with an intention by TVKS not to disclaim her interests in those distributions. It is also consistent with an implied acceptance of those distributions. Therefore, I am satisfied there were no valid disclaimers.'
Further, because nothing was done by TVKS to disclaim the 2006 and 2007 distributions until some seven or eight years later, that passage of time was seen as consistent with an intention by TVKS not to disclaim her interests in those distributions.
Effectiveness of Archer resolution
TVKS sought to argue that this ground was included in the original objection via the following statement:
`Without limiting the generality of paragraph 1, neither section 170 nor any other provision of the ITAA36 or the Income Tax Assessment Act 1997 (the ITAA97) required, entitled or permitted the Commissioner to issue the Amended Assessment in that there had not been any failure by the Taxpayer to disclose the whole of her assessable income which she derived during the 2006 Year.'
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DP Forgie considered this statement too broad to be relied upon as the basis on which the ineffectiveness of the resolution was raised as a ground in the objection. DP Forgie refused to grant TVKS leave to extend her grounds of objection as the Commissioner had suffered prejudice as a result of TVKS's failure to raise it earlier by the fact that he had not assessed Archer Property, as trustee, on the income that TVKS claimed had not been effectively distributed to her.
In any event DP Forgie considered that the use of the word `income' in the resolution instead of `net income' did not prevent the resolution from being effective. In the context of the trust deed (including its balance sheet for the 2006 Year), the income distributed to TVKS in the resolution was the profit, being the net income determined according to accounting principles and trust law earned for that year.
The third resolutions
TVKS submitted that the effect of the third resolutions was to cause the first resolutions distributing income to be ineffective with effect from 30 June of the relevant years. TVKS contended that the intention of the third resolutions was distribute an amount to Carson Underwriting or Isaacs Investments as the case might be if any amounts were disallowed or added to the assessable income by the Commissioner and that the first resolution must be read in conjunction with the third resolution. When this is done, it is clear that TVKS never became entitled to such amounts.
DP Forgie considered the contingent nature of the third resolution. He considered that the effect of the third resolution was not to reduce TVKS's entitlement to the whole of the income of the two trusts as provided for by the first resolutions. DP Forgie stated as follows:
In making the Resolution, Archer Property and Shee Investments have clearly intended to distribute the whole of the income of the relevant trust in the manner indicated. Even if it could be said that their interest in the distribution were intended to be defeasible if the Commissioner made certain decisions, TVKS and, in the case of the Shee Investments Resolution, Isaacs Investments Pty Ltd and TVKS were intended as at 30 June 2006 and 30 June 2007, as the case might be, to enjoy possession and benefit of the income distributed. It was vested both in interest and in possession at that date by the relevant Resolution.
DP Forgie considered that TVKS's entitlement as at 30 June 2006 and 2007 could not be changed by the third resolutions by reference to event that might or might not occur in the future. DP Forgie stated as follows:
The attempt by the Further Resolution to deem the distribution to have been made otherwise than it was from 30 June 2006 or 30 June 2007 cannot change what was in practical terms the result. There was nothing in either Resolution that indicates that the beneficiaries named were not free to use and spend the distribution as they would. It only has to be expressed in that way to show that Archer Property and Shee Investments had exhausted their powers to distribute when they made their first Resolutions. There was nothing left to be distributed in the Further Resolutions so neither could stand but each of the Resolutions was effective in making the distribution to TVKS and Isaacs Investments in the proportions shown on their face.
COMMENT the view of DP Forgie that the third resolution was ineffective is consistent with the ATO
view of such resolutions.
Citation TVKS and Commissioner of Taxation (Taxation) [2016] AATA 1010 (DP Forgie, Melbourne) w http://www.austlii.edu.au/au/cases/cth/AATA/2016/1010.html
1.3 UNSW payroll tax and employment agents
Facts
UNSW Global Pty Ltd, an entity wholly owned by the University of New South Wales, provided the services of experts to provide:
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1. reports and act as experts in legal proceedings (a line of service referred to as the Expert Opinion Services (EOS); and
2. consulting services by way of reports and other services for a client's business (a line of service referred to as Domestic Consulting). Examples included providing reports for clinical trials conducted by a pharmaceutical company.
UNSW maintained a database of experts that it used to select an appropriate expert upon an enquiry by a client.
Upon identifying an appropriate expert, a copy of the expert's CV is sent to the client for approval of the chosen expert and a fee proposal based on the rate set by the expert for their services.
Contracts are then entered into between:
1. UNSW Global and the expert; and 2. UNSW Global and the client.
The expert would then do any necessary work and prepare a report at a time and place of his or her choosing.
Where an expert failed to complete a report, UNSW Global would select and engage a new expert and the original expert would not be paid.
Upon the completion of his or her report, the expert would send the report to UNSW Global, which would insert the report into a UNSW Global template. UNSW Global would also ensure that the report met other requirements, including that it:
1. contained an executive summary; 2. contained a statement of the expert's qualifications; and 3. referred to the expert witness code of conduct.
It was accepted by all parties that the experts by UNSW Global were independent contractors. Some of the experts were engaged through service companies.
The Chief Commissioner assessed UNSW Global for payroll tax on the basis that payments made to the experts were taxable wages in accordance with Division 8 of the Payroll Tax Act 1971 (NSW). Division 8 of the PTA treats a person who engages another person under an `employment agency contract' as the employer of that person for payroll tax and any payments made for the services are treated as taxable wages. The relevant provisions are as follows:
`Division 8 Employment agents
37 Definitions
(1) For the purposes of this Act, an employment agency contract is a contract, whether formal or informal and whether express or implied, under which a person (an employment agent) procures the services of another person (a service provider) for a client of the employment agent.
(2) However, a contract is not an employment agency contract for the purposes of this Act if it is, or results in the creation of, a contract of employment between the service provider and the client.
(3) In this section:
contract includes agreement, arrangement and undertaking.
38 Persons taken to be employers
For the purposes of this Act, the employment agent under an employment agency contract is taken to be an employer.
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39 Persons taken to be employees
For the purposes of this Act, the person who performs work for or in relation to which services are supplied to the client under an employment agency contract is taken to be an employee of the employment agent.
40 Amounts taken to be wages
(1) For the purposes of this Act, the following are taken to be wages paid or payable by the employment agent under an employment agency contract:
(a) any amount paid or payable to or in relation to the service provider in respect of the provision of services in connection with the employment agency contract,
(b) the value of any benefit provided for or in relation to the provision of services in connection with the employment agency contract that would be a fringe benefit if provided to a person in the capacity of an employee,
(c) any payment made in relation to the service provider that would be a superannuation contribution if made in relation to a person in the capacity of an employee.
(2) Subsection (1) does not apply to an employment agency contract to the extent that an amount, benefit or payment referred to in that subsection would be exempt from payroll tax under Part 4 (other than under Division 4 or 5 of that Part, section 50 or clause 5 of Schedule 2) had the service provider been paid by the client as an employee, if the client has given a declaration to that effect, in the form approved by the Chief Commissioner, to the employment agent.
The case also involved a consideration of the predecessor provisions to the above provisions. We only deal with the current provisions in these notes, but note that they were largely similar.
UNSW Global lodged an objection against the Chief Commissioner inclusion of the payments in its taxable wages for payroll tax.
UNSW Global contended that it was not an `employment agent' as Division 8 does not apply where the service provider is in substance an independent contractor, as, if the arrangement was directly, the payments would not be taxable wages and Division 8 should not be interpreted to operate to tax an indirect arrangement that would not be taxed if was undertaken directly.
UNSW Global's objection was disallowed. UNSW Global appealed the objection decision of the Chief Commissioner to the Supreme Court of New South Wales.
In the court UNSW Global argued that:
... if the Chief Commissioner's contentions [that they were an employment agent] in the present case were accepted then many like arrangements would attract payroll tax which could not have been contemplated by Parliament. Examples include barristers engaged by a law firm for clients of that firm. On the Chief Commissioner's contentions in his Appeal Statement a law firm would be liable to pay payroll tax on the payments made by the law firm to a barrister chosen by the law firm, for the services provided by the barrister to the client of the law firm. Payments to expert valuers engaged by an investment bank to provide an independent valuation for prospectuses for companies who were being advised by the investment bank, would attract payroll tax payable by the investment bank. Payments to architects engaged by a building company to design an aspect of a building for the building company's client would be liable to payroll tax. Payments to an interior designer engaged by an architect to design the interiors of the architect's client's home would be similarly liable. A planning professional who engaged a consultant to write a report for the planner's client for the purposes of obtaining development approval for the client's project would be liable to pay payroll tax for the consultant's fees. These examples could be and were multiplied. UNSW Global submitted that there were many independent consultants in New South
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Wales who obtain most or all of their work through intermediaries and that hitherto it has never been suggested that payments to them should be subject to payroll tax.
Issue
Did the employment agency provisions in Division 8 of the PTA apply such that the payments made to experts by UNSW Global were included in the taxable wages of UNSW Global for payroll tax?
Decision
Before the Supreme Court, UNSW Global argued that either:
1. Division 8 could be interpreted to so that it did not apply to tax indirect arrangements that would not be taxed directly on its terms, despite the provisions seemingly applying in such circumstances; or
2. if a literal interpretation was that Division 8 did apply to tax indirect arrangements that would not be taxed directly, such an interpretation is manifestly absurd and regard should be had to the purpose of Parliament in enacting such provisions to interpret the provisions in a way that is not absurd.
The Chief Commissioner ultimately accepted in the Supreme Court proceedings that if a literal interpretation of Division 8 had the effect of taxing indirect arrangements that would not have been tax directly, this was not the intended approach in enacting Division 8 and would create anomalies. In disavowing that a literal approach had such an effect the Chief Commissioner submitted as follows:
1. Division 8 only applied to a person who could be described as an `employment agent' in the ordinary sense of that term;
2. that the `commonly understood' description of a `labour hire firm/agent' is an entity that procures persons to provide their labour `in, and for the purpose of, the ordinary conduct of the clients' businesses'.
White J rejected the contention that a literal interpretation of Division 8 could arrive at such a conclusion, given that `employment agent' had a defined term in the legislation and therefore could not adopt its ordinary meaning, if a literal approach was adopted. However, White J accepted applying a literal interpretation leads to a manifestly absurd or unreasonable approach.
After considering the legislative history and the mischief that Division 8 sought to address which was the avoidance of payroll tax through the interposition of an agent to give the appearance of a contractor relationship where one did not exist in substance White J concluded that Division 8 applies to a contract under which an `employment agent' procures the services of another ... for a client of the employment agent' in and for the conduct of the business of the employment agent's client.
White J concluded that the services provided by the experts in the:
1. EOS line of the services were clearly not provided in the conduct of the client's business; and 2. Domestic consulting line of services, whilst provided for the benefit of the client's business, were
not carried out in the client's business.
The test applied by White J as to whether UNSW Global should be treated as an employment agent turned on whether the experts were doing work that would otherwise have been done by employees of the clients.
COMMENT there are three main considerations in determining whether a person is an
employee or deemed employee of another person, such that any remuneration needs to be included in the taxable wages of the other person as follows:
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1. whether the person is an employee within the ordinary meaning of that term, noting that ordinary meaning considers the substance of the relationship rather than formal titles or the stated intention of the parties;
2. whether the arrangement is a `relevant contract'; and 3. whether the entity making the payments is an `employment agent'.
