March 2017.DOCX - Brown Wright Stein Lawyers [PDF]

TAX TRAINING NOTES Monthly tax training March 2017

Brown Wright Stein tax partners: Andrew Noolan E: [email protected] Chris Ardagna E: [email protected] Geoff Stein E: [email protected] Michael Malanos E: [email protected]

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 RGGW – carry forward losses .......................................................................................................... 4 1.2 Whitby – alternative trustee assessments......................................................................................... 7 1.3 Caratti and Bazzo – construction of tax debt agreement .................................................................. 9 1.4 Eastwin – creditable acquisitions .................................................................................................... 11 1.5 Vakiloroaya – deductibility of work-related expenses ..................................................................... 13 1.6 Kilshore – TASA Code of Professional Conduct ............................................................................. 16 1.7 Cavallo – land tax primary production exemption ........................................................................... 18 1.8 Leppington – land tax primary production exemption ..................................................................... 21 1.9 Urmar – payroll tax grouping ........................................................................................................... 24 1.10 Uber – taxi services and GST ......................................................................................................... 26 1.11 Appeals Update ............................................................................................................................... 28 2 Legislation ........................................................................................................................................... 30 2.1 Progress of legislation ..................................................................................................................... 30 2.2 State taxes amendments................................................................................................................. 30 2.3 Treasury Law Amendment (2017 Measures No. 1) Bill 2017 .........................................................32 2.4 Correcting GST errors Amendment Determination 2017 (No. 1) ....................................................33 2.5 GST on low value goods ................................................................................................................. 34 3 Rulings................................................................................................................................................. 37 3.1 Transitional CGT relief for Superannuation Funds ......................................................................... 37 4 Determinations ................................................................................................................................... 40 4.1 GST and second hand goods ......................................................................................................... 40 5 ATO materials ..................................................................................................................................... 42 5.1 Trust income reduction arrangements ............................................................................................ 42 5.2 Transfer pricing record keeping ...................................................................................................... 44 5.3 TA 2017/1 – ATO concerns regarding infrastructure groups ..........................................................45 5.4 R&D Tax Incentive taxpayer alerts .................................................................................................. 45 6 Other materials ................................................................................................................................... 47 6.1 TPB Practice Note: cloud computing .............................................................................................. 47

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Monthly tax training – March 2017

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Our lawyers specialise in working with business owners and their business advisors, such as accountants, financial consultants, property consultants and IT consultants – what we see as our clients' 'business family'. We develop long-term relationships which give our lawyers a deep understanding of our clients' business and personal needs. Over the years we have gained a unique insight into the nature of operating owner-managed businesses and the outcome is that we provide practical commercial solutions to business issues. At Brown Wright Stein, we believe in excellence in everything we do for our clients. It's this commitment that enables us to develop creative, innovative solutions that lead to positive outcomes. This paper has been prepared for the purposes of general training and information only. It should not be taken to be specific advice purposes or be used in decision-making. All readers are advised to undertake their own research or to seek professional advice to keep abreast of any reforms and developments in the law. Brown Wright Stein Lawyers excludes all liability relating to relying on the information and ideas contained within. All rights reserved. No part of these notes may be reproduced or utilised in any form or by any means, electronic or mechanical, including photocopying, recording, or by information storage or retrieval system, without prior written permission from Brown Wright Stein Lawyers. These materials represent the law as it stood on 28 February 2017. Copyright © Brown Wright Stein Lawyers 2017.

Liability limited by a scheme approved under Professional Standards Legislation

Monthly tax training – March 2017

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Cases

1.1

RGGW – carry forward losses

Facts RGGW (a company) was a 50% partner in a partnership established to develop a shopping centre in Sydney. Prior to 20 December 1994 the shares in RGGW were owned by C1 Limited. At that time, the shares in C1 were owned by C2 Limited and K1 Pty Ltd, as to 50% each. The shares in C2 were held as follows: 1. 2.

as to 61.7%, by S1 Ltd; and as to 38.3%, by L1 Pty Ltd.

V3 Pty Ltd, as the trustee of six trusts established in 1960 and a trust established in 1990, owned 92% of the shares in S1. The remaining eight shares in S1 were owned by Marshall Holdings Pty Ltd (five shares), and by Ronald Marshall, Harry Marshall and Harry’s wife Ursula (one share each). Th six 1960 trusts were in almost identical terms, except for the beneficiaries named in each of them. The beneficiaries were the the children of Ronald Marshall - Harry, Oliver and Zara – with each of the children is named as the beneficiary in two of the trust deeds. From 1969 Ronald Marshall was given the power to appoint and remove the trustee of each of the six trusts. On 20 December 1994: 1. 2. 3. 4.

C2 sold its shares in C1 to D1 Pty Ltd; D1 Pty Ltd also became the owner of RGGW; D1 was wholly owned by V1 Pty Ltd; and V1 became owned by V3 as trustee of the 1960 trusts in relation to 1000 shares.

In October 1995 F1 as trustee of a number of trusts established in October 1995 became the owner of 200,000 shares in V1. In about December 1995 V3 was replaced as trustee for the 1960 trusts and the 1990 trust by V2. All of the above entities were part of the same family group, the Marshall family. The structure of the family group involved numerous entities. The relevant activities of RGGW were as follows. In the years up to and including the 1995 financial year – (a) the directors’ report for RGGW each of the years ended 30 June 1991 and 30 June 1992 stated: The principal activity of the company is investment in [the] Partnership which is involved in the development of a site for the purpose of constructing a [shopping centre] and other commercial buildings. (b) the directors' report for RGGW for the year ended 30 June 1993 stated as follows: The principal activity of the company is investment in [the] Partnership which developed a [shopping centre] and other commercial buildings for sale. (c) the notes to the accounts for RGGW for the year ended 30 June 1991 stated as follows: The principal activity of the company is property acquisition, development and investment. (d) the notes to the accounts for RGGW for the years ended 30 1992 and 30 June 1993

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Monthly tax training – March 2017 The principle (sic) activity of the company is property development. (e) the shopping centre was sold in August 1993. It was not clear what RGGW did from that time until 1996. In respect of the income years from 30 June 1996 the Marshall family received a proposal to invest in service stations. A unit trust was acquired to make such investments. B1 Pty Ltd, as trustee of the B Trust, owned all the units in the unit trust that acquired the service stations and RGGW owned all the units in the B Trust. By the time the Partnership's development of the shopping centre had been completed in around 1993, the Partnership was in a very poor financial position. Ultimately, a Receiver and Manager was appointed to the Partnership and RGGW was placed into administration. For the years ended 30 June 1996 to 30 June 2003 RGGW claimed that the Partnership incurred tax losses at least during the tax years 1990 to 1995, and that its share of those losses exceeded $25 million. The Commissioner did not accept the claims for the losses and issued amended assessments for those years on the basis that the losses were not allowable. Penalties were imposed on RGGW on the basis that there had been intentional disregard of the law (at 75%) for the 1996 year but with an uplift of 20% for the subsequent years. RGGW objected and, upon the Commissioner disallowing its objection, applied the AAT for review. Issues 1. 2. 3.

whether tax losses are available to RGGW through application of the continuity of ownership test; whether, in the alternative, tax losses are available to RGGW through application of the same business test; whether a penalty for intentional disregard of the law was appropriate.

