In this edition, we discuss some of the latest cases, including the Supreme Court of NSW decision in Australian Karting Association Ltd v Karting (NSW) Incorporated, the Full Federal Court decision in CUB Australia Holding Limited v Commissioner of Taxation and the NSW Civil and Administrative Appeal Tribunal decision in Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue.

We provide an overview of the latest ATO updates including the Legal Professional Privilege Protocol and draft taxation determination on the meaning of genuine disposal for employee share schemes.

We also cover developments that have occurred since the release of the Pandora Papers, and the extension of the application dates for Director Identification Numbers and deductible gift recipient criteria.

Case law

The ‘karting’ battle – are credits to a loan account trust distributions?

The Supreme Court of NSW case of Australian Karting Association Ltd v Karting (NSW) Incorporated [2021] NSWSC 1075 concerned a dispute between the Australian Karting Association Ltd (Karting Australia) and Karting (NSW) Incorporated (Karting NSW).

The dispute related, in part, to the AKA Track Development Fund Trust (Trust). The Trust was established for the purpose of receiving money collected by its beneficiaries, the State karting associations (including Karting NSW), on which it earned interest.

From time to time, Karting Australia also advanced funds to the State karting associations (including Karting NSW) for the benefit of particular karting clubs within the corresponding State or Territory. These loans were the subject of written loan agreements.

One of the key issues in dispute was whether amounts credited to the loan account for Karting NSW by the trustee of AKA Track Development Fund Trust (Trust) each year amounted to distributions from the trust to Karting NSW in its capacity as a beneficiary.

The Supreme Court ultimately concluded that the answer to this question was yes, notwithstanding that the trustee had never formally resolved to make distributions to its beneficiaries in the amounts that were credited to their loan accounts, and stated that:

each year, at the time the accounts were signed on behalf of the trustee and declarations made that they fairly represented the trust’s financial affairs, Karting NSW (and all other beneficiaries with loan accounts to the trust) had an action for money had and received in the amount recorded as being the balance of the loan account in its favour.

Importantly, the manner in which the Trust’s financial accounts were prepared was vital to the findings of the Supreme Court. The Supreme Court noted that its conclusion was consistent with the fact that the balance sheet of the Trust for each year showed net assets of $1, and that the total liabilities of the Trust included the amounts in the loan accounts to each beneficiary.

Interestingly, in response to an argument that Karting NSW had not proved that Karting Australia had resolved to make the distributions each year to Karting NSW, the Supreme Court stated:

Latitude is given to companies in being found to have made resolutions notwithstanding that no formal meeting has taken place and no resolution has been documented: MYT Engineering Pty Ltd v Mulcon Pty Ltd (1997) 140 FLR 247 at 266 (Powell JA). The intention of the directors of a company may be determined by reference to what they say or do: H L Bolton (Engineering) Co Ltd v T J Graham & Sons Ltd [1957] 1 QB 159 (H L Bolton (Engineering)) at 170-173 (Denning LJ, Hodson and Morris LJJ agreeing).

The case highlights the complexities and nuances involved in the law of trusts, and the extent to which financial accounts will be taken into account in determining the decisions of directors of a corporate trustee.

However, for tax purposes, this case should be approached with caution. The burden of proof will still rest with a taxpayer to prove that a trust distribution was made (usually before 30 June). In many cases, the ATO will not accept financial accounts prepared after 30 June as proof of a distribution made before that date.

CUB losses appeal over section 353 notices

The Full Federal Court has unanimously held that a notice to produce documents for the purpose of obtaining information to allow the Commissioner to determine whether or not to challenge a taxpayer’s claim for legal professional privilege was valid in CUB Australia Holding Pty Ltd v Commissioner of Taxation [2021] FCAFC 171.

In May 2018, the Commissioner of Taxation (Commissioner) issued a notice to produce pursuant to section 353-10 of the Schedule to the Tax Administration Act 1953 (Cth) (TAA) to CUB (2018 Notice). CUB refused to produce some of the documents covered by the 2018 Notice on the ground of legal professional privilege.

In March 2020, the Commissioner subsequently issued a second notice to CUB pursuant to section 353-10 of the Schedule to the Tax Administration Act 1953 (Cth) requiring it to produce further information about the documents over which it claimed privilege (2020 Notice).

CUB sought, in the Federal Court, judicial review of the Commissioner’s decision to issue the 2020 Notice. The three grounds of contention considered before the Federal Court, which related to the 2020 Notice, were as follows:

  • that it was not authorised by section 353-10 of the Schedule to the TAA 000 or was otherwise beyond power;
  • alternatively, that the Commissioner’s primary or substantial purpose was an improper purpose; or
  • alternatively, that the Commissioner took into account an irrelevant consideration.