TRAP where an employment agency arrangement does exist it is important to be aware of the OSR's
position in relation to a `chain of on-hire' covered by Payroll Tax Ruling PTA 027. The OSR consider that where there are multiple employment agents in a chain (that is between the ultimate client and the employees) that only the employment agent closest to the client is an employment agent.
Citation UNSW Global Pty Ltd v Chief Commissioner of State Revenue [2016] NSWSC 1852 (White J, Sydney) w http://www.austlii.edu.au/au/cases/nsw/NSWSC/2016/1852.html
1.4 Winday Payroll tax and medical practice arrangements
Winday carries a business of providing a fully operational radiology facility to radiologists so that they are able provide radiology services to the public. Winday provided the following to the radiologists:
1. a place to conduct the radiology services; 2. radiological plan and equipment; 3. medical supplies; 4. semi-professional staff and managerial and administrative staff.
Winday did not employ the radiologists. Each radiologist had their own ABN and insurance.
A services agreement was entered into between Winday and each radiologist for the use of the radiology facilities. Under the agreement the radiologists could choose whether or not to use the facilities. A clause of the agreement provided that Winday would ensure that the net amount payable to the radiologists would be no less than $2,000 for exclusive of GST for each day that services were provided.
Winday advertised the radiology services at the facility on behalf of the radiologist. The facility charged clients via bulk billing through the Medicare system. The radiologists were entitled to a prescribed fee for each service through the Medicare. The radiologists directed Medicare to pay its fee to Winday. Winday would make a payment to the radiologist.
Winday contended that:
1. it does not control whether any of the radiologists attend the facility or prepare a radiology report or how often the radiologists choose to work;
2. the radiologists perform their work without any direction from Winday; 3. the effect of the agreement concerning the Medicare payments was that Winday would collect the
amounts, deduct a service charge and then pay the balance of the fees to the radiologist.
However, this characterisation of the arrangements was not entirely consistent with the services agreement as follows:
1. the agreement provided that `[t]he Radiologist will arrange to provide locum cover if he is unable to provide Radiology services on any given day;'
2. the agreement provided that the radiologist would ensure that all amounts to which they were entitled from Medicare were paid to Winday. Separately the agreement provided that the radiologist would pay to Winday a specified percentage of billings for services rendered by the radiologist; and
3. Winday retained a discretion to vary the percentage based on its assessment of the performance of the radiologist or an increase in costs of providing the facilities.
The Chief Commissioner contended that the payments to the radiologists by Winday were taxable wages either under the contractor provisions (Division 7) or the employment agent provisions (Division 8) in the PTA and assessed Winday on such a basis.
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Winday objected to the Chief Commissioner's assessment and, after the Chief Commissioner disallowed its objection, applied to the New South Wales Civil and Administrative Review Tribunal for the review of the decision.
Issue
1. Whether Winday was an employment agent in relation to the arrangements with the radiologists under Division 8 of the PTA?
2. Whether the contract between Winday and the radiologists was a relevant contract under Division 7 of the PTA?
Decision
Employment agent
The Tribunal considered that the relevant question in determining whether Winday was an employment agent was, did Winday `procure' the services of the radiologists for the clients of Winday? In considering this question, the Tribunal noted that comments of White J in Freelance Global Ltd v Chief Commissioner of State Revenue [2014] NSWSC 127 that `procure' in the employment agent provisions in the PTA means more than `facilitate or enable'. In Freelance White J stated as follows:
`it requires that the employment agent cause the services of a contract worker (or service provider) to be provided to the employment agent's client, with the expenditure of care or effort by the employment agent. I do not accept that this can only be done if the employment agent recruits the contract worker or service provider for the client.
The Tribunal concluded that it was satisfied that Winday procured the services of the radiologists to be supplied to clients of Winday for the following reasons:
1. the facility was not large enough to allow multiple radiologists to book the use of it at any one time. It was common practice for radiologists to book it for dedicated periods;
2. the Tribunal referred to the terms of the service agreement as to the obligation of the radiologists to attend the facility or organise a locum over Winday's characterisation that they were free to come and go;
3. that the effect of the advertising by Winday was that it, and not the individual radiologists, made an offer to provide services to the public with an implied undertaking that it would procure the services of suitably qualified radiologists; and
4. given point 3, the Tribunal was satisfied that the patients were clients of Winday and not the individual radiologists.
The Tribunal noted that the radiologists provided services to GPs upon a referral. Whilst there was a question of whether or not the GPs were clients of Winday, given that Winday had not produced copies of the referrals in evidence, and that it bore the onus of satisfying the Tribunal of its case, the Tribunal was not satisfied that the GPs were not clients of Winday.
Following on from the conclusion that Winday procured the services of the radiologists to be supplied to clients of Winday, the Tribunal held that the contracts between Winday and the radiologists were employment agency contracts for the purpose of Division 8 of the PTA and the payments by Winday to the radiologists were taxable wages for Winday.
Relevant contract
As the contracts between Winday and the radiologists were employment agency contracts, they were not relevant contracts.
COMMENT it is possible that given the decision in UNSW Global, that the employment agency
provisions would not have application, as the radiologists would not have been working `in' the business of their patients. This would however have meant that, if there was an arrangement where Winday paid the radiologists, consideration would need to be given to the relevant contract provisions.
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COMMENT the guaranteed minimum amount to be received by the radiologists likely assisted the
member in determining that the radiologists were employees of Winday.
TRAP businesses are often structured as providing services so as to prevent there being taxable wages
this case indicates that the OSR and the NCAT are prepared to look beyond the legal documents to the substance of the arrangement, and also that certain elements in the legal documents (such as minimum fees) may cause issues in characterizing the arrangement.
Citation Winday International Pty Ltd v Chief Commissioner of State Revenue [2016] NSWCATAD 270 (Isenberg SM, Sydney) w http://www.austlii.edu.au/au/cases/nsw/NSWCATAD/2016/270.html
1.5 McKinnon Holdings No `Consideration' for GST purposes
Facts
On 1 July 2010 McKinnon Holdings entered into an `Asset Sale and Purchase Agreement' with an associated entity called Clinton and Michelle McKinnon Excavation Pty Ltd.
Prior to 1 July 2010, Excavation owned certain plant and equipment most of which were subject to charges held by third party financiers. McKinnon acquired the assets under the Agreement as part of its business operations from Excavation. It was a term of the Agreement that if the liabilities of Excavation associated with the assets exceeded the value of the assets as determined by a valuer, then no amounts would be paid by McKinnon to acquire the assets. Whilst the Agreement contained this clause, it did not provide a legal or effective assumption of the liabilities by McKinnon.
The aggregate liabilities of Excavation as at 1 July 2010 ($1,206,272.70) was an amount that clearly exceeded the agreed unencumbered value of the Assets if sold at auction as determined by an independent valuer ($922,000). Consequently, no monies were paid by the McKinnon to Excavation at completion of the Agreement as the liabilities associated with the assets exceeded the unencumbered value of the assets.
McKinnon claimed input tax credits $83,818.18 being 1/11th of the unencumbered value of the assets.
29-10 of the GST Act sets out when a taxpayer is entitled to input tax credits as follows:
`(1) The input tax credit to which you are entitled for a creditable acquisition is attributable to:
(a) the tax period in which you provide any of the consideration for the acquisition; or
(b) if, before you provide any of the consideration, an invoice is issued relating to the acquisition--the tax period in which the invoice is issued.
(2) However, if you account on a cash basis, then:
(a) if, in a tax period, you provide all of the consideration for a creditable acquisition--the input tax credit for the acquisition is attributable to that tax period; or
(b) if, in a tax period, you provide part of the consideration--the input tax credit for the acquisition is attributable to that tax period, but only to the extent that you provided the consideration in that tax period; or
(c) if, in a tax period, none of the consideration is provided--none of the input tax credit for the acquisition is attributable to that tax period
McKinnon accounted for GST on a cash basis and, accordingly, in order for it to claim an input tax credit it needed to have given consideration for acquisition of the Assets.
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The Commissioner considered that no consideration was ever provided by McKinnon, in part because no `payment' was made, and that no liabilities were actually assumed, which also would have amounted to a `payment'. For this reason, the Commissioner considered McKinnon was not entitled to the input tax credits.
McKinnon argued that it either provided consideration of:
1. $922,000 being the unencumbered value of the Assets if sold at auction as determined by the independent valuer; or
2. $1,206,272.70 being the liabilities of the Excavation assumed under the Agreement.
Issue
Did the McKinnon provide consideration to Excavation for the supply of the Assets?
Decision
Unencumbered value as consideration
As the Agreement provided that the amount payable would be no more than nil or $1.00 if the liabilities associated with the assets exceed the unencumbered value, there was no payment made under the Agreement in connection with the supply of anything. Accordingly, McKinnon did not provide consideration equal to the unencumbered value.
Assumed liabilities as consideration
The Tribunal concluded that the Agreement did not in and of itself legally assign the liabilities of Excavation to the McKinnon. All it did was provide an obligation for the parties to use their reasonable endeavours to assist McKinnon to obtain prior to completion or as soon as possible after completion the assignment or novation of each Equipment Lease and consents from other parties as needed.
The liabilities never in fact moved to the McKinnon either in a legal sense or in a practical sense.
The Tribunal added that if there had been an assumption of liabilities as a result of the Agreement, it would follow that the McKinnon had provided consideration for the supply of the assets.
TRAP The critical feature missing from the contract (Agreement) in question was the legal and/or
equitable assignment of the liabilities. It is not enough to merely include the liabilities in the items being acquired under contract, and there must be some mechanism of assigning the liabilities beyond merely an agreement by the purchaser to assume them upon completion of the contract.
Citation: McKinnon Holdings (NSW) Pty Ltd as Trustee for the McKinnon Equipment Trust and Commissioner of Taxation [2016] AATA 917 (Prof R Deutsch DP, Sydney) w http://www.austlii.edu.au/au/cases/cth/AATA/2016/917.html
1.6 HWZG Home office expenses and fair and reasonable apportionment
Facts
On 19 October 2015, HWZG applied to the Commissioner for a private ruling in respect of home-office expenses for his electrical contracting business.
The basis of the application was the apportionment of occupancy costs (rates, taxes, etc.) for the tax years ended 30 June 2016, 2017 and 2018.
The property was serviced by a dual driveway (left hand side and right hand side), with a carport accessed by the left-hand side driveway and a garage accessed by the right-hand side driveway.
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HWZG, in his suggested apportionment calculation presented to the Commissioner in the ruling application, sought to include the right-hand side driveway and garage (used in the business) in the 'deductible area' of the property, but to exclude the left-hand side driveway and carport (used privately) from the 'non-deductible area' of the property in apportioning the costs for deductibility.
HWZG was employed full-time as an electrician and had been for many years. He had recently commenced as a sole trader with an ABN, a year-round electrical contracting business to be run in his spare time and with the hope to eventually replace his job. He conducted his administration tasks for his business and employment from a dedicated office in his home. HWZG had no other place of business. The home had a small sign out the front and the address was on his business card
HWZG owned and used a utility vehicle, overwhelmingly to carry on his business. He used, almost exclusively, the right-hand side driveway and corresponding garage in carrying on his business and with ample alternative storage being available for personal items. HWZG used the garage as a secure workshop, storeroom, and parking space for his utility vehicle, tools and ladders etc. and inventory business materials (stock) and intended for customers to visit as required
HWZG wished to use the floor space method (in m2) to quantify his occupancy expense claims as a business use percentage. In doing so he considered that:
1. the deductible area should be the area of the inside office with the right-hand side driveway and garage; and
2. the total area of the house should be the habitable areas of the house, plus the right-hand driveway.