Decision Continuity of ownership test The Tribunal noted that determining whether the continuity of ownership test was satisfied required consideration of the applicable test for each income year given that the statutory test had changed over the relevant period. 1.

in respect of the 1996 and 1997 tax years: (a) the test was in section 80A of the ITAA 1936 and required an analysis of the beneficial ownership of shares in two different tax years – the year in which the loss was incurred (loss year), and the year in which the loss is claimed as a deduction (income year); (b) the test required that the Commissioner, or the Tribunal on review, be satisfied that, at all times during both of those years, the same persons beneficially owned shares in the company carrying between them:◦ (i) the right to exercise more than one-half of the voting power in the company (ii) the right to receive more than one-half of any dividends that may be paid by the company; and (iii) the right to receive more than one-half of any distribution of capital of the company. (c) the test could satisfied by tracing indirect interests held by individual natural persons through interposed companies, trustees and partnerships.

2.

in respect of the 1998 to 1999 tax years – (a) the test was in section 165-12 of the ITAA 1997 and included the concept of the ownership test period, which is specified in s 165-12(1) to be the period from the start of the loss year, to the end of the income year in question. (b) the test required that there be persons who, at all times during the ownership test period, had:◦ (i) more than 50% of the voting power in the company; (ii) rights to more than 50% of the company’s dividends; and (iii) rights to more than 50% of the company’s capital distributions.

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in respect of the income years ended 30 June 2000 to 30 June 2003 the test in section 165-12 of the ITAA 1997 was subject to a further restriction being that in tracing ownership from the loss year to the income year, interests cannot be taken into account unless they are ‘exactly the same interests and are beneficially owned by the same persons’.

The Tribunal noted that, although it appeared that the ultimate owner of the shares in RGGW was always a member of the Marshall family, given the changes in ownership from prior to 1995 to 2000, it could not be said that the same persons held the same beneficial interests. Whilst there was evidence of RGGW's ownership just before 20 December 1994 and just after 20 December 1994, there was no evidence as to the ownership in 1990, when the losses first commenced to be incurred. The Tribunal then considered the position if it was assumed that the ownership at 20 December 1994 was the same as in 1990 when the losses were first incurred and noted as follows: 1.

2.

3.

4.

one part of the ownership chain is traced through L1 and Marshall Holdings. Marshall Holdings was deregistered, and ceased to exist, on 28 August 1995 such that this part of the chain of ownership could not be relied upon by RGGW; and the other part of the ownership was traced through V3, and the trusts of which it claimed to be trustee. V3, as trustee of the various trusts owned 92 of the 100 shares in S1. Since S1 owned 61.7% of the shares in C2, the arithmetic for the holdings of the Marshall family members who are beneficiaries of the trusts would be 61.7% x 92% = 56.76%. However, 1992 annual return for S1 showed that V3 owned 5 shares beneficially, with Marshall Holdings also holding five shares (also beneficially), and Ronald, Harry and Ursula Marshall holding one each. This meant that the earliest that V3 came to own the 92 shares in S1 was sometime in the year ended 30 June 1993. As such, there was not sufficient certainty as to who was the beneficial owner in 1990, 1991, 1992 and 1993. in relation to the losses incurred in the 1994 and 1995 years, the continuity of ownership test required the Tribunal to accept the following: (a) that V3 (or, later, V2) was the trustee of the trusts established in 1960 and the 1990 trust; (b) prior to the reorganisation in December 1994, V3 held the shares in S1 on trust for the 1960 trusts and the 1990 trust; and (c) after 20 December 1994, V3 or V2 held the shares in V1 on trust for the for the 1960 trusts and the 1990 trust. The Tribunal noted that the documentation in support of such conclusions was 'strikingly absent'. Accordingly, the Tribunal was not satisfied that the continuity of ownership test was met with respect to the losses incurred in the 1994 and 1995 income years.

Same business test The Tribunal noted that there were two different same business tests to consider as follows: 1.

2.

in respect of the 1996 and 1997 tax years – the test provided that, if the continuity of ownership test is not satisfied by reason of a change in beneficial ownership of shares in the loss company or some other company, the losses can still be taken into account provided: (a) at all times during the income year, the loss company carried on the same business as it carried on immediately before the change took place; and (b) the loss company did not at any time during the income year derive income from a business of a kind that it did not carry on, or from a transaction of a kind that it had not entered into in the course of its business operations, before the change took place. in respect of the 1998 and later years - if, throughout the same business test period (the income year in which the tax loss is to be claimed), the company carried on the same business as it carried on immediately before the test time, with the test time being either: (a) the latest time, if it could be determined, it is possible to satisfy the continuity of ownership test before it is failed; (b) otherwise, the start of the loss year.

In applying the same business test, the Tribunal:

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2.

did not accept RGGW's characterisation of its pre-1996 business as a business of ‘investment’. It considered that RGGW's document indicated that a more accurate characterisation is as a business of property development; and considered that its post-1995 business is most accurately described as investing in units in a trust.