In the first instance the Federal Court found that none of the grounds were made out, and Justice Moshinsky summarised his reasoning as follows:

In my view, CUB’s (factual) contention that, in issuing the March 2020 Notice, the Commissioner’s primary or substantial purpose was to determine the validity of CUB’s legal professional privilege claims, is not established. I find that the Commissioner’s purpose (or substantial purpose) was to obtain information that he considered necessary to determine whether to accept or challenge CUB’s legal professional privilege claims in respect of the relevant documents. Further, I find that the Commissioner considered that the documents, which were responsive to the May 2018 Notice, remained relevant to the statutory functions he was still carrying on.

CUB appealed the decision in the Full Federal Court on the following grounds:

  • the primary judge erred by failing to apply the correct test as set out in the applicable case authorities which required him to consider whether there was a substantial and improper purpose;
  • having accepted that there were multiple events disclosed in the evidence (when viewed in isolation) that were capable of supporting CUB’s case, the primary judge erred by failing to:
    • consider whether the cumulative effect of the totality of the evidence supported an inference that the Commissioner was motivated by a substantial and improper purpose in issuing the 2020 Notice; and
    • conclude that the cumulative effect of the totality of the evidence was that the Commissioner should be found to have been motivated by a substantial and improper purpose in issuing the 2020 Notice.

On appeal, the Full Federal Court found that none of the grounds were made out and dismissed the appeal with costs.

This case reflects that the Commissioner’s power to issue section 353 notices is broad, and that he will likely continue to press for particulars so he can assess whether or not to challenge any legal professional privilege claim.

Interestingly, CUB also raised a fourth ground before the Federal Court in the first instance, where it contended that the titles of the relevant documents (being part of the information sought under the 2020 Notice) are themselves privileged. However, as it was agreed by the parties to have this fourth ground determined separately after the first three grounds, the result of that contention remains to be seen.

Payroll tax net widens for medical and healthcare practices

The NSW Civil and Administrative Tribunal (NCAT) in Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue (Thomas Case) held that payments from service entities to medical practitioners were subject to payroll tax.[1]

The decision largely follows a similar decision in the Optical Superstore case in Victoria, but will have far greater implications for medical and health care practices across Australia, as the Thomas Case is the first with features common to most administrative service entities.

This decision means that businesses which rely on similar service entity models for delivering administrative services – whether in the healthcare industry or other industries – could potentially be liable to payroll tax for payments made to their contractors. For further insights, continue reading below, or read our article ‘Healthcare practices under payroll tax microscope.

The facts

Thomas and Naaz operated three separate medical centres. Doctors who provided services out of these centres would enter into a written agreement with the taxpayer under which the taxpayer provided rooms at the centres to the doctors, and would also provide shared administrative and medical support services (such as nurses, reception, admin staff and charging and collection of medical fees). The doctors provided their medical services to patients from the centres provided by the taxpayer.

Under the administrative arrangements:

  1. the doctors bulk billed each patient and the patient assigned their Medicare benefits to the doctors;
  2. the doctors could then claim the benefits directly from Medicare or have the taxpayer collect it (all but three doctors had the taxpayer claim on their behalf);
  3. once benefits were claimed, the funds were deposited to the account of the medical centre and the administrative staff reconciled these payments; and
  4. every fortnight, 70% of the claimed funds were paid to the doctors and the remaining 30% was retained by the taxpayer as a ‘service fee’ for the provision of rooms and shared administrative and medical support services.


The central issue was whether the payments made to the doctors, being the 70% share of their Medicare benefits were deemed wages and subject to payroll tax.

Payroll tax under section 35 of the Payroll Tax Act 2007 (NSW) (Payroll Tax Act) is levied on wages paid or payable by an employer for or in relation to the performance of work relating to a relevant contract.

The tribunal considered two issues in deciding whether the payments were subject to payroll tax:

  1. Issue 1: Were the agreements ‘relevant contracts’?
  2. Issue 2: If so, were the deemed wages paid or payable during the financial year for or in relation to the performance of work relating to the relevant contract?

Tribunal’s decision

Issue 1

The Tribunal found the agreements were relevant contracts. In the course of the taxpayer’s business of operating medical centres, the taxpayer had supplied to it, under agreements, the services of persons (ie doctors) for or in relation to the performance of work. In particular, NCAT stated the following:

  1. the doctors’ services were of a medical nature and were more directly supplied to the patients rather than to the taxpayer. But this did not mean that services were not also provided to the taxpayer.
  2. in circumstances where the doctors’ services were a necessary part of the taxpayer operating its medical centre business, the doctors provided the services not only to the patients but also to the company, sufficient for there to exist a ‘relevant contract’.

The taxpayer also unsuccessfully argued that an exemption under s 32(2)(b) of the Payroll Tax Act applied – ie whether the services are performed by a person who ordinarily performs services of that kind to the public generally in that financial year.

Issue 2

The Tribunal held that there was a clear relationship between the provision of medical services (the performance of work under the relevant contract) and the payments made to the doctors – despite the payments being sourced from Medicare benefits assigned to the doctors.