That is, he considered that the left-hand side driveway should not be taken into account in determining the total area.
The Commissioner in his ruling agreed with the deductible areas identified by HWZG (right hand side driveway, garage and internal office).
The Commissioner agreed with the taxpayer's methodology, in principle, that:
the deductible area total area = the deductible portion; and
total area = deductible area + non-deductible area.
The only point of contention was what parts/areas of the property should be included in the `total area' of the above formulae, specifically the `non-deductible area'.
The Commissioner contended that the private outdoor areas (left hand of drive way plus carport) should be included in the total area, thereby reducing the percentage of the deductible portion.
HWZG objected to the ruling on 16 February 2016 and, following the Commissioner's disallowance of the objection, appealed to the Tribunal.
Issue
For the purposes of section 8-1 of ITAA97, should the apportionment for deductibility of home-office expenses include the outdoor private areas?
Decision
To determine what is a `fair and reasonable' apportionment, the Tribunal cited, with approval, Taxation Ruling TR 93/30, [17]:
The actual amount which can be claimed is dependent on the taxpayer's individual circumstances. In most cases, the apportionment of the total expense incurred on a floor area basis is the most appropriate method. (Emphasis added by the Tribunal)
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The Tribunal considered the Commissioner's approach - that a `like-for-like' approach to what should be included be applied, that is, if some type of area used for business is included in the deductible area, similar types of areas used privately should also be included in the non-deductible area - was the fair and reasonable approach.
Therefore, if the driveway and garage being used in the business are included in the deductible area, the driveway and carport should be included in the non-deductible area.
Citation HWZG and Commissioner of Taxation [2016] AATA 1017 (SM Walsh, Perth) w http://www.austlii.edu.au/au/cases/cth/AATA/2016/1017.html
1.7 Binetter fraud or evasion
Facts
On 19 April 2010, the Commissioner commenced an audit of Mrs Binetter's taxation affairs in the 2002 to 2007 years as he had formed the view that she should have treated deposits to a bank account she had held jointly with her late husband as her income in those years.
The standard amendment period being four years for which the Commissioner was permitted to amend Mrs Binetter's assessments for the 2002 to 2007 years had expired. The Commissioner's ability to amend the assessments depended on him forming an opinion that there had been fraud or evasion. The Commissioner formed the opinion that there had been evasion and issued amended assessments for the 2002 to 2007 years.
Mrs Binetter objected to the amended assessments, which were subsequently disallowed by the Commissioner.
Mrs Binetter then applied to the Administrative Appeals Tribunal for review of the objection decision.
Before the Tribunal, the Commissioner contended that Mrs Binetter bore the onus of satisfying the Tribunal that there was no fraud or evasion in each of the years. This was because section 14ZZK(b)(i) of Schedule 1 of the TAA1953 provides as follows:
14ZZK Grounds of objection and burden of proof
On an application for review of a reviewable objection decision:
(a) the applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates; and
(b) the applicant has the burden of proving:
(i) if the taxation decision concerned is an assessment--that the assessment is excessive or otherwise incorrect and what the assessment should have been; or ...
Mrs Binetter submitted to the Tribunal that 14ZZK(b)(i) of the TAA does not apply to the formation of the opinion that had the effect of creating or imposing tax liabilities. Mrs Binetter argued that the formation of such an opinion, whilst a necessary condition that generated a tax liability, was different to the process of applying provisions of the ITAA36 and the ITAA97 to determine a person's liabilities. Mrs Binetter contended that the Tribunal could not simply find that an applicant had not discharged his or her onus to satisfy it that there had been no fraud or evasion, but rather the Tribunal had to form its own opinion that there had been fraud or evasion.
Mrs Binetter ultimately decided to not rely on any material in the hearing of her matter in the Tribunal on the basis that the material lodged by the Commissioner was not sufficient for the Tribunal to form its own opinion of fraud or evasion. In the Tribunal Mrs Binetter asserted that the Commissioner only provided the first and last page of his 10 page opinion on why there was fraud or evasion and provided no reasons.
The Tribunal held that Mrs Binetter was required to satisfy it that there had been no fraud or evasion in accordance with section 14ZZK(b)(i) of the TAA. As Mrs Binetter had decided not to rely on any materials at the hearing, she had failed to establish that there was no fraud or evasion and, as a result, her assessment was excessive.
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Mrs Binetter appealed the decision of the Tribunal to the Full Federal Court.
Issue
In proceedings before the Administrative Appeals Tribunal from assessments that were made as a result of the Commissioner forming an opinion of fraud or evasion, does a taxpayer have an onus to satisfy the Tribunal that there was no fraud or evasion or must the Tribunal form its own opinion of fraud or evasion?
Decision
The Federal Court considered that the decision of the Tribunal was correct at law. A taxpayer bears the onus of proof in showing that the formation of an opinion of fraud or evasion has been wrongly made so that the relevant assessment is out of time to amend. It is not for the Commissioner to provide evidence of fraud or evasion so that the Tribunal can make an independent finding.
The Federal Court did set out the difference between appealing the excessiveness of the assessment to the AAT as compared to the Federal Court:
In cases where the amendment power depends on the formation of an opinion by the Commissioner of fraud or evasion, the difference between merits review by the Tribunal and an appeal to the Court is that the Tribunal re-considers whether, on the evidence before it, there was an avoidance of tax due to fraud or evasion, whereas the Court will only interfere with the Commissioner's exercise of the amendment power if the Commissioner did not form the requisite opinion or the Commissioner's opinion that there was fraud or evasion is vitiated by some error of law: s 43 of the AAT Act; Shell Co of Australia v Federal Commissioner of Taxation (1930) 44 CLR 530 at 544-5; Jolly v Federal Commissioner of Taxation [1935] HCA 21; (1935) 53 CLR 206 at 212-4; Avon Downs Pty Ltd v Federal Commissioner of Taxation [1949] HCA 26; (1949) 78 CLR 353 at 360. Although the Tribunal re-examines whether, on the evidence before it, there was an avoidance of tax due to fraud or evasion, and is able to substitute its opinion for that of the Commissioner, the issue for the Tribunal is whether the taxpayer has discharged the onus of showing that the opinion that there was fraud or evasion should not have been formed, and therefore, that the statutory condition for the power to amend is not satisfied. Unless the taxpayer discharges that onus, the assessments are not shown to be excessive and the effect of s 14ZZK is that the Tribunal must affirm the amended assessments, such assessments having been made by the Commissioner in compliance with the statutory requirements: McCormack v Federal Commissioner of Taxation [1979] HCA 18; (1979) 143 CLR 284 at 303; Millar v Commissioner of Taxation [2015] FCA 1104; (2015) 67 AAR 490. In Millar Griffiths J correctly held that on a merits review before the Tribunal, the onus of proof imposed by s 14ZZK places on the taxpayer the burden of disproving fraud or evasion.
Given that Mrs Binetter had not discharged her burden of proof in the AAT that there was not fraud or evasion it was correct for the AAT to find that she had not provide that the assessment issued to her was excessive, which would be necessary for that assessment to be set aside.
COMMENT putting a taxpayer to the burden of proving that there was no fraud or evasion, in the
absence of a full understanding of what the Commissioner might argue supports a finding of fraud or evasion, puts a taxpayer at a distinct disadvantage when opposing an assessment that has been amended because of fraud or evasion.
Citation Binetter v Commissioner of Taxation [2016] FCAFC 163 (Siopsis, Perram and Davies JJ, Sydney) w http://www.austlii.edu.au/au/cases/cth/FCAFC/2016/163.html
1.8 Nguyen fraud or evasion
Facts
Ms Nguyen was born in Vietnam and lived in Queensland for over 9 years. In that time, Ms Nguyen had been employed as a nail technician in a nail or operated her own nail salon and beauty services business in the Brisbane CBD.
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Ms Nguyen was a frequent gambler.
The Commissioner amended Ms Nguyen assessments for the 2008 to 2012 income to include in her assessable income a series of deposits made to her bank accounts and amounts presented by her at casinos totalling $2,471.789.
In objecting to the amended assessments, Ms Nguyen contended that the amounts were sourced from a combination of:
1. gifts from family members that were made to when family from Vietnam visited her; 2. a significant loan from her friend, a Mr George Morris; 3. gambling winnings; and 4. her income from the beauty salons she worked in or carried on.
The Commissioner disallowed Ms Nguyen's objection to the amended assessments and Ms Nguyen then applied to the Administrative Appeals Tribunal for review of that decision.
Issue
Whether the Commissioner was permitted to amend the assessments for fraud or evasion?
Decision
Ms Nguyen submitted that evasion is:
1. something more than avoidance, or the mere fact of non-payment; and 2. more than mere withholding of information or furnishing of misleading information; 3. falls between innocent mistake, and the intention to defraud; 4. omitting income from a return, or wrongly claiming a deduction (intentionally or otherwise) without any
credible or excusable explanation for either; 5. an enquiry as to whether a taxpayer has acted honestly and reasonably in relation to his public
obligations; and 6. a conscious act of will by the taxpayer beyond an accident or mistake,
Ms Nguyen submitted that none of these findings could be made where:
1. no business activity was identified that would have been capable of generating such amounts of income; 2. Ms Nguyen had established the source of the funds.
The Tribunal rejected this submission. The Tribunal noted that where the Commissioner identifies particulars as constituting fraud or evasion, it may be sufficient for the taxpayer to demonstrate that such behavior does not fall within the meaning of fraud or evasion. This is because the taxpayer bears to onus of satisfying the Tribunal that there is no fraud or evasion. Where the Commissioner had not identified any particular matters as constituting fraud or evasion, the taxpayer will however fail to discharge their burden of establishing there is no fraud or evasion unless they can also show that the amounts identified by the Commissioner as income are not income.
The Tribunal noted as follows:
Provided the Commissioner has formed the requisite opinion, in an income case, the effect of the Binetter decision, and those on which it is based, may well be to make a fraud or evasion finding unchallengeable independently of the challenge to the assessability of the relevant amount. If that is so that is not a matter that the Tribunal can alter. Thus the Applicant's contention at paragraph [29(m)] above, in the present circumstances, and notwithstanding the possibility noted at paragraph [27] above, cannot be accepted.
The Tribunal concluded that it was not satisfied with Ms Nguyen explanations for the amounts as:
1. the dates of the asserted gifts from her relatives did not coincide with the dates that those relatives visited Australia according to their immigration records;
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2. whilst Mr Morris had provided a statutory declaration that he had lent $2.555 million to Ms Nguyen, such evidence was not persuasive for the following reasons: (a) Mr Morris had not attended for Tribunal hearing and had not been cross-examined; (b) there were no records of the loan; (c) Ms Nguyen did not provide any security for the loan; (d) no repayments were identified as having been made; and (e) Mr Morris' bank statements, and the transactions he identified as the advances, were not consistent with a loan having been made. Many of the transactions were cash withdrawals made in cities where Ms Nguyen was not present at the time; and
3. the gambling facilities records did not show winnings consistent with the amounts that Ms Nguyen claimed to have won.
The Tribunal concluded that Ms Nguyen failed to satisfy it that the identified amounts were not income and, therefore, had also failed to satisfy her onus of showing there was no fraud or evasion.
