ATO guidance

ATO guidance on foreign resident capital gains withholding tax

The ATO amended its instructions to taxpayers seeking a reduced withholding tax rate on the sale of property on 6 December 2016.

The amended instructions include examples of the supporting information that should be included in an application, which is dependent on the reasons for variation of rate.

Non-portfolio dividend exemption participation test

The ATO has released two draft taxation determinations regarding the application of Subdivision 768-A of the Income Tax Assessment Act 1997 (Cth) (ITAA97) to Australian corporate tax entities which are either a partner of a partnership (TD 2016/D6) or a beneficiary of a trust (TD 2016/D7). The determinations consider the same issue, being whether these partners or beneficiaries can hold a direct control interest within the meaning of section 350 of the ITAA97.

The draft determinations state that partnerships and trusts can be taken to ‘hold’ a direct control interest in a foreign company for the purpose of satisfying the 10% participation test in s 768-15.

Accordingly, depending on their own participation in the partnership or trust, if a partner or beneficiary Australian corporate tax entity receives a distribution from a foreign company, section 768-5 may deem the distribution is non-assessable non-exempt income.

Legislation

Tasmanian Duties Amendment (Landholder and Corporate Reconstruction Consolidation) Act 2016

Duties Amendment (Landholder and Corporate Reconstruction Consolidation) Act 2016 received royal assent and commenced on Wednesday 8 December 2016, enacting amendments to the Duties Act 2001 (Tas).

The amendments are aimed at aligning the treatment of stamp duty for indirect acquisitions of land with the existing provisions for direct acquisitions in the Tasmanian Duties Act 2001.

The amendments broaden the definition of ‘associated persons’, introduce further dutiable transactions, remove the land ratio test to implement a landholder model of duty and provide a statutory duty exemption for genuine corporate reconstructions.[/vc_column_text]

Broadening the definition of ‘associated persons’

The definition of associated persons is amended to widen the entities that will be considered ‘associated persons’. The following changes have been made:

  • replacing ‘majority interest’ with ‘significant interest’ in the associated persons definition for private companies, lowering the threshold for deeming companies associated
  • including that public companies are associated persons if common shareholders have a majority shareholding and
  • include that a company and the trustee of a unit trust, or the trustees of two or more unit trusts, are associated if the shares and units are stapled.

New dutiable transactions

The Act amends Chapter 3 to charge duty on certain transactions that indirectly result in the transfer of a landholding through a unit trust, a private company or listed company with a landholding valued at over $500,000, where a ‘significant interest’ is acquired by the taxpayer. Where a ‘significant interest’ is acquired, a taxpayer must lodge a statement with the Commissioner within three months of the acquisition. A ‘significant interest’ is:

  • for a private landholder, 50% or more of the property or
  • for a public landholder (being a public unit trust or listed entity), 90% of more of the property.

The higher threshold for public landholder is imposed to reflect the fact that a taxpayer will generally have very little control over the dealings of a listed entity in which they invest.

Statutory duty exemption for corporate reconstructions

Section 226E introduces a stamp duty exception for ‘corporate reconstruction transactions’ and ‘corporate consolidation transactions’.

The exemption applies to a transaction changing the structure of a corporate group or the holding of assets within a corporate where the transaction is not undertaken for the purpose of avoiding or reducing the duty or other tax payable in Australia.

To utilise the exemption, the taxpayer must make an application under section 226F for an exemption in the approved form following the date of the transaction. From there, the Commissioner may grant the duty exemption with or without conditions.

Cases

Binetter v FC of T; FC of T v BAI [2016] FCAFC 163

Joining two proceedings involving the same questions of law, specifically an appeal by taxpayers from a decision of the AAT in Bennett & Ors v FCT (involving the Binetter family), and an appeal from a decision of the Federal Court Bai v FCT by the Commissioner, the Full Federal Court has addressed two issues within the merit review process performed by the Administrative Appeals Tribunal (AAT) in tax matters.

The Tribunal held that:

  • the taxpayer bore the onus in appeals before the AAT of proving the absence of fraud or evasion where the Commissioner had previously issued an amended assessment out of time on such a basis and
  • procedural fairness may have been denied to a taxpayer where relevant documents have been seized by the Commissioner who then ulteriorly refuses to give access to them, depending upon the volume of material seized and the taxpayer’s efforts to obtain access to them.