As such, the Tribunal considered that RGGW was not carrying on the same business after 1995 as it had in prior years. The Tribunal noted that even if it accepted the characterisation of the pre-1996 business as being one of investment, it would have still concluded that the later business was not the same. The Tribunal referred to the decision of the High Court in Avondale Motors (Parts) Pty Ltd v Commissioner of Taxation [1971] HCA 17; (1971) 124 CLR 97 where it was held that the words ‘same business’ mean precisely that and that ‘mere similarity of kind is not enough’. Intentional disregard of the law In considering whether RGGW's conduct amount to intentional disregard for the law, the Tribunal referred to the comments of Collier J in Price Street Professional Centre Pty Ltd v Commissioner of Taxation [2007] FCA 345: As made clear by the Explanatory Memorandum to the Taxation Laws Amendment (Self Assessment) Bill 1992 which introduced s 226J, s 226J requires knowledge by the taxpayer that, for example, it has claimed a deduction knowing that it is not allowable. Accordingly, ‘intentional disregard’ of the ITAA 1936 or regulations requires, inter alia, an understanding by the taxpayer of the effect of the relevant legislation or regulations, an appreciation by the taxpayer of how that legislation or regulation applies to the circumstances of the taxpayer, and finally, deliberate conduct of the taxpayer so as to flout the ITAA 1936 or regulations. The legislation treats ‘intentional disregard’ differently from, and more seriously than, negligence to comply with the Act (cf s 226G) or recklessness with regard to the correct operation of the Act (cf s 226H). The Tribunal concluded that, applying such a test, it was satisfied that there had not been intentional disregard of the law but that there had been recklessness. Citation RGGW and Commissioner of Taxation [2017] AATA 238 (Frost SM, Sydney) w http://www.austlii.edu.au/au/cases/cth/AATA/2017/238.html 1.2

Whitby – alternative trustee assessments

Facts Whitby Land Company Pty Ltd is the trustee of a discretionary trust with five beneficiaries, who are the children of Whitby's director, Allen Carrati. One of the beneficiaries was a minor and thus subject to legal disability. On 17 April 2014 the Commissioner issued two separate income tax assessments to Whitby as follows: 1.

2.

a primary assessment which was issued on the basis that there were four adult beneficiaries presently entitled to 80% of the income, with the trustee being assessed under section 98 in relation to the remaining 20% which was an amount to which the minor was presently entitled; and an alternative assessment under section 99A which was issued on the basis that none of the beneficiaries were presently entitled to any of the income of the trust.

Whitby applied to the Federal Court for an order quashing the assessments on the basis that they were invalid as they were tentative and provisional. On 12 October 2015 and 27 October 2015 the Commissioner issued Whitby two further separate notices of assessments for each of the income years ended 30 June 2011 to 30 June 2014 (inclusive). The Commissioner issued these further assessments in order to avoid an argument about double taxation given that it had effectively taxed Whitby on 120% of the net income of the trust on the approach it had adopted on April 2014,the separate assessments issued in October 2015 were calculated as follows:

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an assessment included 20% of the net income of the trust under section 98 of the ITAA 1936, being an assessment for a trustee where a presently entitled beneficiary is under a legal disability; and an assessment that included 80% of the net income of the trust for the year under section 99A of the ITAA 1936.

In its letters dated 27 October 2015 the Commissioner stated that he would apply Law Administration Practice Statement 2006/7 which states, with respect to recovery where there are primary and alternative assessments, as follows: The Commissioner intends to collect the ‘relevant amount of tax’ with regard to the trust’s net income [or ‘omitted trust income’ in the case of the ‘s 98 assessment’] as calculated by the Commissioner under the primary assessment, subject to the outcome of any dispute. Following the issue of the October 2015 assessments, the original Federal Court proceedings were withdrawn by the parties by consent. Whitby then commenced fresh proceedings in the Federal Court in relation to the October 2015 assessments. Whitby submitted that, by issuing two assessments for each year, the Commissioner had sought to tax it twice on the net income of the trust estate for each year as each assessment is conclusive evidence of Whitby’s liability to tax for each year. Whitby contended that the Commissioner should have issued a single assessment that included: 1. 2. 3.

the amount of the net income of the trust estate; and the amount of the tax payable, including the rates to be applied; and the total of the taxpayer’s tax offsets.

In Whitby's view section 166 of the ITAA 1936, being the source of the Commissioner's power to issue an assessment, only contemplated a single tax liability for each year. Section 166 Assessment From the returns, and from any other information in the Commissioner's possession, or from any one or more of these sources, the Commissioner must make an assessment of: (a) the amount of the taxable income (or that there is no taxable income) of any taxpayer; and (b) the amount of the tax payable thereon (or that no tax is payable); and (c) the total of the taxpayer's tax offset refunds (or that the taxpayer can get no such refunds). The Commissioner’s splitting up of the net income into an 80% and a 20%, so as to avoid double taxation, did not overcome the problem of having more than one tax liability. Whitby contended that the Commissioner should have issued a single assessment. The Commissioner contended that his power to issue an assessment on a trustee was under section 169 of the ITAA 1936 not section 166 as Whitby had contended. Section 169 of the ITAA 1936 provides as follows: Section 169 Assessments on all persons liable to tax Where under this Act any person is liable to pay tax (including a nil liability), the Commissioner may make an assessment of the amount of such tax (or an assessment that no tax is payable). The Commissioner contended the scheme of the ITAA 1936 permitted multiple trustee assessments for the following reasons: 1.

assessments issued to a person as trustee under section 98 differ from ordinary assessments in that the person is assessed in a representative character; and

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trustees can be assessed for tax not only in their personal capacity and a representative capacity, but also, in respect of section 98 of the ITAA 1936, in different representative capacities (for instance a trustee could be assessed on behalf of a minor beneficiary, but also on behalf of a non-resident beneficiary).

The Commissioner argued that the assessments were not provisional or tentative in that they provided for a definitive tax liability. Finally, the Commissioner submitted that Whitby’s position could be rejected because the October 2015 assessments were capable of standing together in that section 99A assessment only applied to that portion of the income to which the section 98 assessment did not apply. Issue Whether the Commissioner could issue more than one assessment to a trustee. Decision Jagot J in the Federal Court held that the assessments were valid. Jagot J accepted that sections 98 and 99A of the ITAA 1936 do not empower the Commissioner to make an assessment. Rather, those provisions are the source of a trustee’s liability for assessment and payment of tax. However, contrary to Whitby’s submission section 166 is not the sole source of the Commissioner’s power to make an assessment and this was not the provision under which the assessments were made here. Consistent with the Commissioner’s submissions, as a taxpayer is not assessed under section 98 by reference to taxable income but, rather, by reference to net income, the assessments were issued under section 169, being the source of the Commissioner’s power to make an assessment of tax payable where any person is liable to pay tax, without any mention of ‘taxable income’. Jagot J also noted that, as it is contemplated that a trustee may be assessed in different capacities, there can be no rule of ‘one income, one taxpayer, one tax’ for a trustee. Jagot J agreed with the Commissioner’s submission that the assessments were not tentative or provisional merely because they had assessed Whitby on different postulates – one assessment merely assumes a present entitlement where as the other assumes no such present entitlement. Jagot J also noted that the approach of Whitby would have incongruous effect given that it is well understood that the Commissioner can assess two different taxpayers in relation to the same liability to effectively ‘hedge his bets’ in respect of the tax payable. Whitby’s approach would provides for a special rule that the Commissioner is not able to hedge is bets for trustees but must make a potentially binding decision as to the basis of an assessment.