COMMENT the Tribunal's view that, where an opinion of fraud or evasion has been formed by the
Commissioner, it is necessary for the taxpayer to show that any amounts that are identified by the Commissioner are not income in order to establish there is no fraud or evasion, does not appear to follow from the Binetter decision. It is at least arguable that a taxpayer could satisfy their onus that there is no fraud or evasion without satisfying their onus that the identified amounts are not income. For example, it would appear to be open to the Tribunal to conclude that an amount is income but that the taxpayer may have honestly believed that such an amount was not income in lodging their tax return.
Citation Nguyen and Commissioner of Taxation [2016] AATA 1041 (M O'Loughlin, Melbourne) w http://www.austlii.edu.au/au/cases/cth/AATA/2016/1041.html
1.9 Balcaskie transfer duty and a change of trustee
Facts
Mrs Shirley Tina Wall was the trustee of a discretionary trust established on 1 August 2002 and known as the Shirley Wall Family Trust. The trust deed for the trust (the Trust Deed) provided that any trustee was not precluded from benefiting so long as they are within the class of beneficiaries specified in the trust deed. The trust deed contained a power of amendment at clause 14 as follows:
The Trustee may at any time and from time to time by written or oral resolution or Deed revoke add to or vary all or any of the provisions contained in this Deed (including this clause), as varied altered or added to by any previous variation alteration or addition, provided always that:
(a) no such variation alteration or addition may be in favour of or for the benefit of the Ineligible Beneficiaries or result in any benefit to the Ineligible Beneficiaries; and
(b) no such variation alteration or amendment shall affect the beneficial entitlement to any amount set aside for any beneficiary prior to the date of the variation alteration or addition;
subject always to paragraphs (a) and (b) of this clause, nothing in this clause or any other provision of this Deed shall prevent the Trustee from changing the persons or legal entities who are within the definition of `Beneficiary' or `Beneficiaries' pursuant to this Deed.
On the same day that the trust was established, Mrs Wall, in her capacity as trustee, acquired an interest in two parcels of land at Milsons with the intention of redeveloping that land with other parties.
On 12 January 2011 Mrs Wall and Balcaskie executed a Deed Appointing a New Trustee (the 2011 Deed) under which Balcaskie was appointed, and Mrs Wall was removed, as trustee. The deed also provided that Mrs Wall exercised her power to amend the trust deed for trust by inserting a new clause 22 into the trust deed that read as follows
The Original Trustee and the New Trustee and any future and past trustees are absolutely
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prohibited from being a beneficiary under the Trust Deed or from otherwise directly or indirectly benefiting under the Trust Deed and this clause will not be capable of amendment or revocation.
The Original Trustee was defined as Mrs Wall and the New Trustee was defined as Balcaskie in the 2011 Deed, however, the 2011 Deed did not insert those definitions in the Trust Deed.
Recital G to the 2011 Deed set out the intention of inserting clause 22 as follows: 'The parties wish to ensure that the Original Trustee and the New Trustee will not be entitled to any direct or indirect benefit or interest in the Trust'.
Clause 22 was inserted to address section 54(3) of the Duties Act which has the effect that only $50 of duty, and not the ad valorem rate, is chargeable on a transfer of property from a former trustee to a new trustee of the same trust unless the new trustee benefits or is capable of benefiting under the terms of the trust. Section 54(3) of the Duties Act provides as follows:
(3) Duty of $50 is chargeable in respect of a transfer of dutiable property to a person other than a licensed trustee company, a special trustee, a trustee of a self managed superannuation fund or a trustee of a special disability trust as a consequence of the retirement of a trustee or the appointment of a new trustee, if the Chief Commissioner is satisfied that, as the case may be:
(a) none of the continuing trustees remaining after the retirement of a trustee is or can become a beneficiary under the trust, and
(b) none of the trustees of the trust after the appointment of a new trustee is or can become a beneficiary under the trust, and
(c) the transfer is not part of a scheme for conferring an interest, in relation to the trust property, on a new trustee or any other person, whether as a beneficiary or otherwise, to the detriment of the beneficial interest or potential beneficial interest of any person.
On 18 May 2011 the 2011 Deed was lodged for stamping with the Chief Commissioner but was regarded as not being dutiable.
Mrs Wall died on 4 October 2012 after which time Balcaskie caused the two parcels of land to be transferred from Mrs Wall's estate to itself in accordance with the 2011 Deed. The transfers of the two parcels were lodged for stamping under section 54(3) of the Duties Act.
The Chief Commissioner considered that clause 22 did not prevent Balcaskie from benefiting under the trust as there was a conflict between clauses 14 and 22 because
1. clause 22 provides that `... this clause will not be capable of amendment or revocation'; while 2. clause 14 provides that `... nothing in this clause or any other provision of this Deed shall prevent the
Trustee from changing the persons or legal entities who are within the definition of `Beneficiary' or `Beneficiaries' pursuant to this Deed'.
The Chief Commissioner argued that remained open to Balcaskie, in reliance on those words in clause 14, to either:
1. provide that the Applicant is a Beneficiary; or 2. include an express provision that clause 14 prevails over clause 22.
The Chief Commissioner assessed Balcaskie for duty on the transfers of the two parcels of land at ad valorem rate on the basis that the conditions in section 54(3) were not satisfied.
Balcaskie objected to that assessment and, following the Chief Commissioner's disallowance of the objection, applied for review to the New South Wales Civil and Administrative Tribunal.
Balcaskie contended that the Chief Commissioner's characterisation of the interaction between clause 14 and 22 of the Trust Deed was incorrect for the following reasons:
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1. clause 22 deals with a specific circumstance whereas clause 14 is a general power. In accordance with the normal rule of contractual interpretation, any inconsistency should be resolved in favour of the specific provision;
2. Recital G of the 2011 Deed provided an aid in interpreting the intention of the parties and interaction between clauses 14 and 22; and
3. Recital G would operate to establish an estoppel by convention against Balcaskie, preventing it from amending the Trust Deed so as to make itself a beneficiary of the Trust. Estoppel by convention prevents a person from adopting a position that is contradictory to their previous position if certain matters are satisfied.
The Chief Commissioner disagreed with these contentions for the following reasons:
1. Clauses 14 and 22 were both provisions dealing with specific situations. Clause 14 provides a specific power to appoint additional beneficiaries and provides that such a power prevails over any other provision of the Deed. Therefore, the principle that you give greater weight to specific provisions over general provisions did not operate in these circumstances in the manner contended by Balcaskie;
2. you cannot have recourse to a recital in aiding an interpretation where the operative words are clear and unambiguous;
3. the estoppel argument was flawed as: (a) an estoppel only arises where the parties have assumed specific facts. Recital G did not assume facts but stated the wishes of the parties; (b) the assumption made by the parties must be one that is sufficiently certain to be enforceable to give rise to an estoppel. Recital G did not give rise to such an assumption; (c) the parties must have relied on the assumption and there was no evidence of any such reliance; and (d) it is a requirement of an estoppel by convention that the party who relied on the assumption in doing a particular act suffered detriment. There was no evidence that Mrs Wall, being the person who appointed Balcaskie as trustee, suffered any detriment.
Issue
Was Balcaskie capable of benefiting under the Trust Deed at the time following the execution of the 2011 Deed?
Decision
The Tribunal considered that the issue could be resolved in favour of Balcaskie on a construction of clause 14 and 22. That is, without having regard to Recital G or because of estoppel by convention. The Tribunal disagreed with the Chief Commissioner's submission that clause 14 provided a specific power to appoint additional beneficiaries. Rather, the clause provided two things:
1. a general power to amend subject to specific limitations; 2. clarification that such specific limitations, as well as any other provision of the deed, do not prevent the
trustee adding beneficiaries. The Tribunal considered that this second element of clause 14 did not provide an additional power or have independent operation, it merely restated `in more specific terms one particular element of the general authority of the Trustee conferred under the preceding provisions of the clause.'
When the clause is properly construed in this manner, it was a general provision and not a specific provision.
In contrast, clause 22 is 'a provision which expressly and specifically prohibits any Trustee, present past or future, from being a Beneficiary, and expressly prohibits its own amendment or revocation.'
The Tribunal concluded that given the specificity of clause 22 compared with the general nature of clause 14, clause 22 prevailed.
The Tribunal noted that, whilst it may have been clumsy drafting, the failure to insert the definitions of Original Trustee and New Trustee into the Trust Deed, was not determinative. It is clear on the ordinary meaning of Original Trustee and New Trustee what those terms mean.
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COMMENT this is first decision on the operation of section 54(3) of the Duties Act and suggests a more
generous approach than the approach that has traditionally been adopted by the Office of State Revenue.
Citation Balcaskie Investments Pty Limited v Chief Commissioner of State Revenue [2017] NSWCATAD 19 (M O'Loughlin, Melbourne) w http://www.austlii.edu.au/au/cases/nsw/NSWCATAD/2017/19.html
1.10 Tan residency tiebreaker under Australia/Malaysia DTA
Facts
Mr Tan was born in Malaysia and had lived in Australia since 1998. He was an Australian citizen with an Australian passport. His wife is a Malaysian citizen. During the year ended 30 June 2015, neither him nor his wife owned any real property in Australia.
Since 2008 Mr Tan lived in his parents' home in Western Australian. He had a key for access and he used the property as a registered location and address for service for his business.
When Mr Tan was in Malaysia during the year ended 30 June 2015, he lived at his in-laws' home in Malaysia. He entered into a lease agreement in relation to this.
During the income year ended 30 June 2015 Mr Tan was in Australia for a total of 279 days and in Malaysia for 88 days. During the 2015 calendar year Mr Tan was in Australia for a total of 106 days and in Malaysia for 264 days;
On 20 July 2015 Mr Tan applied to the ATO for a private binding ruling for the period from 1 January 2015 to 31 December 2015 in relation what portion of his non-Australian sourced income was assessable in Australia. The ATO issued a private binding ruling on 24 August 2015 that all Mr Tan's income was assessable in Australia.
Mr Tan then lodged his tax return on 29 October 2015 and an assessment was issued by the ATO on 9 November 2015. Mr Tan objected to the assessment, and the Commissioner, in failing to respond to the objection, was treated as having made a decision on the objection on 29 April 2016. Mr Tan applied to the AAT for a review of the objection decision.
The Commissioner's position was that Mr Tan was to be treated as a tax resident of Australia for the entire income year ended 30 June 2015.
Mr Tan contended that:
for the period from 1 July 2014 to 31 December 2014 he was a tax resident of Australia; for the period from 1 January 2015 to 31 March 2015, he is to be treated as a tax resident of Australia by
reason of the DTA with Malaysia; and for the period from 1 April 2015 to 30 June 2015, he ought to be treated as a tax resident of Malaysia.
Both the Commissioner and Mr Tan accepted that Mr Tan was a resident of Australia for Australian tax purposes. Mr Tan contended that he was also a resident of Malaysia for Malaysian tax purposes for the relevant income year. The Commissioner did not disagree with this contention. Accordingly, the question was whether the residency tie-breaker rules Australia/Malaysia DTA meant that there was a period for which Mr Tan was not a resident of Australian in the year ended 30 June 2015.
Article 4(2) of the Australia/Malaysia DTA provides:
2. Where by reason of the preceding provisions an individual is a resident of both Contracting States, then his status shall be determined in accordance with the following rules:
(a) he shall be deemed to be a resident solely of the Contracting State in which he has a permanent home available to him;
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(b) if he has a permanent home available to him in both Contracting States, or if he does not have a permanent home available to him in either of them, he shall be deemed to be a resident solely of the Contracting State in which he has an habitual abode;
(c) if he has an habitual abode in both Contracting States, or if he does not have an habitual abode in either of them, he shall be deemed to be a resident solely of the Contracting State with which his personal and economic relations are the closer.