In both cases the Commissioner had amended the taxpayers’ assessments under section 170 of the Income Tax Assessment Act 1936 (Cth). The taxpayers objected to the amended assessments and sought merit review by the AAT when the objections were disallowed.

In the Binetter proceedings, the taxpayers submitted that the Commissioner had the burden of satisfying the AAT that there had been fraud or evasion. Applying s 14ZZK of the Taxation Administration Act 1953 (Cth), the AAT held that there was no obligation or onus on the Commissioner in a merit review before the AAT to prove that there had been fraud or evasion within the definition of section 170.

In the BAI proceedings, the AAT formed the view that it could not ‘exclude the possibility’ that the relevant receipts were receipts of income the taxpayers knowingly failed to declare. On this basis, they were satisfied that tax evasion could be present. On appeal to the Federal Court, Rares J held that the AAT incorrectly applied s 14ZZK as the taxpayer did not bare the onus of excluding every possibility of fraud or evasion to negate the Commissioner’s power to issue amend assessment under section 170(1). The taxpayer only bore the onus of proving, on the balance of probabilities, that there was no fraud or evasion if she were to prove that the assessment was excessive in law.

In the recent case, the Full Federal Court heard appeals from both the taxpayer in the Binetter proceedings and the Commissioner in the BAI proceedings.

Onus of Proof

Both cases required a determination as to whether a taxpayer bore the onus of proving the absence of fraud or evasion where the Commissioner had previously issued an amended assessment on such a basis which would otherwise have been out of time.

The issue before the AAT was whether the taxpayer had discharged the onus of showing that the Commissioner’s opinion should not have been formed and, therefore, that the statutory condition for the power was not satisfied. Consequently, the AAT was correct to hold that the taxpayers bore the onus of proving that the conditions for the exercise of the amendment power did not exist. The court unanimously held that section 14ZZK modifies the powers of the AAT in relation to an application for review of a taxation decision

Regarding the BAI proceedings, the court held that when the AAT’s reasons were read fairly and as a whole, they did not support the idea that the AAT member mistakenly thought the case should have the criminal standard of proof applied to it.

Procedural Fairness

In the BAI proceedings, the taxpayer argued that the AAT had denied the right to procedural fairness as the Commissioner had submitted, and the AAT accepted, that there was no material to corroborate the taxpayer’s account when the Commissioner had seized the corroborative material under warrant and then refused to return it to her.

Justice Perram and Justice Davies rejected this argument, finding that the taxpayer’s efforts to obtain access to the documents were insufficient and that insufficient material had been seized for the refusal to return the documents to be relevant. Justice Siopis dissented, finding that the AAT denied procedural fairness.

Happy Days Property Pty Ltd v Chief Commissioner of State Revenue [2016] NSWCATAD 289

The decision of the New South Wales Civil and Administrative Tribunal in Happy Days Property Pty Ltd v Chief Commissioner of State Revenue deals with the stamp duty issues that may arise where the incorporation of the transferee company is contemporaneous with a dutiable transaction.

The Commissioner claimed that double duty was payable as a result of the transferee not satisfying the requirements for the exemption in section 18(3) of the Duties Act 1997 (NSW) (Duties Act). This exemption requires the party to the contract and the transferee to be related parties at the time of the transaction.

The Tribunal found in favour of the Commissioner and held that double duty applied to the transfer of land where the transferee is registered at the same as the signing of the purchase contract by a related company.

The trustee company of a self-managed superannuation fund (Fund) entered into a deed with a company wholly owned by the sole member of the Fund (Custodian). Under this deed, the Custodian was to act as purchaser and custodian of the property.

After entering the contract but prior to settlement, the bank advised that the Custodian was an inappropriate entity to hold the property and that a non-trading corporate custodian was required. Accordingly, a new company was incorporated to act as custodian. The newly created company then completed the transfer of land and became the registered owner.

Under section 18(1) of the Duties Act, where a dutiable transaction is effected by more than one instrument, only one instrument is to be stamped with the duty payable on the dutiable transaction. Section 18(3) adds requirements for the exemption to apply to a transfer of dutiable property where the contractor and the transferee are separate entities.  One of those requirements is that the two entities must have been related entities both at the time of entering into the agreement and at the completion of the transaction. The Tribunal found that this condition was not complied with as the transferee had not been registered by the time the agreement was entered into.

This article was written with the assistance of Vanessa Murphy, Law Graduate and William Sabatier, Seasonal clerk.