COMMENT

– while only a narrow point in most cases, this broaden’s the ability of the Commissioner to issue multiple assessments. He has previously been acknowledged as being able to assess multiple taxpayers in relation to the same amount of taxable income, subject to him collecting only once. He can now assess a trustee with multiple notices of assessment. Citation Whitby Land Company Pty Ltd (Trustee) v Deputy Commissioner of Taxation [2017] FCA 28 (Jagot J, Sydney) w http://www.austlii.edu.au/au/cases/cth/FCA/2017/28.html 1.3

Caratti and Bazzo – construction of tax debt agreement

Facts These cases both involved the question of the construction of a Deed of Agreement between each taxpayer and the Commissioner. In both cases, the taxpayers had been issued with Notices of Amended Assessment and Notices of Penalty, with Caratti assessed for $10,984,507 and Bazzo $13,828,790.

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Monthly tax training – March 2017 Both Bazzo and Caratti entered Deeds of Agreement with the Commissioner, under which the the Commissioner agreed to refrain from commencing any proceedings to recover any part of the ‘Taxation Debt’ until the ‘30th day after the Determination of the Objection Process’. Taxation Debt was defined in the Deeds as ‘the amount of [$10,984,507 for Carrati and $13,828,790 for Bazzo], which is comprised of Tax-Related Liability and applicable General Interest Charge (GIC) due and payable by the Taxpayer as at 7 August 2015, subject to any adjustment to those amounts by virtue of the Determination of the Objection Process’. Clause 6.1 of the Deed provided as follows: The Commissioner agrees, subject to clause 11.2, to refrain from commencing any proceedings or employing his statutory ‘garnishee’ power (pursuant to s260-5 of Schedule 1 of the TAA 1953) to recover any part of the Taxation Debt. For the sake of clarity, however, the Commissioner may employ any and all recovery options and powers to pursue any tax-related liabilities of the Taxpayer which are not part of the Taxation Debt which is the subject of this Deed, including any income tax liability that might be due following lodgement of the 2014 Income Tax Return. Clause 6.4 of the Deed provided as follows: The Taxation Debt will continue to accrue GIC daily from the due date for payment in accordance with and at the rate as may be applied from time to time under the TAA 1953. The parties to the Deed included guarantors who provided security for the Taxation Debt. Carrati and Bazzo and the Commissioner disagreed as to the construction of the Deed in relation to GIC accrued since 7 August 2015. Carrati and Bazzo contended that the definition of Taxation Debt included GIC accrued since 7 August 2015 and that, therefore, the Commissioner could not recover such amounts until the Part IVC proceedings commenced by them had been concluded. The Commissioner contended that it could recover amounts of GIC accrued after 7 August 2015 as such amounts were not included in the definition of Taxation Debt. Issues Did the definition of Taxation Debt in the Deed of Agreement include GIC accrued after 7 August 2015? Decision Robertson J held that the definition of Taxation Debt did not include the GIC accrued after 7 August 2015. Robertson J noted that the definition of Taxation Debt had two aspects as follows: 1. 2.

the amount specified in each Deed, being $10,984,507 for Carrato and $13,828,790 for Bazzo; but with such amounts being subject to any adjustment to those amounts by virtue of the Determination of the Objection Process.

Robertson J considered that further accruals of GIC did not constitute an 'adjustment' for the purpose of the definition. Robertson J noted that, the fact that the GIC accrued after 7 August 2015 may itself need to be adjusted after the completion of the Part IVC proceedings, had no bearing on the question as it is commonly the case that GIC paid by a taxpayer needed to be adjusted following the completion of an objection, review and appeal process.

COMMENT

– these cases demonstrate a need to exercise caution when entering into debt agreements with the Commissioner to ensure that the deferral of tax and associated liabilities is appropriately obtained. A consideration, other than the recovery of further accruals of GIC that was considered in this case, is that debt agreements with the Commissioner will usually include a covenant that the Commissioner can rescind the agreement if the taxpayer fails to meet their taxation obligations. This would include future taxation obligations not covered by the agreement.

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Monthly tax training – March 2017 Citation Caratti v Commissioner of Taxation [2017] FCA 70 (Robertson J, Sydney) w http://www.austlii.edu.au/au/cases/cth/FCA/2017/70.html Bazzo v Commissioner of Taxation [2017] FCA 71 (Robertson J, Sydney) w http://www.austlii.edu.au/au/cases/cth/FCA/2017/71.html 1.4

Eastwin – creditable acquisitions

On 16 September 2011 Xudong Wang incorporated Eastwin Trade Pty Ltd and registered it for GST. In January 2014 Eastwin commenced to operate a business of trading gold dore (bars of semi-pure gold-silver alloy requiring further refining) that had previously been operated by a friend of Mr Wang, Ethan. All of Eastwin's purchases had been from the same supplier, Oz Group Trade Pty Ltd. Payments were made to Oz Group by Eastwin using the bank details on Oz Group's invoices. Eastwin would then receive money when it on-sold the gold dore for a profit of approximately 0.3-0.45% (a commission on sale). After becoming aware that gold dore was available for sale, Eastwin would contact potential buyers. The acquisition of the gold dore took place in carparks in Maroubra and Kingsford and were facilitated by a Mr Li representing Oz Group with the gold being delivered by a Mr Song. After receipt of the gold dore, Eastwin would then ‘lock-in’ a price with its buyers. The gold dore had a gold purity in the range of 85% to 97%, and when Eastwin on-sold the gold dore it provided an estimated weight of the gold content based on the dore having a 97% gold content. There was no evidence that customers ever complained where the gold content was not 97%. Payments for the Oz Group invoices were made to New Access Investments Group Pty Ltd (NAIG), an entity which had no apparent connection to Oz Group. The sole shareholder and director of NAIG was Mr Tao Yang. In January 2014 Mr Wang's wife made an investment of $800,000 in NAIG. NAIG had purchased gold bullion in the period from January 2014 to September 2014. In its business activity statements, Eastwin reported the net amount of the payments into and out of its account. Mr Wang did this on the basis that Eastwin was "running a business on consignment". In conducting such a practice, Mr Wang was aware that Ethan’s company had adopted a similar practice but that it had been regarded by the ATO as under-reporting and additional GST liabilities had been imposed on it. In July 2014 the ATO commenced an audit of Eastwin following a complaint from a customer about the absence of tax invoices for sale. On 29 January 2015 the Commissioner issued amended GST assessments denying Eastwin input tax credits for the acquisitions from Oz Group for the following reasons: 1. 2. 3.