Article 4(3) of the Australia/Malaysia DTA provides:
3. In determining for the purposes of paragraph 2 the Contracting State with which an individual's personal and economic relations are closer, the matters to which regard may be had shall include the citizenship of the individual.
Issues
Did the residence tie-breaker test in the Australia/Malaysia DTA operate so that there were periods in the year ended 30 June 2015 that Mr Tan was not a resident of Australia?
Decision
Permanent home
Mr Tan contended that he did not have a permanent home available to him in Australia in the period as he did not arrange to have the Australian address available to him at all times, and that he had no power of disposition or control over the Australian property.
The Tribunal held that Mr Tan had a permanent home available in Australia, within the ordinary meaning, as:
1. he had lived in the residence with his parents since 2008; 2. even though he did not enter into a formal lease arrangement, there is no evidence that his residence at
the Australian property was short term; 3. even when Mr Tan was in Malaysia, he left the majority of his personal effects in Australia and retained a
key to the residence; 4. he had a verbal arrangement with his parents that he would have a room at the Australian property at all
times.
The Tribunal disagreed that a power to sell a property is required for it to be the person's permanent home. The Tribunal had a permanent home in Australia in the whole of the year ended 30 June 2015.
It was accepted that Mr Tan had a permanent home in Malaysia. Accordingly, it was necessary to consider the next aspect of the tie-breaker test.
Habitual abode
It was common ground Mr Tan had a habitual abode in both Australia and Malaysia during the income year ended 30 June 2015.
Personal and economic relations
While the Tribunal acknowledged that Mr Tan had connections with both Australia and Malaysia, the Tribunal held that Mr Tan's personal and economic relations were closer to Australia than Malaysia.
Therefore, the Tribunal found that Mr Tan is a resident solely of Australia for the purposes of the Australia/Malaysia DTA, the income derived by him in Malaysia is taxable in Australia. The reasons for this conclusion included the following:
Mr Tan is an Australian citizen; he holds an Australian passport;
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he has lived in Australia since 1998, and has not taken any action to cease residing in Australia; his wife is a permanent Australian resident, and has purchased a home in Australia; his baby was born in Australia; his parents live in Perth; and he described himself as an Australian resident in his income tax returns for the year ended 30 June 2015
and the year ended 30 June 2016.
Accordingly, applying the tiebreaker rules, the Tribunal considered Mr Tan was a resident of Australia in the year ended 30 June 2015 and not Malaysia.
Citation Tan and Commissioner of Taxation [2016] AATA 1062 (SM Walsh, Perth) w http://www.austlii.edu.au/au/cases/cth/AATA/2016/1062.html
1.11 McEwans GST clause in contract
Facts
McEwans Australia Pty Ltd is a property developer. McEwans became interested in developing and sub-dividing parcels of land in Brisbane; one on Levitt Road and the other on Ross Road. In May 2006, prior to purchasing these parcels of land, McEwans applied, with the approval of the then owners, to Brisbane City Council (Council) for approval of the sub-division of the two parcels.
In December 2007, McEwans entered into a contract to acquire the Levitt Road land for a purchase price of $3,300,000 plus GST. The contract provided `the margin scheme under the GST Act is to be applied by the seller for the purposes of calculating the GST payable on the supply of the property to the buyer'.
In January 2008, McEwans purchased the Ross Road land for a purchase price of $3,550,000 on the basis that, if the seller became liable for GST on the sale, the purchase price would increase accordingly and McEwans could at its election apply the margin scheme. The seller did become liable for GST and the purchase price has increased by $355,000. McEwans did not elect to apply the margin scheme.
In September 2008, McEwans claimed an input tax credit for the GST that it paid on the acquisition of the Ross Road land. No input tax credit was claimed in respect to the Levitt Road land as the margin scheme was applied.
Usually, it is condition of approvals of a sub-division that the developer make a financial contribution to the local authority for community infrastructure. Such financial contributions, or in-kind contributions, are generally tax-free under Division 81 or 82 of the GST Act for the position in NSW see CR 2013/13.
McEwans entered into an infrastructure agreement with the Council under which the Council would acquire parts of each of the Levitt Road land and the Ross Road land. The price paid by the Council was the value of the land ($7,370,402.29) - referred to as the `Infrastructure Offset' in the agreement - less the infrastructure contribution applicable to the subdivision (calculated to be $300,917.56) - referred to as the `Financial Contribution' in the agreement.
Clause 6.1(b)(ii) of the agreement provided as follows:
(ii) The parties agree that GST shall not apply to the Infrastructure Offset nor any amount payable for the provision of the proposed Lot 90 under the Conditions of Approval, however, if for any reason Commissioner for Taxation does not accept that the Infrastructure Offset and any amount payable for the provision of the proposed Lot 90 under the Conditions of Approval is a GST free payment of infrastructure charges, the Council, the Applicant and the Owner agree in accordance with Division 75-5 of the GST Law, that the Margin Scheme shall apply to the provision of proposed Lot 90 under the Conditions of Approval. Despite any other term, the Council shall pay, in addition to the Agreed Balance an amount equal to the GST that the Applicant will have to pay on account of GST associated with the receipt of the Agreed Balance. (emphasis added)
The parties considered that the transfer of parts of the parcels of land to the Council was a GST free supply of infrastructure charges.
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The agreement contained a clause dealing with GST generally (Clause 4). Clause 4.1 of the agreement provided that terms used in clause 4 that were defined under GST Act took their meaning from the GST Act. The agreement was silent on whether terms used in other parts of the agreement that were defined in the GST Act took their meaning from the GST Act. Clause 4 provided that `If GST is payable on any supply made by a party (or any entity through which that party acts) (Supplier) under or in connection with this document, the recipient will pay to the Supplier an amount equal to the GST payable on the supply.'
Following an audit, the ATO concluded:
1. because the Ross Road land had been acquired by McEwans through a taxable supply, an increasing adjustment of $160,116 arose for the input tax credits claim;
2. the GST-free treatment of the land was incorrect and as a result, after applying the margin scheme, McEwans was assessed for GST of $250,881.
McEwans sent the Council a tax invoice for the $411,997 and $63,720 for general interest charges on the basis that such amounts were `GST associated with the agreed balance' under clause 6.1(b)(ii) of the agreement in support of that claim.
The Council paid the $250,881 but refused to pay the $160,116 and general interest charges.
McEwans ultimately commenced proceedings in the District Court of Queensland to recover the disputed amounts.
Issue
Whether the Council was required to pay the $160,116 and general interest charges to McEwans under the agreement?
Decision
In the District Court of Queensland McGill DCJ noted that there was a distinction between GST as defined in the GST Act and the ordinary meaning of that term as follows:
1. under the GST Act, 'GST' is defined as the 'tax that is payable under the GST law and imposed as goods and services tax' by any of a list of statutes, each of which is an imposition Act.' The amount payable under the GST Act is the 'net amount', which takes into account input tax credits and adjustments, as well as the 1/11th of the consideration for a taxable supply;
2. by contrast, in its popular usage, GST means 1/11th of the consideration for a taxable supply.
McGill DCJ considered that GST took its ordinary and natural meaning in clause 6 for the following reasons:
1. clause 4.1 incorporated the defined terms in the GST Act only for the purpose of clause 4; 2. whether and to what extent the transfer of the land under the amended infrastructure agreement
produced an increasing adjustment will depend on matters solely within the knowledge of McEwans. For example, that it claimed an input tax credit on the original acquisition of the land. There was nothing in the agreement that indicated that the indemnity was intended to extend to such matters.
Accordingly, McGill DCJ dismissed McEwans application.
COMMENT the problem here appears to have been that clause 4 was a standard clause of the
relevant contract whereas clause 6.1(b)(ii) was included specifically for this arrangement. Unfortunately, in drafting the agreement, clause 4.1 was not amended to reflect that the term GST was being used outside of clause 4.
Citation McEwans Australia Pty Ltd v Brisbane City Council [2016] QDC 347 (McGill SC DCJ, Brisbane) w http://www.austlii.edu.au/au/cases/qld/QDC/2016/347.html
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1.12 Doutch SBC and aggregated turnover
Facts
Mr Doutch sold mining tenements to Golden West Resources Pty Ltd. Mr Doutch received $5,000,000 cash and 5,000,000 ordinary shares in Golden West Resources as consideration for the tenements. The value of the sale was $11,680,000 (GST exclusive).
Mr Doutch declared the capital gain in his tax return for the year of income ended 30 June 2009. He claimed the 50% general CGT discount. A notice of assessment for the 2009 income year was issued on 14 September 2010, showing Mr Doutch's taxable income to be $5,612,632. On 19 December 2013, Mr Doutch objected to the 2009 assessment on the basis that the small business 50% reduction in Subdivision 152-C of the ITAA97 should also apply to the capital gain. Mr Doutch claimed to be entitled the 50% small business CGT reduction as the tenements were used in a business carried on by an entity connected with him.
The principal issue in whether Mr Doutch was entitled to the 50% small business reduction was whether the aggregated turnover of an associated entity, Denarda Holdings Pty Ltd, for the prior income year was less than $2,000,000. This turned upon whether receipts totalling $55,106 on account of fuel disbursements formed part of Denarda's annual turnover for the year ended 30 June 2008.
Denarda was an oil and gas drilling business based in Western Australia and carried out exploration activities on the land the subject of the tenements. Mr Doutch was a director of Denarda. The issued capital in Denarda was two ordinary shares, one B class share and one C chass share. Mr Doutch owned one ordinary share and one B class share.
The ordinary practice was for Denarda's customers to provide fuel for Denarda. However, in respect of two clients, Denarda purchased fuel, and the costs were disbursed in invoices from Denarda. If the repayments of the fuel disbursements were included, Denarda's annual income would exceed the $2,000,000 threshold.
'Annual turnover' is defined in s 328-120(1) of the ITAA97 as 'an entity's annual turnover for an income year is the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business.'
Mr Doutch contended that the annual turnover of Denarda should be calculated with the repayments of the fuel disbursements being excluded, on the basis that they were 'extraordinary' to the ordinary course of the taxpayer's business.
The Commissioner disallowed Doutch's objection.
Mr Doutch applied for a review to the Administrative Appeals Tribunal.
The Tribunal considered the `Explanatory Memorandum' to the Tax Laws Amendment (Small Business) Bill 2007 (EM) which provided as follows:
What does `in the ordinary course of carrying on a business' mean?
........
2.15 In general, income is derived in the ordinary course of carrying on a business if the income is of a kind that is regularly or customarily derived by the entity in the course of carrying on its business, arising out of no special circumstance or event. Similarly, the income is derived in the ordinary course of carrying on a business if the income although not regularly derived, is a direct result of the normal activities of the business.
2.16 Ordinary income may be derived in the ordinary course of carrying on a business even if it is not the main type of ordinary income derived by the entity. Similarly, the income does not need to account for a significant part of the entity's overall receipts. It is sufficient that the ordinary income is of a kind derived regularly or customarily in the carrying on of a business.
