First proposed application of Commissioner’s exercise of remedial power

The Commissioner of Taxation now has the power to amend taxation laws in certain cases. The first proposed application of the Commissioner’s exercise of remedial power is Commissioner's Remedial Power - CRP 2017/D1: Draft Taxation Administration (Remedial Power - Foreign Resident Capital Gains Withholding Tax) Determination 2017, which is available for general comment.

The Draft determination seeks to ensure that an entity's credit entitlement for amounts paid to the Commissioner under the Foreign Resident Capital Gains Withholding (FRCGW) legislation is made available in the income year in which the transaction that caused the amount to be withheld is recognised for tax purposes (i.e. to deal with contracts that straddle income years).

The simplest straddling cases and the most common to arise are where a contract entered into in May or June settles in July or August of the same calendar year and gives rise to a capital gain for the vendor in the year in which the CGT event occurred, i.e. the year the contract was entered into.

According to the explanatory statement accompanying the draft determination, the issue where settlement occurs in a year subsequent to the year the contract is entered into does not appear to have been considered by Parliament in creating the FRCGW provisions. The crediting misalignment produced in straddling cases results in unintended compliance costs and adverse cash flow impacts for affected entities. It is reasonable to conclude that interactions with the crediting provisions in straddling cases would have been addressed if the issue had been considered. In light of the intended purpose of the FRCGW and crediting provisions, the Commissioner considers it reasonable to exercise the Commissioner's discretion to use the remedial power for this issue.

The draft determination is proposed to apply retrospectively to align with the commencement date of the FRCGW legislation, being 1 July 2016.

PAYG withholding variation for foreign resident capital gains withholding payments - income tax exempt entities

The ATO has issued an Instrument which varies to nil the rate of withholding for purposes of the FRCGW legislation when an entity provides to the purchaser evidence of a private binding ruling issued by the ATO confirming the entity is income tax exempt for the year in which the transaction is occurring; or documentation showing that the entity is endorsed for income tax exemption as a registered charity under item 1.1 of section 50-5 of the Income Tax Assessment Act 1997 (ITAA 1997).

Special leave refused regarding application of annual threshold for accessing the small business CGT concessions

The High Court in Doutch v Commissioner of Taxation & Anor [2017] HCASL 85 has refused the taxpayer’s application for special leave to appeal on the basis that the application disclosed no reason to doubt the correctness of the decision of the Full Federal Court. As reported in TaxTalk Monthly: February 2017, the Full Federal Court had dismissed the taxpayer’s appeal and upheld the decision of the Administrative Appeals Tribunal (AAT) which found that receipts in respect of fuel disbursements were ordinary income that the entity derived ‘in the ordinary course of carrying on a business’. As such, the taxpayer's aggregated turnover exceeded the annual threshold, as applicable under section 328-120 of the ITAA 1997 which meant that the taxpayer did not meet the requirements for the small business Capital Gains Tax (CGT) concessions.

Distributing franking credits to beneficiary of a discretionary trust

The Full Federal Court in Thomas v Commissioner of Taxation [2017] FCAFC 57 has allowed the taxpayer's appeal against the Federal Court decision and held that a beneficiary of a discretionary trust was entitled to the benefit of the franking credits for the relevant years in accordance with the resolution of the trustee. This outcome applied notwithstanding that the allocation of franking credits was disproportionate to the distribution of the franked dividend. The Supreme Court of Queensland in the first instance held that trustee resolutions were effective in distributing franking credits to the beneficiaries of the trust. It is worth noting that this decision dealt with the law as it applied before introduction of the interim trust streaming rules which rely on the notion of specific entitlement to franked dividends.

Federal Court rules on entitlement to roll-over relief following marriage breakdown

The Federal Court in Sandini Pty Ltd v Commissioner of Taxation [2017] FCA 287 has made a declaration that the taxpayer was entitled to roll-over relief under Subdivision 126-A of the ITAA 1997 applicable to marriage or relationship breakdowns in relation to the disposal of shares to a family trust pursuant to a Family Court order. The Federal Court held that CGT Event A1 occurred on the transfer, as the expression ‘change of ownership’ in section 104-10 of the ITAA 1997 includes changes in equitable ownership.

Taxation statistics for 2014-15 released

The Australian Taxation Office (ATO) has released the taxation statistics for 2014-15, which provides a comprehensive statistical picture of the Australian tax system. It covers most labels from return forms and schedules.

Cyclone Debbie declared a disaster for tax purposes

The Minister for Revenue and Financial Services has declared Tropical Cyclone Debbie, and the associated rainfall and flooding, a disaster for the purposes of establishing Australian disaster relief funds. Donations to Australian disaster relief funds, established to provide relief in the aftermath of the cyclone, will be tax deductible for a period of two years from 28 March 2017, the date the cyclone made landfall in Queensland.

In addition, the ATO is fast-tracking refunds for people affected by tropical cyclone Debbie and ex-Cyclone Debbie in Queensland and New South Wales. Taxpayers and their tax and Business Activity Statement agents will also have additional time to lodge income tax returns and activity statements. For further information, refer to Natural disasters - March-April 2017.