4.

20 invoices were issued by Oz Group between 13 January and 24 March 2014, even though Oz Group was incorporated on 01 April 2014; Oz Group had never been registered for GST and its ABN was inactive; the supplies were undocumented and irregular in that they were said to be arranged by a Mr Li solely by text or email, delivered at night in a carparks (Maroubra and Kingsford) by a Mr Song, for whom there was no contact details payments to Oz Group had actually been banked in the bank account of an unrelated entity, NAIG;

The amended assessments imposed additional GST liabilities of $13m and penalties, on the basis that the taxpayer had been reckless, of $7.8m. Section 29-10 of the GST Act also provides that, where a person accounts on a cash basis, an input tax credit for a creditable acquisition is only attributable to a period, so that it can be claimed in the person's BAS, if the person had a tax invoice for the acquisition at the time that they lodge their BAS. There are formal requirements for tax invoices, and the Commissioner has discretion under section 29-70(3) of the GST Act to treat as a tax invoice a document that does not otherwise meet the requirements set out in the above sub-sections. Eastwin objected on 20 February 2015, and attached 350 pages of evidentiary material including all tax invoices from 13 January 2014 to 20 October 2014 for ITCs claimed in the BASs in question. The additional information

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Monthly tax training – March 2017 included invoices from 13 January 2014 to 22 March 2014 from a supplier called Jin Fan (Shen Zhen), email correspondence between Eastwin and ‘[email protected]’ (or ‘.net1’) and email correspondence between Eastwin and ‘[email protected]’ dated from 18 April 2014 to 21 January 2015. In April 2015 Eastwin provided further information for its objection, including that in April 2014 Eastwin had discovered that the invoices issued by Jin Fan (Shen Zhen) were missing required information and contained an incorrect ABN. Mr Li then provided Eastwin with replacement invoices from Oz Group. The Commissioner disallowed Eastwin's objection noting the following reasons in addition to those reasons in issuing the amended assessments: 1. the explanation of the replacement invoices that Eastwin provided in April 2015 was inconsistent with the responses that Mr Wang had provided in interviews in July and August 2014 in which he stated that the only supplier to Eastwin was Oz Group; 2. the evidence of the circumstances of each supply, including that Eastwin was unable to provide contact details for Mr Li or Mr Song, meant that the Commissioner could not be satisfied that the supplies had taken place; and 3. in the absence of evidence of a supply, there was no basis for the Commissioner to treat the tax invoices provided by Oz Gold and Jin Fan (Shen Zhen) as a tax invoices that would give rise to ITCs. Eastwin then applied for review by the AAT. In the Tribunal, the Commissioner hypothesised that the transaction was a disguised transaction and that Eastwin had actually purchased gold bullion, which would be an input taxed supply under the GST Act, and then converted it to gold dore, a supply of which is taxable. The Commissioner provided evidence from a Mr Elvish of a lost cost method by which gold bullion could be converted into gold dore. Issues 1. Did Eastwin make creditable acquisitions of gold dore for which it was eligible to claim input tax credits? 2. If not, was the penalty for recklessness imposed by the Commissioner appropriate? Decision Entitlement to input tax credits The Tribunal accepted that Eastwin had actually sold gold. This was not really contentious, as the finding that the supplies were of gold dore amounted to taxable supplies anyway, thereby creating a GST liability on the supplies. However, this did make the acquisitions capable of being creditable as they were used to make taxable supplies. This fact was also not in contention between the parties. The Tribunal considered that there was no reliable evidence of what Eastwin actually acquired. This was the more critical point, as the ITCs could only be available if Eastwin proved that they made creditable acquisitions of dore, not bullion, which is input taxed. The main reasons Eastwin failed on this point were, primarily, twofold: 1. lack of valid documentary evidence (tax invoices) – as the purported issuers of the said tax invoices were either not registered, or the tax invoices quoted the wrong ABN; and 2. lack of other evidence that the Tribunal may have accepted as prima facie evidence of the purported acquisitions (e.g. delivery dockets, order forms) and otherwise unreliable or unverifiable testimony as to what was acquired or who it was acquired from. As the Tribunal commented, Mr Wang purported to buy over $140m of gold ‘without making the most rudimentary efforts to record accurately what he received, when he received it, what he sold, and when he contracted to sell it.’ This, basically, required great ‘credulity’ to believe. The Tribunal found that the manner in which Eastwin entered into transactions and dealt with suppliers and customers was not believable as: 1. Eastwin was never able to positively identify the supplier(s) (except for general names like ‘Mr Li’) and transacted in car parks at night – contrary to the expected manner of dealings involving valuable goods;