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The Tribunal held that the fact Denarda did not derive income from fuel disbursements in every contract for drilling services that it entered, did not alter that characterisation of the income in those circumstances when it did derive income from that source, namely, by charging for the supply of fuel to the rig. The income derived from the payment of the fuel disbursement is no less income in the ordinary course of Denarda's business than the income derived from any of the other charges levied in the invoices, for example, the charge for hammers.
The Tribunal affirmed the Commissioner's decision, concluding that the receipts in respect of fuel the disbursements were ordinary income that Denarda derived in the year ended 30 June 2008 in the ordinary course of carrying on a business.
Mr Doutch appealed to the Full Federal Court on a question of law. Mr Doutch raised a number of grounds. However, his primary contention was that in construing `in the ordinary course of carrying on a business' the Tribunal should have adopted the meaning given to the phrase in case law, in particular in Commissioner of Taxation v The Myer Emporium Limited (1987) 163 CLR 199 where the High Court stated at 209-210 as follows:
Although it is well settled that a profit or gain made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer's business is not income. Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose, thereby stamping the profit with the character of income. But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case. Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business. Nor does the fact that a profit or gain is made as the result of an isolated venture or a `one-off' transaction preclude it from being properly characterized as income: Federal Commissioner of Taxation v. Whitfords Beach Pty. Ltd. [(1982) [1982] HCA 8; 150 CLR 355 at pp 366-367, 376]. The authorities establish that a profit or gain so made will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit.
Issue
Were the fuel disbursement receipts ordinary income derived by Denarda in the ordinary course of its business?
Decision
The Full Federal Court dismissed the appeal, holding that:
1. the Tribunal was correct in determining that the phrase `in the ordinary course of carrying on a business' took its ordinary meaning. The passage which Mr Doutch relied on in Myer Emporium was concerned with what constitutes income according to ordinary concepts, not on what constitutes the ordinary course of carrying on business; and
2. it was open to the Tribunal to conclude that the transactions in dispute took place in the ordinary course of carrying on a business by Denarda. In particular, although the ordinary practice was for Denarda's customers to provide fuel for Denarda, the transactions giving rise to the fuel disbursements were from the provision of drilling services by Denarda, which were services in the ordinary course of carrying on a business by Denarda. As such, the receipts were incidental to an ordinary part of Denarda's business. In circumstances where income derived is incidental to the normal day to day activities of a business, it is income that is derived `in the ordinary course of carrying on a business.'
TIP annual turnover for SBE purposes does not include sales of retail fuel. In this case the sales were not of
retail fuel.
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Citation Doutch v Commissioner of Taxation [2016] FCAFC 166 (Greenwood, Mckerracher And Moshinsky JJ, Sydney) w http://www.austlii.edu.au/au/cases/cth/FCAFC/2016/166.html
1.13 BCI Finances and Binetter directors' duties and tax returns
Facts
BCI Finances Pty Ltd, EGL Development Pty Ltd, Ligon 268 Pty Ltd and BINQLD Finances Pty Ltd were companies associated with the families of Erwin and Emil Binetter, two brothers who came to Australia from Eastern Europe as refugees in 1950. Erwin and Emil Binetter both died a number of years ago.
After an extensive audit by the ATO which commenced in about July 2006, the Commissioner issued notices of assessment, amended assessment and penalty assessment to the companies between December 2009 and July 2010. The revised assessments dated as far back as to the year ended 30 June 1992, requiring the Commissioner to form the opinion that there had been fraud or evasion.
After several years of disputing the revised assessments, the companies went into liquidation. The only creditor of all four companies was the ATO.
The liquidators' brought claims against a number of individuals (some were directors of the companies and others were not), including Emil and Eriwn's estates, and a number of companies. The claims were made on the following bases:
1. breach of fiduciary, common law, equitable and or statutory duties owed to the various applicant companies by the various individuals who were directors of the Companies at various times; and
2. knowing participation by other, non-directors in the breaches of duty by the directors.
The alleged breaches by the respondents concerned the companies' dealings with two banks in Israel being the Bank Hapoalim and the Israel Discount Bank. The liquidators' case was based on a complex analysis of the transactions between the companies and the two Israeli banks, and on the factual context in which those transactions took place, dating back to 1988. The liquidators argued that the individuals and companies had participated in a scheme for the purpose of evading or avoiding a liability to pay income tax. The scheme involved advances to the companies from various banks in Israel under `back to back loans' in relation to which the companies claimed deductions for interest on the advances. The Commissioner had claimed the advances were not loans but payments from the Israeli banks, which were secured by moneys deposited in other Israeli and Swiss offshore accounts of the companies.
Following audits in 2006, the Commissioner issued assessments disallowing the interest claims and included the advances in the assessable income of the companies for the years in question.
The liquidators claimed that their loss (the debt due to the ATO) arose from having to meet the tax liability on the winding up of the companies and that the cause of this loss was the directors' breach of duty in their dealings with the Israeli banks, which gave rise to the schemes to evade or avoid tax. The liquidators also claimed that the Israeli banks knew that the purpose of the directors in implementing the scheme was to assist persons or the companies in evading Australian tax. It was contended that in entering into these schemes, the directors had exposed the companies to financial risk, resulting in the denial of deductions, tax penalties and, ultimately, winding-up.
The liquidators claimed that the companies were entitled to equitable compensation from the individuals and other companies, quantified by reference to the tax liabilities arising from the revised assessments. Claims for relief were also made with respect to the costs of the winding up of the applicant companies and in the nature of charging orders over various identified assets. The claims totalled over $120 million as at 27 September 2015.
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Issue
Whether or not the directors and one non-director, a family member who acted as a 'solicitor' for the Binetter companies, were in breach of their directors' duties in allowing the Companies to enter into the tax avoidance schemes involving the back-to-back loans.
Decision
Gleeson J allowed the liquidator's application, finding that that 4 of the 6 directors (2 of whom are deceased) had breached their fiduciary duties to the Companies.
The relevant directors' duties as identified by Gleeson J were:
(a) a duty not to permit the interests of the relevant director to conflict with the interests of the relevant company, without the company's informed consent (`conflict duty');
(b) a duty not to exercise a power conferred upon the relevant director in order to obtain some private advantage or for any purpose foreign to the power (`proper purpose duty');
(c) a duty not to exercise a power conferred upon the relevant director in a manner which is detrimental to the interests of the relevant company (`company interests duty').
In finding against the directors, Gleeson J noted that:
Lodgement of a tax return on behalf of the company ... involves an exercise of power in that it affects the company's legal rights. In this case, lodgement of the relevant tax returns exposed the applicants to the risk that, in the event the Commissioner did not accept the tax returns as accurate, the applicants would be liable to pay penalties and interest charges.
In reaching her Honour's findings, it was critical that the transactions involved in the scheme provided no benefit to the companies. In particular, her Honour found that:
the scheme (and the individual transactions undertaken in pursuance of the scheme) operated to the benefit of various of the respondents but, if revealed, would operate to the detriment of the applicant companies. Such detriments would include liabilities to pay income tax for which the relevant applicant company would not otherwise have been liable, liabilities to pay penalties on assessments issued by the Commissioner and liabilities to pay interest including shortfall interest charges and general interest charges.
The individuals and companies alleged that the relevant fiduciary duties were owed to the shareholders, who had given their consent to the transactions. Her Honour rejected this argument and upheld that directors' duties are owed generally to the company, and where the solvency of the company is at issue, the duties are also owed to creditors of the Company. Her Honour upheld that the doctrine of unanimous consent does not enable shareholders to ratify conduct that amounts to a fraud on the creditors of a company.
One of the respondents in the case was Michael Binetter. While Michael Binetter was not a director of BCI Finances, her Honour concluded that he had taken on such an active role in that company, such that he was a de facto director (within the meaning of section 9(b) of the Corporations Act 2001). Counsel for the Binetters had submitted that Michael was simply acting as the company solicitor but her Honour concluded that in procuring the arrangements between BCI and Bank Hapoalim and documentation to evidence the arrangements, Mr Binetter was a de facto director of BCI.
Citation BCI Finances Pty Limited (in liq) v Binetter (No 4) [2016] FCA 1351 (Gleeson J, Sydney) w http://www.austlii.edu.au/au/cases/cth/FCA/2016/1351.html
1.14 ElecNet unit trust
ElecNet is the trustee of the Electrical Industry Severance Scheme (the EISS). The EISS is an employment termination payment scheme for employers within the electrical contracting industry. Employer members are
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required to make payments for the benefit of employees. ElecNet then credits such payments to accounts in the name of the respective employees.
ElecNet applied for a private ruling that the EISS was a unit trust within the meaning of that term in Division 6C of the ITAA36 such that it was a public trading trust and taxed as a company. The Commissioner ruled that the EISS was not a unit trust within the meaning of Division 6C and ElecNet objected to the private ruling. The reason for ElecNet applying for the ruling was that the EISS had retained income that the Commissioner had taxed using the punitive tax rates in section 99A.
The Commissioner disallowed Electnet's objection and Electnet appealed to the Federal Court. At first instance, the Federal Court allowed the appeal, holding that the EISS was a unit trust for the purposes of Division 6C. On appeal to the Full Court, the Full Court unanimously allowed the Commissioner's appeal, holding that the EISS was not a unit trust for the purposes of Division 6C. ElecNet then sought special leave to the High Court and the High Court heard its appeal.
Issue
Was the EISS a unit trust within the meaning of section 6C?
Decision
The High Court held that the EISS was not a unit trust for the purposes of Division 6C on the basis that any interest an employee had in the EISS could not be characterised as a unit. The meaning of `unit trust' in Division 6C took on its ordinary meaning of a trust in which the beneficial interest in the trust estate is divided into discrete parcels of rights that are capable of being dealt with, like shares in a company.
The High Court noted that payments made to the employees were not calculated by reference to units but to contributions made by the employer over time and other conditions in the trust estate. The person's entitlement was not calculated as a percentage of the trust estate.
The High Court noted that the purpose of Division 6C is to treat unit trusts for tax purposes as analogous to the relationship of a company and a shareholder. The relationship of Electnet and an employee under the EISS deed was not analogous to a company and shareholder relationship.
TIP the public trading trust provisions changed on 1 July 2016 so that ownership of a unit trust by a
complying superannuation fund no longer causes a unit trust to be treated as a publich unit trust, so that such a trust cannot merely because of such ownership be treated as a public trading trust.
Citation ElecNet (Aust) Pty Ltd v Commissioner of Taxation [2016] HCA 51 (Kiefel CJ, Gageler, Keane, Nettle and Gordon JJ, Sydney) w http://www.austlii.edu.au/au/cases/cth/HCA/2016/51.html
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2 Legislation
2.1 Progress of legislation
Title
Treasury Laws Amendment (Enterprise Tax Plan) 2016
Treasury Laws Amendment (2016 Measures No. 1) 2016
Tax and Superannuation Laws Amendment (2016 Measures No. 2) 2016
Income Tax Amendment (Working Holiday Maker Reform) 2016
Superannuation (Objective) 2016
Introduced House 1/9 1/12 14/9
12/10 9/11
Passed House
7/2 17/10 22/11
Introduced Senate
Passed Senate
8/2
7/11 23/11
Assented
2.2 Fair and Sustainable Superannuation
In November 2016 the Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 was introduced, passed and assented to.