Government response to the Senate Economics References Committee report - Foreign Investment Review Framework

The Government tabled its response to the findings and recommendations of the Senate Economic References Committee report into the Foreign Investment Review Framework on 28 March 2017. This response addresses the recommendations raised in the report including those that sought to establish a publicly available Agricultural Land Register for all foreign-owned agricultural land.

AAT extends the time for lodgment of out of time objections

The AAT in Primary Health Care Limited v Commissioner of Taxation [2017] AATA 393 has set aside the Commissioner’s decision to refuse to extend the time for lodgement of objections and found that the relevant objections are taken to have been lodged within the required time frame.

According to the Tribunal, factors which weighed heavily in favour of the extension of time in the matter in hand include:

·       the apparent strength of the taxpayer’s case,

·       the absence of genuine prejudice to the Commissioner, and

·       the fact that the applicant was seeking to ensure correct and consistent tax treatment over time of a long-standing business model that continues to the present day.

The Tribunal, in exercising the discretion in section 14ZX(1) of the Taxation Administration Act 1953 (Cth) to consider applications for extension of time, referred to the decision of Justice Hill in Brown v Federal Commissioner of Taxation (1999) 99 ATC 4516, which according to the Tribunal provides a suitable framework of the matters that are required to be considered when a taxpayer seeks an extension of time in which to lodge an objection.

ATO advice and guidance issued

The ATO has issued the following taxation determinations since our last edition of TaxTalk:

·       TD 2017/7: Freshwater crayfish can be trading stock and a reasonable estimate of the number of freshwater crayfish can be used to value trading stock on hand at year end.

·       TD 2017/8 : The cost of travelling to have a tax return prepared by a ‘recognised tax adviser’ is deductible (under section 25-5 of the ITAA 1997), however the expenditure needs to be apportioned to the extent that the travel relates to another non-incidental purpose.

·       TD 2017/9: This determination sets out the value of goods taken from stock for private use for the 2016-17 income year.

·       TD 2017/10: Costs incurred after a CGT event happens can relate to that CGT event for the purpose of working out incidental costs that form part of the cost base of the asset.

The ATO has also released for comment draft effective lives for depreciating assets used in the oil and fat manufacturing industry.

Tax and Revenue Standing Committee report on ATO Performance

The House of Representatives Tax and Revenue Standing Committee has released its report on the ATO's 2015/16 Annual Report. Recommendations made to the ATO include:

·       further investing in data analytics and auditing to promote the integrity of the tax system and working with other agencies to enhance the auditing and review of apparent discrepancies identified through data matching,

·       developing best practice benchmarks for measuring and reporting on the security and functionality of ATO online systems in its Annual Report,

·       providing information in its Annual Report on its trajectory and progress in the redesign of tax law to simplify compliance; and the number and timeliness of public rulings, issued and finalised, over the reporting period,

·       assess and issue automatic notices of assessment to non-resident taxpayers with nil income in the interests of fairness (to address concerns regarding retrospective audits and no limited amendment period where no income tax return is lodged), and

·       publish its revenue gap measures, and report the total revenue gap estimate and assessments for different community sectors on its website as they become available, and in the 2016–17 Annual Report.

IGOT review into administration of PAYG instalments

The Inspector-General of Taxation (IGOT) has announced the terms of reference for his review into the administration of PAYG instalments system with respect to individual taxpayers and called for submissions. Some of the concerns that previously have been raised with the IGOT include individual taxpayers:

·       being unnecessarily entered into the PAYG instalments system due to one-off spikes in income in a particular income year;

·       being unaware of automatic entry into the system or not receiving appropriate correspondence which may, for example, explain reasons for entry into the system and receiving unexpected tax debts,

·       experiencing difficulties varying instalment amounts or lodgment frequency, making payments or exiting the system, all of which may result in tax debt errors or refund delays, and

·       receiving unclear ATO communications and guidance on reporting and payment obligations, including how PAYG instalment debts are applied against income tax return assessments as well as how to vary instalment amounts and reporting frequency requirements.

External scrutiny of the ATO Report – Government response

The Government has released its response to the House of Representatives Standing Committee on Tax and Revenue report, External scrutiny of the Australian Taxation Office. The Government has agreed with the recommendations made by the Committee and noted that the scope of the biannual inquiries into either the ATO or the IGOT will increase to accommodate the working relationship between the two bodies.

Shining a light on offshore tax evasion

Through a joint international investigation, the Serious Financial Crime Taskforce (SFCT) has identified 346 Australians with links to Swiss banking relationship managers alleged to have actively promoted and facilitated tax evasion schemes. The Minister for Revenue and Financial Services said information gathered throughout the course of international collaboration by the SFCT indicates that the Australians identified hold unnamed numbered accounts with a Swiss bank. Of the 346 Australians identified, 23 have already come forward under the ATO’s Project DO IT or have been previously subject to ATO compliance action.