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Monthly tax training – March 2017 2. Eastwin had no method of confirming the contents of the acquisitions. The purity of the gold was tested via a portable testing kit belonging to the supplier – Eastwin did not, apparently, possess any facilities for testing gold purity; and 3. Eastwin supplied the gold and communicated to its customers the purity it had been advised of by its supplier, without a single complaint – which would be expected when dealing with very valuable goods of varying purity and relying purely on supplier assertions as to product quality. The Tribunal rejected a submission by Eastwin that it did not gain a sufficient commercial advantage to explain or warrant the bullion-conversion activity contended by the Commissioner for the following reasons: 1. The 'commission' earned by Eastwin was not immaterial, and in fact significant, even if not as large as the Commissioner contended; 2. The wife of Mr Wang – the controller of Eastwin – was involved in the activities of the supplier, New Access, depositing money into New Access' bank account and was paid what appeared to be a commission; 3. New Access did not remit any GST to the ATO for the supplies purportedly made to Eastwin (nor did any other taxpayer), so the commercial advantage asserted by the Commissioner (buy bullion and claim input tax credits as if dore) was achieved, as the supplier had no GST liability. In terms of the contention that Eastwin had been running a business on consignment, the Tribunal noted that 'there is not the slightest evidence to substantiate the proposition that Eastwin’s business was that of selling gold on consignment.' Recklessness Penalty The Tribunal considered that the reckless penalty was appropriate as the suggestion made that Mr Wang believed that reporting method Eastwin applied was correct in the circumstances and was based on professional advice – was ‘not credible’. The Tribunal noted Mr Wang's knowledge of previous net-basis reporting issues, and his knowledge, established by the Tribunal, that his invoicing and reporting method (gross sales, gross purchases) was atypical of consignment stock sales and even contrary to his own understanding of how selling on consignment worked. Therefore, the Tribunal considered that a penalty for recklessness. was appropriate. Tax Agent Safe Harbour Where a taxpayer provides all relevant information to their tax agent and there is still an error or omission (false or misleading statement), the taxpayer may be able to escape penalty on the basis that they took all reasonable steps to comply with the relevant tax laws. In the present case, Mr Wang made 2 contentions – that Eastwin provided the necessary information to their accountants, and that the accounting method was pursuant to professional advice. The Tribunal concluded that contrary to Mr Wang's evidence, that: 1. Eastwin never provided the tax agent with all necessary information; and 2. the accountants never gave Eastwin oral advice about GST (as asserted by Mr Wang).

TIP

– as well as the Commissioner having the power to treat something as a tax invoice, an incomplete tax invoice can be treated as such if, a) it would comply with the requirements for a tax invoice but for the fact that it does not contain certain information; and b) all of that information can be clearly ascertained from other documents given by the supplier to the other recipient. Citation Eastwin Trade Pty Ltd and Commissioner of Taxation [2017] AATA 140 (PW Taylor SC SM, Sydney) w http://www.austlii.edu.au/au/cases/cth/AATA/2017/140.html 1.5

Vakiloroaya – deductibility of work-related expenses

Dr Vahid Vakiloroaya PhD is a mechanical engineer. Between 16 September 2013 and 22 January 2015 Vahid was employed as a Heating, Ventilation and Air Conditioning Mechanical Engineer by Hi-Air Australia Pty Ltd. Nearly all of Vahid's income for the year ended 30 June 2014 was from his employment with Hi-Air. In the 2014 year, Vahid claimed the following deductions:

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Monthly tax training – March 2017 Label

Description

Amount $

D1

Work-related motor vehicle expenses (using the expense-per-kilometre method)

D4

Work-related self-education expenses

D5

Other work-related expenses

3,250

48,287 6,787

Work-related motor vehicle expenses The basis for being able to claim the work-related motor vehicle expenses was that Vahid carried confidential and sensitive documents to and from work on a daily basis. This amount was claimed as follows: 4 days per week x 36 weeks = 5,184 > 5,000 (max) so claim 5,000 km. Vahid's employer wrote a letter confirming that: 1. 2. 3.

Vahid drove to and from work each day; he confidential information; and that he did not received a car allowance.

There was no evidence that it was a requirement of Vahid's employment that he work from home. Vahid also claimed that he was entitled to deduct his motor vehicle expenses on the basis that he used his car to transport items during client meetings and site visits and 'traveling to and from university, to conduct his research and to attending his PhD classes'. Self-education expenses The self-education expenses were claimed for the costs of constructing a test chamber to test his air conditioning invention and protecting his intellectual property through the patents application process. Vahid accepted that the invention had no connection with his employment at Hi-Air or his PHD. The category was comprised of the following expenses: 1. 2. 3.

Two invoices of $9,940 and $25,000 for various ‘control and measuring instruments’; Two invoices of $5,489 each for amounts paid to patent attorneys for preparing and filing provisional patent applications and related filing fees; and Various expenses for attending awards functions in connection with his invention.

Other work-related expenses This category was comprises of the following expenses: 1.

expenses for which no substantiation was provided: (a) (b) (c) (d)

2.

Mobile Phone ($1,123 based on 80% work-related); Internet ($360 based on 50% work-related); Membership Fees ($120 – American Institute of Refrigeration Air Conditioning and Heating); Engineering Report ($149 for assessment and approval of his patent)

expenses for which substantiation was provided:

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Monthly tax training – March 2017 (a) (b) (c)

Conferences and Registration Fees: $1,170 (Engineers Australia) – invoices were produced for some of these expenses showing payment made on 16 April 2013; Tickets: $1,120 (Awards function); and Depreciation: $797 (Computer Equipment).

The Commissioner denied all claimed deductions apart from an amount of $854 of other work-related expenses and imposed penalties at the rate of 25% for a failure to take reasonable care. Following the Commissioner's objection decision, Vahid applied to the AAT for a review of that decision. Issue Was Vahid entitled to deduct the expenses as claimed and should the penalty have been imposed? Decision Entitlement to deductions The Tribunal noted that under section 8-1 of the ITAA 1997 a person can deduct expenses to the extent that such expenses are incurred in gaining or producing the person's assessable income. The Tribunal noted that ‘in’ means ‘in the course’ referring to the statement of the High Court in Ronpibon Tin NL & Tong Kah Compound NL v Federal Commissioner of Taxation [1949] HCA 15 as follows: it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income. Motor vehicle expenses The Tribunal commented that travelling between home and work had been broadly accepted as a ‘prerequisite’ to earning income, and was therefore not part of the income-producing activities of an employee. However, the Tribunal noted, referring to the decision in John Holland Group Pty Ltd v Federal Commissioner of Taxation (2015) 232 FCR 59, that work-related travel expenses may be deductible if an employee is required to travel as part of their employment: In this context, Tribunal found: 1. 2. 3. 4.

Expenses incurred in travelling to and from work are generally not deductible; Where home-to-work travel is required for or by the person's employment, it will be deductible; There was no requirement for Vahid to travel for work; There was no requirement to work from home (which would make the home-to-work trips deductible as between workplaces); and 5. The claim that Vahid was required to carry confidential information to and from work was never confirmed, and the employer's representations, even after 3 letters from the employer were submitted to the Tribunal, were too vague to verify that claim. In any event, the carrying of confidential information would not be a sufficient basis to claim a deduction for motor vehicle expenses. Furthermore, even if Dr Vakiloroaya did establish his legitimate work purpose, the actual use was in question. Section 28-25(3) of the ITAA 1997 allows for a cents-per-kilometre claim and says: ‘You calculate the number of business kilometres by making a reasonable estimate.’ But to be a ‘reasonable’ estimate, there must be some basis for the amount estimated/claimed and the Tribunal noted that Vahid's claim was ‘without providing any explanation or records to support distances travelled’. Self-education expenses The Tribunal noted that the expenditure claimed was ‘expenditure … incurred in getting work, not doing it’ referring to the statements of Hill J in Federal Commissioner of Taxation v Cooper (1991) 29 FCR 177. There was not a sufficient connection between the expenditure and any current income producing activity.