This Bill included the following measures to apply from 1 July 2017:
Introduce the $1.6 million transfer balance cap. A reduction in the annual concessional contributions cap to $25,000 (from $30,000 for those aged under
49 at the end of the previous financial year and $35,000 otherwise). A reduction in the threshold at which high-income earners pay Division 293 tax on their concessionally
taxed contributions to superannuation, to $250,000 (from $300,000). A reduction in the annual non-concessional contributions cap from $180,000 to $100,000 A removal of the requirement that an individual must earn less than 10 per cent of their income from their
employment related activities to be able to deduct a personal contribution to superannuation. An increase in the amount of income an individual's spouse can earn before the individual ceases to be
entitled to a tax offset for making superannuation contributions on behalf of their spouse. A removal of the anti-detriment deductions.
The Bill included the measure to allow for the carry forward of up to five years of the concessional contribution cap from 2020 if an individual's superannuation balance is less than $500,000 just before the start of the financial year.
The Bill also included the measures allowing a reset of the tax cost of an asset if it is necessary to commute a pension income stream to come within the $1.6 million transfer balance cap on 1 July 2017.
A previously unannounced measure included in the Bill was a prohibition on a SMSF adopting a segregation strategy if one of the members of the fund has a total superannuation fund balance of more than $1.6 million where part of that fund balance is in retirement phase.
w http://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r5760
2.3 Superannuation reforms
The Exposure Draft - Treasury Laws Amendment (Fair and Sustainable Superannuation) Regulations 2017 was released on 16 December 2016. The purpose of the draft regulations is to give effect to the superannuation reforms introduced into parliament in 2016, by amending the Superannuation Industry (Supervision) Regulations 1994 (Cth).
The key regulations proposed in the Exposure Draft are as follows:
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1. Schedule 1 $1,600,000 Transfer Balance Cap
(a) Commutations allowing for superannuation members to commute part of their pension account for the purpose of complying with the maximum $1.6m transfer balance cap to the greater of:
(i) that excess transfer balance; and
(ii) the crystallised reduction amount stated in an excess transfer balance determination issued to the person by the Commissioner under Subdivision 136-A in Schedule 1 to the TAA1953.
(b) Actuarial Certificates, exceptions prescribes the following exceptions to the requirement to obtain an actuarial certificate for the purposes of s 295-390(7) of the SIS Act:
(i) an allocated pension within the meaning of the SIS Regulations; or
(ii) a market linked pension within the meaning of the SIS Regulations; or
(iii) an account based pension within the meaning of the SIS Regulations; or
(iv) a death benefit income stream where the deceased was previously in receipt of an income stream of any of (b)(i)-(iii) above.
The exemption from having to obtain a certificate will not be available if any part of any of the income streams paid by the fund are any other type of income stream.
(c) Rollover Death Benefits allows death benefits payable to the following persons to be rolled over within superannuation:
(i) The spouse of the deceased;
(ii) A child of the deceased under 18;
(iii) A financially-dependant child of the deceased under 25; or
(iv) an interdependent of the deceased.
Currently, with the exception of spouse reversionary pensions, superannuation death benefits must be paid to the beneficiary and cannot be retained within superannuation.
(d) Death Benefit Pensions the compulsory cashing rules are amended in respect of pensions and annuities to include a requirement that the beneficiary also be in the retirement phase. The Explanatory Statement states as follows
`An example is where a death benefits pension is paid to a dependant spouse who has already reached the limit of their transfer balance cap because of their own superannuation interests. If the provider of the pension refuses to comply with a commutation authority that is issued under Subdivision 136-B in Schedule 1 to the TAA 1953 in respect of the superannuation income stream, the income stream would cease to be in the retirement phase (see subsection 307-80(4) of the ITAA97). If this were to occur, the provider would no longer be entitled to an earnings tax exemption in respect of a superannuation income stream. These amendments ensure that the pension would also cease to satisfy the compulsory cashing rules in paragraphs 4.24(3)(b)(i) and (ii) of the RSAR 1997 and 6.21(2)(b)(i) and (ii) of the SISR 1994, meaning that the provider would also be required to cash the relevant benefits in another form.'
(e) Minimum Pension Drawdowns and Commutations excludes commutations from counting towards the minimum pension amount required to be drawn down by the member.
2. Schedule 2 Deducting Personal Super Contributions
A defined benefit fund may elect to make defined benefit member contributions, or all member contributions, non-deductible.
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3. Schedule 3 Non-concessional Contributions As a consequence of the changes to the non-concessional and bring-forward caps regulation 7.04 of the SIS Regulations concerning when a trustee must refuse to accept a contribution - is amended to remove the requirement that trustee refuse to accept contributions over a specified level. The obligation is now on the member to ensure that contributions are within their relevant caps.
All amendments above will take effect from 1 July 2017.
w https://consult.treasury.gov.au/retirement-income-policy-division/superannuation-reform-package-regulations/
2.4 Increasing Penalties for Significant Global Entities
On 20 December 2016, the federal Government released Treasury Laws Amendment (Combating Multinational Tax Avoidance) Bill 2017: increasing penalties for significant global entities, which takes effect from 1 July 2017 or the day after Royal Assent (whichever is later).
The draft legislation is to give effect to the 2016/17 Federal Budget announcements to increase penalties on taxpayers with group worldwide revenue of greater than $1 billion AUD. The penalty regime is generally scaled up for such entities, with the penalty for intentional disregard becoming 150% (usually 75%) and the penalty for a return being outstanding more than 112 days rising from $4,500 to $450,000.
w http://treasury.gov.au/ConsultationsandReviews/Consultations/2016/Increasing-administrative-penalties-forsignificant-global-entities
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3 Rulings
3.1 GST cross border supplies determining if a recipient is an Australian consumer
The Commissioner has issued a draft ruling (GSTR 2016/D1) providing guidance on how to determine if a recipient of a supply is an Australian for the purpose of determining a supply is connected to Australia under section 9-25(5) of A New Tax System (Goods and Services Tax) Act 1999 (Cth).
The draft ruling notes that under section 84-100 of the GST Act a supply can be treated as not having been made to an Australian consumer where:
1. particular evidentiary requirements have been satisfied; and
2. the supplier holds a reasonable belief that the recipient is not an Australian consumer (either because of the residency requirement or the consumer element).
The ruling details the evidentiary requirements that the Commissioner will accept as being a reasonable basis to form a belief that a person is not an Australian consumer.
ATO reference GSTR 2016/D1 w https://www.ato.gov.au/law/view/document?DocID=DGS/GSTR2016D1/NAT/ATO/00001
3.2 Total superannuation balance
The Commissioner has issued a draft Law Companion Guide, LCG 2016/D12, concerning the meaning of `Total Superannuation Balance' (TSB).
A TSB is relevant for determining a person's eligibility for the following
1. the unused concessional contributions cap carry forward; 2. the non-concessional contributions cap and the bring forward of your non-concessional contributions cap; 3. the government co-contribution; 4. the tax offset for spouse contributions; and 5. in the case of self-managed superannuation funds (SMSFs), to use the segregated assets method to
determine their exempt current pension income (ECPI).
The TSB calculation
At [6] of LCG2016/D12 the Commissioner states that a persons TSB is the sum of the following:
1. The accumulation phase value of your superannuation interests that are not in the retirement phase; 2. In the event that the person has a transfer balance account, the person's transfer balance or your
modified transfer balance (but not less than nil); if you are the recipient of certain account-based income streams in the retirement phase and/or have made any structured settlement contributions, your transfer balance is subject to modifications for the purpose of calculating your total superannuation balance': see also LCG 2016/D9 explained further at [14] of LCG 2016/D12 which effectively restates that balance to be the current balance; and 3. The amount of any roll-over superannuation benefit not already reflected in your accumulation phase value of your superannuation interests or your transfer balance,
reduced by the sum of any structured settlement contributions.
The Commissioner provided the following examples in the LCG:
On 1 April 2018 Erin commences an account-based pension. The value of the superannuation interest at the commencement of the pension was $2,000,000. The balance of her transfer balance account on 1 April 2018 is $2,000,000. Her transfer balance cap is $1,600,000. She has an excess transfer balance of $400,000.
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On 1 May 2018, having realised her mistake, Erin partially commutes the pension to remove the excess and as a result receives a superannuation lump sum of $500,000.
For the 30 days that Erin's transfer balance account was in excess she accrued excess transfer balance earnings of $3,036 (assuming an earnings rate of 9.2%).
The amount that would be paid to Kathleen if she voluntarily ceased the account-based pension at the end of 30 June 2018 is $1,460,000. She has no other superannuation interests.
Erin's total superannuation balance at the end of 30 June 2018 is the sum of:
1. Step 1 Accumulation phase value = zero
2. Step 2 Modified transfer balance
Erin's transfer balance account at the end of 30 June 2018 is $1,503,036.
Date
Description
Credit
Debit Balance
01 April 2018 Account-based Pension $2,000,000
$2,000,000
02 April * to 01 May 2018
Excess Transfer Balance Earnings
$3,036
$2,003,036
01 May 2018 Partial Commutation
$500,000 $1,503,036
* Credits for excess transfer balance earnings arise on the start of the day after they have accrued.
(a) Disregard the credit that has arisen in respect of the account-based pension ($2,000,000).
(b) The credit arising from the excess transfer balance earnings is not disregarded.
(c) Disregard the debit that has arisen from the partial commutation of the account-based pension ($500,000).
(d) Increase the balance by the amount that would become payable if the account-based pension was voluntarily ceased at the end of 30 June 2018 ($1,460,000).
Modified transfer balance is:$1,503,036 $2,000,000 +$500,000+$1,460,000 = $1,463,036.
3. Step 3 Rollover superannuation benefits = zero
4. Step 4 Structured settlement contributions = zero
5. Erin's total superannuation balance at 30 June 2018 = $1,463,036 (Steps 1, 2, 3 and 4).
TRAP when working out the TSB it may be tempting to simply look at the member's super balance
nominally, without considering the various adjustments that could impact the actual 'modified' TSB and therefore have consequential adverse implications for the individual (e.g. mistakenly believing a member is eligible for an increased concessional contributions cap, or a rollover of their unused concessional contributions cap).
ATO Reference Draft Law Companion Guide LCG 2016/D12 w https://www.ato.gov.au/law/view/pdf/cog/lcg2016-012.pdf
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4 Determinations
4.1 CGT: intangible capital improvements as separate assets
The ATO has issued a taxation determination (TD 2017/1) providing that intangible capital improvements may be separate assets for the purpose of section 108-70(2) and (3) of the ITAA97.
Subdivision 108-D deems certain assets that are attached to land, and otherwise treated as part of the land for legal purposes, to be separate assets for CGT purposes. Section 108-70 of the ITAA97 deals with capital improvements. It provides that a capital improvement is a separate CGT asset where:
1. the original asset is a pre-CGT asset; 2. the improvement's cost base is more than the improvement threshold for the income year in which the
CGT event happened to the original asset; and 3. the improvements cost base is more than 5% of the capital proceeds from the event.
In TD 2017/1 that Commissioner indicates that intangible capital improvements can be separate assets under section 108-70 as there is nothing in the section that confines it to tangible capital improvements.
The example in the determination is:
A farmer, holding pre-CGT land, obtains council approval to rezone and subdivide the land. Those improvements may be separate CGT assets from the land.
COMMENT it is to be hoped that this TD does not signal that the Commissioner intends to now treat
improvements to post-CGT assets, such as an approval to develop, as separate assets that need to have consideration apportioned to them. Given that he relies on the legislation to treat such an asset (an approval) as a separate asset, this is unlikely.