ATO updates

Legal Professional Privilege Protocol

The ATO has released a protocol setting out the recommended approach for identifying communications covered by legal professional privilege (LPP) and making LPP claims to the ATO.

The protocol is intended to assist taxpayers and their advisers when making LPP claims in response to requests for information from the Commissioner of Taxation.

Broadly, the ATO recommends that taxpayers take a three-step approach before claiming PP.

  1. Assess – your situation and communication;
  2. Explain – particularise the basis of your claim; and
  3. Advise – tell us how you approached your claims.

The protocol is detailed and, in light of recent case law on point (including the CUB case discussed above), it will be important that taxpayers and advisers have read and understood the protocol before making a LPP claim.

Employee Share Scheme (ESS): meaning of ‘genuine disposal conditions’ as a deferred taxing point

On 14 October 2021, the ATO released Draft Taxation Determination TD 2021/D5 Income tax: when are you genuinely restricted from immediately disposing of an interest provided under an employee share scheme? (Draft Determination).

The Draft Determination sets out the principles for working out when a scheme's disposal restrictions were 'genuine disposal restrictions' and, if they were, when a taxpayer is no longer genuinely restricted by the scheme for the purposes of determining the employee share scheme (ESS) deferred taxing point.

The Draft Determination contains four examples, and addresses the following key matters.

  • What disposal restrictions are relevant?
  • When is a disposal restriction a genuine disposal restriction?
  • How do you show that you are genuinely restricted from disposing of your ESS interest?
  • When are you no longer restricted?

When finalised, the determination will apply retrospectively. This may therefore mean that the Commissioner will consider that some ESSs have an earlier taxing point than previously thought to be the case.

Other news

Pandora Papers released: ATO’s involvement

In October 2021, the International Consortium of Investigative Journalists (ICIJ) released 2.94 terabytes of data (almost 12 million files) from 14 different offshore services firms.

The release is purported to include information relating to more than 330 politicians, 130 Forbes billionaires, celebrities, fraudsters, drug dealers, royal family members and leaders of religious groups around the world. Among this group there are allegedly at least 402 Australians.

The Pandora Papers eclipse earlier releases such as the Panama Papers in 2016 and Paradise Papers in 2017.

The ATO has made a public statement about the Pandora Papers release, with ATO Deputy Commissioner and Serious Financial Crime Taskforce (SFCT) Chief Will Day stating that:

While the information in data leaks is interesting, we don’t rely on data leaks to do our job. We detect, investigate and deal with offshore tax evasion year-round.

We are well connected locally and globally in our efforts to fight financial crime. We will certainly look at this data set and compare it with the data we already have to identify any potential connections.

Taxpayers affected by the Pandora Papers leaks should speak to their advisors about making a voluntary disclosure immediately.

Following the completion of the ATO’s Project DO-IT several years ago, we have assisted a significant number of taxpayers in making a voluntary disclosure to the ATO in respect of offshore income and assets. If you need assistance, please contact one of the authors.

Director Identification Number: application deadlines extended

The introduction of the Corporations (Director Identification Numbers—Transitional Application Period) Instrument 2021 extends the time for eligible officers to apply for a Director Identification Number (DIN).

Applications for a DIN must be made before the end of the applicable transitional application period, which will depend on whether the corporation is governed by the Corporations Act 2001 (Corporations Act) or the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (CATSI Act).

The ATO has released website guidance setting out how eligible officers can apply for a DIN. Importantly, eligible officers must apply for a DIN themselves and cannot have anyone apply on their behalf (including a tax agent).

The tables below set out the relevant dates and deadlines:

Corporations Act

Date of director appointment

Date director must apply

On or before 31 October 2021 By 30 November 2022
Between 1 November 2021 and 4 April 2022 Within 28 days of appointment
From 5 April 2022 Before appointment



Date of director appointment

Date director must apply

On or before 31 October 2021 By 30 November 2023
From 1 November 2021

Before appointment



Criteria for DGR application date extension

As previously announced, under recent legislation all non-government Deductible Gift Recipients (DGRs) will need to register as charities with the Australian Charities and Not-for-profits Commission (ACNC) in order to seek or maintain their DGR status.

This change does not affect ancillary funds and DGRs specifically listed in the Income Tax Assessment Act 1997 (although most will already have charity registration).

Existing DGRs have been given a twelve-month transitional period to register with the ACNC. The Commissioner may extend this period by an additional three years at their discretion, having regard to the criteria provided in the Treasury Laws Amendment (2021 Measures No. 2) (Deductible Gift Recipients—Extended Application Date) Instrument 2021.

The criteria include (among other things) whether the entity:

  • has made reasonable steps to apply for charity registration with the ACNC;
  • has made material changes to its purpose or activities, affecting ongoing entitlement to DGR endorsement;
  • is likely to be eligible for charity registration with the ACNC; and
  • has previously had a charity registration refused or voluntarily revoked by the ACNC.

Law Graduate Kevin Dorostkar and Paralegal Gabrielle Terliatan assisted with this edition of Talking Tax.