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Monthly tax training – March 2017 The Commissioner also noted that Vahid could not claim the self-education expenses on the basis of being a business-related expense, as his activities (of creating the prototype) did not amount to a business. The Tribunal accepted the Commissioner's argument, notwithstanding that Vahid never actually advanced the business-related argument at any stage. Other work-related expenses The Tribunal's conclusion on this category of expenses was as follows: 1. 2. 3.

4.

The expenses where no substantiation was provided (mobile phone, internet, membership fees and the engineering report) were disallowed; The conference fees had been incurred in the year ended 30 June 2013 not in the year ended 30 June 2014 and were, therefore, disallowed; awards entry fee and tickets of $1,120 were deductible as attendance at the functions related to Vahid's employment and, given the length, and informative nature, of the functions, were not excluded on the basis that they involved the provision of non-deductible entertainment expenses; depreciation of laptop and home computer – there was no reliable evidence that this equipment was used for work-related purposes and, accordingly, the deduction was disallowed.

Penalty for failure to take reasonable care The Tribunal noted that Vahid had not discharged his burden of proving that the 25% penalty for failure to take reasonable care was incorrect. In coming to this conclusion, the Tribunal relied on the fact that Vahid is a very knowledgeable and highly credentialed professional and academic and that, given he claimed 'significant deductions', and he could have obtained a second opinion or sought a private ruling from the ATO. The Tribunal concluded on that the penalty issue that 'Dr Vakiloroaya was seeking to be subsidised, through his taxation affairs, for his private expenditure'.

COMMENT

– the Tribunal determined the penalty issue largely on the basis of the taxpayer's imputed sophistication, inferred from his profession/occupation, even where that vocation was not tax/law-related. This is consistent with the penalty standards requiring, as set out in Miscellaneous Taxation Ruling MT 2008/1, a consideration of a person with all the circumstances of the taxpayer, including knowledge, education, experience and skill, would have done.

COMMENT

– the motor vehicle claim for home-to-work travel requires the taxpayer to establish their home as a place of work, either as a place of business, or because they are required to perform employment duties from home. An exception to this is where employee performs duties at a number of places requiring the transport or the use of equipment of substantial bulk (which cannot be stored on site) such as to justify the need for a motor vehicle to transport it. The transportation of confidential information was not sufficient in the Tribunal's view, presumably because there was no evidence that the confidential information was so voluminous that it could not be transported otherwise than by car. Citation Vakiloroaya and Commissioner of Taxation [2017] AATA 95 (G Lazanas SM, Sydney) w http://www.austlii.edu.au/au/cases/cth/AATA/2017/95.html 1.6

Kilshore – TASA Code of Professional Conduct

Facts Kamal Kilshore has been a registered tax agent since 7 March 2011. He had worked for Charltons CJC Pty Ltd (an accounting firm) for around 12 of years. From at least May 2012 Kamal, with two other employees of Charltons, Alden Fitzgerald and Kirat Prasad, planned to commence their own accounting business. Without the knowledge of Charltons, Kamal, Alden and Kirat began to cultivate clients of Charltons with the intention that they would become clients of their new business. This included not billing the clients for work they were undertaking.

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Monthly tax training – March 2017 Kamal, Alden and Kirat also solicited new clients and undertook work for them without billing them on behalf of Charltons. Between 2 and 27 July, Fitzgerald, Kishore and Prasad gave notice of their resignation from Charltons. On 13 July Kamal, Alden and Kirat set up Intuitive Accountants & Associates Pty Ltd with each of them as a director and equal shareholder. Intuitive subsequently billed clients for work undertaken whilst Kamal, Alden and Kirat were at Charltons but which they had not caused to be billed whilst as Charltons. From 31 July 2012 Charltons received letters and emails from clients terminating Charltons as their accountant. Charltons did not receive a ‘professional letter’ for the new accounting firm of these clients. It was accepted that Kamal, Alden and Kirat had solicited these clients from Charltons. Charltons commenced proceedings in the Supreme Court of New South Wales against Kamal, Alden, Kirat and Intuitive and was successful in obtaining an award for damages in excess of $300,000. On 14 October 2014 the Tax Practitioners Board notified Kamal that it had decided to terminate his registration as a tax agent, for breaching section 30-10(1) of the Tax Agent Services Act 2009 (Cth) by not ‘acting honestly and with integrity’ towards Charltons when he left the firm. Section 30-10(1) of the TASA provides as follows: 30-10 The Code of Professional Conduct Honesty and integrity (1) You must act honestly and with integrity. Kamal applied to the AAT for review of that decision. Kamal contended that the obligation in section 30-10(1) of the TASA does extend to conduct undertaken with respect to an employer/employee relationship, particularly as such conduct is not a tax agent service. Issues 1. 2. 3.

whether the conduct capable of breaching section 30-10(1) if so, whether the conduct breached section 30-10(1); and if it did breach section 30-10(1), whether termination of registration was appropriate.

Decision Conduct capable of breaching section 30-10(1)? Frost DP in the Tribunal noted that conduct relied upon by the TPB included: 1. 2. 3. 4.

5.

breach of contractual obligations; breach of fiduciary obligations; ‘engag[ing] in a strategy of deception’ to Charltons’ detriment; providing accounting services to people who were not existing clients of Charltons and without billing them people on behalf of Charltons which had the effect of diverting such a business opportunity from Charltons; and soliciting and enticing away a significant number of Charltons existing clients.

Frost DP concluded that such conduct was capable of breaching section 30-10(1) as the Code reaches beyond conduct undertaken in relation to the provision of tax agent services. Frost DP noted that it ‘is by requiring appropriate standards in all aspects of a person’s personal and professional conduct as a registered tax agent that the Code seeks to ensure that tax agent services are provided to the public ‘in accordance with appropriate standards of professional and ethical conduct’’.