ATO reference TD 2017/1 w http://law.ato.gov.au/atolaw/view.htm?docid=%22TXD%2FTD20171%2FNAT%2FATO%2F00001%22
4.2 UPEs and bad debt deductions
The Commissioner has finalised a Taxation Determination (TD 2016/9) that provides that it is the Commissioner's view that where a UPE is written off as a bad debt, the beneficiary is not entitled to deduction under section 25-35 of the ITAA97.
The Commissioner's rationale is that the amount of the UPE is not included in the beneficiary's assessable income. Rather, the entitlement is used to determine the amount of the net income of the trust included in the beneficiary's assessable income. Accordingly, the requirement in paragraph 25-35(1)(a) of the ITAA97, which is that the debt must have been included in your income in an earlier year of income, cannot be met.
The Commissioner's broader reasoning appears to be that a UPE is determined by trust law income, whereas the amount included in the beneficiary's assessable is their share of tax law income (net income of the trust) and that therefore the UPE has not been previously included in assessable income. The Commissioner considers that even where trust law income and tax law income are the same, it is still not a share of the trust law income that is included in the beneficiary's assessable income, yet that is what gives rise to the UPE.
ATO reference TD 2016/9 w http://law.ato.gov.au/atolaw/view.htm?locid='TXD/TD201619/NAT/ATO'&PiT=99991231235958
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5 ATO materials
5.1 Diversion of personal services
The Commissioner has announced an extension to the voluntary disclosure amnesty previously announced in Taxpayer Alert TA 2016/6. The deadline has been extended to 30 April 2017.
What are the ATO's concerns?
The ATO is concerned that in order to avoid paying tax at their personal marginal rate arrangements are being entered into by individuals in an attempt to divert their personal services income to an SMSF, where the income is concessionally taxed, or treated as exempt current pension income.
COMMENT the ATO are currently focusing on income purportedly derived by a SMSF which is not an
accurate reflection of the true arm's-length income (NALI) derived by the fund. The diversion of PSI, like the previous NALI-related announcements, should remind practitioners to review the income reported by the SMSF clients for reasonableness.
w https://www.ato.gov.au/Super/Self-managed-super-funds/In-detail/News/Diverting-personal-services-incometo-an-SMSF/
5.2 GST reverse charging in precious metal industry
From 1 January 2017 the parties to a business to business sale in the precious metals industry can agree to reverse charge for GST. Under a voluntary reverse charge agreement, the buyer will pay GST (which is normally paid by the seller) on behalf of the seller.
Where the buyer is entitled to a GST refund when lodging their BAS, they can direct the ATO to use the refund amount to pay the GST they owe on behalf of the suppliers.
A voluntary reverse charge agreement only covers taxable sales of precious metals, including:
1. goods that consist of gold, silver or platinum, even if those products are not classified as precious metal under GST law;
2. gold ore; 3. gold granules; and 4. gold bars which are not investment form.
https://www.ato.gov.au/Business/GST/In-detail/Rules-for-specific-transactions/Option-to-reverse-charge-in-theprecious-metal-industry/
5.3 Incorrect PAYG instalment variations and GIC
The ATO has warned that some taxpayers are incorrectly varying their PAYG instalment rate or amount noting that this may result in tax debt at the end of the year and general interest charges.
The ATO recommends that tax agents warn clients that they may have to pay GIC if the instalment rate or amount are less than 85% of:
1. the tax payable on their investment and/or business income; or 2. the instalment rate that should have applied for the year.
COMMENT anecdotal evidence suggests that the ATO have not enforced these provisions since
around the time when GST was introduced in 2000. The above may mean that the ATO systems will not be able to monitor for such incorrect variations.
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w https://www.ato.gov.au/Tax-professionals/Newsroom/Income-tax/Incorrect-PAYG-instalment-variations-andGIC/
5.4 Easier GST reporting for new small businesses
On 20 December 2016, the ATO reminded agents that clients who are newly-registered small businesses from 19 January 2017 may opt for reduced data reporting on their BASs.
The ATO has published instructions on how to take advantage of the reduced reporting option which can be found at the link below.
w https://www.ato.gov.au/Tax-professionals/Newsroom/Activity-statements/Easier-GST-reporting-for-new-smallbusinesses/
5.5 ATO Industry focus
The ATO has published a list of the industries that it is targeting, being the following:
1. hair and beauty; (a) potentially 58% of businesses are cash only; (b) 84% of businesses lodge their BAS's on time; (c) 10% of businesses reported amounts significantly outside the small business benchmark ratio; and (d) the industry has the third highest number of community reports of tax evasion.
2. building and construction; (a) high number of cash transactions; (b) 81% of businesses lodge their BAS's on time; (c) 9% of businesses reported amounts significantly outside the small business benchmark ratio; and (d) the industry has the highest number of community reports of tax evasion.
3. restaurant, cafe, takeaway and catering, for the following reasons: (a) potentially 45% of businesses are cash only; (b) 80% of businesses lodge their BAS's on time; (c) 14% of businesses reported amounts significantly outside the small business benchmark ratio; and (d) the industry has the second highest number of community reports of tax evasion.
The ATO stated that it selected these industries based on data analysis that indicated that more businesses in these industries operate in the cash economy.
w https://www.ato.gov.au/General/Building-confidence/In-detail/Working-with-industry/
5.6 R&D Tax Incentive taxpayer alerts
The ATO and Department of Industry, Innovation and Science (DIIS) have released two new taxpayer alerts (TA 2017/2 and 2017/3) concerning the Research & Development (R&D) Tax Incentive.
Expenditure on construction activities
The ATO and the DIIS have indicated that they are reviewing arrangements where construction industry participants are claiming the R&D tax incentive where some or all of the expenditure is incurred on building and construction activities expressly excluded from being taken into account an R&D tax offset or otherwise not meeting the eligibility criteria.
Arrangements with some or all of the following features are of concern to the ATO:
1. A contract is entered into between the acquirer and the builder to construct, extend, alter or improve a building or buildings.
2. The contract is a standard construction contract and is not for the provision of R&D services and does not specify that R&D will be carried out by the builder.
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3. The acquirer or the builder registers one or more activities associated with the construction of the building for the R&D Tax Incentive, identifying the structure or construction techniques as purportedly involving untested or novel elements.
4. Some or all of the activities registered are broadly described and non-specific. For example, whole construction projects may be registered rather than the specific activities which are being undertaken.
5. Some or all of the registered activities are ordinary construction activities that are directed to fulfilling the requirements of the building or construction contract, or relate to expenditure that is expressly excluded from being taken into account in calculating an R&D Tax Incentive.
6. Frequently, the expenditure which is incurred relates to construction methods or techniques that are already known within the building industry, or involve the mere adaptation or integration of existing technology.
7. The acquirer or the builder claims the R&D Tax Incentive for expenditure that is not on eligible R&D activities, or for expenditure which is expressly excluded.
Expenditure incurred relating to ordinary business activities
The ATO has indicated that it is concerned about arrangements that have some or all of the following features:
1. A company registers one or more activities for the R&D Tax Incentive. 2. Some or all of the activities registered are broadly described and non-specific. For example, projects may
be registered instead of the specific activities undertaken. 3. Some or all of the activities registered are ordinary business activities that are not eligible for the R&D
Tax Incentive. 4. Some or all of the activities were undertaken in the course of their ordinary business activities and
recharacterised as R&D activities at a later time. 5. The company claims the R&D Tax Incentive for expenditure that is not on eligible R&D activities.
ATO reference TA 2017/2 and 2017/3 w https://www.ato.gov.au/law/view/document?Mode=type&TOC=%2203%3ATPA%3A2017%3A%2300002%23TA %202017%2F2%20%20Claiming%20the%20Research%20and%20Development%20Tax%20Incentive%20for%20construction%20a ctivities%3B%22&DOCID=%22TPA%2FTA20172%2FNAT%2FATO%2F00001%22 w https://www.ato.gov.au/law/view/document?Mode=type&TOC=%2203%3ATPA%3A2017%3A%2300003%23TA %202017%2F3%20%20Claiming%20the%20Research%20and%20Development%20Tax%20Incentive%20for%20ordinary%20busin ess%20act...%3B%22&DOCID=%22TPA%2FTA20173%2FNAT%2FATO%2F00001%22
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6 Other materials
6.1 ACNC Interpretation Statement on PBIs
The ACNC has issued an Interpretation Statement setting out the ACNC's view on the meaning and scope of the charity subtype of `public benevolent institution' (PBI) for ACNC purpose.
Some of the key points made by the ACNC are set out below.
Public
The ACNC notes that the public component is not limited to the public benefit concept that applies to charities and is distinct from the taxation concept of a public fund.
The main criterion is the extent of the class of individuals that the entity benefits.
Other criterions include:
1. whether the charity receives public funds; 2. whether it has public control and accountability (3 or more unrelated responsible persons); and 3. `connection with government' (but not a `government entity').
Benevolent
The ACNC makes the following observations of the requirement of benevolence:
1. Must be established for the main purpose of, and organised or conducted for the `relief of poverty or distress', and be specifically targeted to those in such need and not generally applied.
2. The ACNC consider that if an entity has other purposes that are not benevolent, it will be ineligible to be a PBI unless those purposes are ancillary or incidental to the main benevolent purpose.
3. To qualify as a PBI, the poverty or distress that is relieved must be `of such seriousness as will arouse community compassion and thus engender the provision of relief.'
4. A PBI is not restricted to providing relief to people in poverty or financial need only.
Institution
The ACNC notes that a PBI must meet the legal requirements of being an `institution', which takes its ordinary meaning.
The ACNC refers to the following statement on the meaning of institution:
`It is the body (so to speak) called into existence to translate the purpose as conceived in the minds of the founders into a living and active principle': Mayor of Manchester v McAdam [1896] AC 500 at 511, per Lord MacNaghten.
The ACNC notes that a new organisation that is yet to commence operating may be eligible for registration as a PBI but it must demonstrate that it has concrete plans to operate into the foreseeable future (within one year of establishment) in order to evidence the bringing of its founders' purposes and intentions into being.
The ACNC also notes that, as a minimum, it must also be a `legal structure' with a `distinct identity'.
w http://acnc.gov.au/ACNC/Publications/Interp_PBI.aspx
6.2 Mid-Year Economic and Fiscal Outlook 2016-17 (MYEFO)
The Federal Government released MYEFO on 19 December 2016 at 12:00pm (midday) (AEDT).
The first of 3 tax-related announcements takes effect at that time.
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Franked Distributions and Capital Raisings
Addressing the concern raised by the Commissioner in TA 2015/2, the Government announced that any distributions funded by capital raisings will not be allowed to be franked. This restriction applies only to `special dividends' (dividends paid outside the normal cycle of dividends for that company).
Examples include an underwritten dividend reinvestment plan, a placement or an underwritten rights issue.
Tax Debts and Credit Reporting
From 1 July 2017, the ATO will be empowered to report to Credit Reporting Bureaus (Credit Agencies) where certain taxpayers are `not effectively engaged' with the ATO.
The new approach will apply to:
1. business taxpayers (who have registered ABNs); 2. with tax debts of greater than $10,000; and 3. which are 90+ days overdue.
This is expected to raise $63m from improved collections.
Penalty Unit Increase
From 1 July 2017, the Penalty Unit amount for Commonwealth offences increases from $180 to $210. This will be indexed every 3 years with the next indexation in 2020. It is expected to raise $40m in the first year (2017/18).
w http://www.budget.gov.au/2016-17/content/myefo/download/2016-17-MYEFO-combined.pdf
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