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Monthly tax training – March 2017 Did the conduct breach section 30-10(1)? Frost DP noted that the question is whether Kamal 'failed to act honestly and with integrity' and that ‘integrity’ is defined in the Macquarie Online Dictionary as ‘soundness of moral principle and character; uprightness; honesty’. Frost DP observed that Pembroke J in the Supreme Court had found that conduct of Kamal, Alden and Kirat was, ‘characterised by dishonesty, misrepresentation and intrigue’, and that they had ‘engaged in a strategy of deception’. Frost DP noted that Kamal put own interests ahead of those of Charltons, even though he was bound to do the opposite by his contract of employment and his fiduciary obligation of loyalty. Frost DP concluded that the conduct breached section 30-10(1) of the TASA. Was termination appropriate? Frost DP noted that it is accepted that termination of registration should be reserved for the most serious cases of wrongdoing. Frost DP considered that this case was not in the most serious category and therefore termination was not warranted. Frost DP concluded that a written caution was sufficient for the following reasons: 1. 2. 3.

Kamal was unlikely to repeat the conduct as he is now employed by a company of which he is a director and shareholder; No client of Charltons or Intuitive suffered a financial loss or disadvantage; and Kamal otherwise had an unblemished professional history.

Citation Kishore and Tax Practitioners Board [2017] AATA 271 (Deputy President Frost, Sydney) w http://www.austlii.edu.au/au/cases/cth/AATA/2017/271.html 1.7

Cavallo – land tax primary production exemption

Facts Brown Cavallo Pty Ltd as trustee for the Cavallo Family Trust objected to the land tax assessment on its land in Woolgoolga for the 2012 to 2015 land tax years. The land, located on the north coast of New South Wales, was 2.987 hectares in area and zoned R2 Low Density Residential. The land was used in conjunction with two other properties (approximately 43kms away) to run the Bennett family’s cattle breeding business. During the relevant period, the number of the cattle on the land was at least four but not more than 6 except for 2 months in 2014 due to a severe drought. The land was used to finish cull-for-age cows from the other properties. As the land was closer to the coast than the other properties, it received more rainfall (average 1750+mm pa compared to an average 1000mm pa) and was not subject to frosting in the colder months. As a result the land had more fertile soil which was capable of growing more nutritious pasture than the other properties. This more nutritious pasture is beneficial in being able to finish cattle quickly prior to their sale. The pasture produced on the land was also softer which was beneficial to cull for age cows as their worn teeth do not manage drier grasses. The cows finished at the land were then moved back to the other two properties for a few days before being taken to the saleyards in Grafton. The land had been owned by the Bennett family for over 40 years and had been used in the farming business for the whole of that time. It was transferred to Brown Cavallo in 2004. From 2004 a small portion of the land, between 0.1 to 0.6 of a hectare, was used to grow avocados and bananas at varying times.

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Monthly tax training – March 2017 In or around 2013, a disgruntled employee of the family’s former accountant deleted the Bennett family’s electronic business records and in 2015, and many of the paper business records were destroyed by water damage. The Bennett family's cattle business made continuous losses before and during the relevant years. Mr George Bennett and his wife, Carolyn, both worked on the farm and had part-time off-farm employment. The Chief Commissioner issued assessments for land tax on the basis that Brown Cavallo was entitled to the land tax threshold. Subsequently, the Chief Commissioner issued replacement assessments on the basis that Brown Cavallo was not entitled to the land tax threshold as it was a 'special trust'. Section 3A(1) of the Land Tax Management Act 1956 (NSW) defines a special trust as follows: 3A Special trust-meaning (1) For the purposes of this Act, a trust is a ‘special trust’ if: (a) the trust property includes land, and (b) the trustee of the trust is the owner of the legal estate in the land, and (c) the trust is not a fixed trust. As the Cavallo Family Trust was a discretionary trust, it was not a fixed trust and, therefore, was a special trust. This position was ultimately accepted by Brown Cavallo during the appeal to the NSW Civil and Administrative Tribunal. Brown Cavallo appealed the Chief Commissioner's objection decision to NCAT. Brown Cavallo claimed that the land was exempt under s10AA of the LTMA because it was land used for primary production. Section 10AA relevantly provides as follows: Exemption for land used for primary production 10AA Exemption for land used for primary production (1) Land that is rural land is exempt from taxation if it is land used for primary production. (2) Land that is not rural land is exempt from taxation if it is land used for primary production and that use of the land: (a) has a significant and substantial commercial purpose or character, and (b) is engaged in for the purpose of profit on a continuous or repetitive basis (whether or not a profit is actually made). (3) For the purposes of this section, ‘land used for primary production’ means land the dominant use of which is for: (a) cultivation, for the purpose of selling the produce of the cultivation, or (b) the maintenance of animals (including birds), whether wild or domesticated, for the purpose of selling them or their natural increase or bodily produce, or (c) commercial fishing (including preparation for that fishing and the storage or preparation of fish or fishing gear) or the commercial farming of fish, molluscs, crustaceans or other aquatic animals, or (d) the keeping of bees, for the purpose of selling their honey, or (e) a commercial plant nursery, but not a nursery at which the principal cultivation is the maintenance of plants pending their sale to the general public, or (f) the propagation for sale of mushrooms, orchids or flowers.

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Monthly tax training – March 2017 As the land was not 'rural land' in addition to showing that the land was used for primary production of the type specified in sub-section 3, in accordance with section 2 the use of the land needed to have a significant and substantial commercial purpose and be engage in the purpose of profit on a continuous basis. The Chief Commissioner claimed that Brown Cavallo failed to discharge its onus of proof in relation to the use of the land during the relevant years largely due to lack of business records. Due the lack of evidence the Chief Commissioner contended that it was not possible to say whether the land was used for primary production or whether it was unused. The Chief Commissioner contended that, whilst there was evidence of sales of cows, there was no evidence that the cows were ever placed on the land. The Chief Commissioner relied on the following comments of Gzell J Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue [2013] NSWSC 23 as to what the commerciality test requires: [89]… use of the lands for primary production, either individually or in conjunction with other lands, to have had a significant and substantial commercial purpose of character. That test required the commercial purpose or character of the use of the lands to have had a relatively high degree of importance. The combination of ‘significant’ and ‘substantial’ demands that conclusion. [90] Not every business will satisfy the commerciality test. The test distinguishes activities amounting to a business that is carried on in a small way or as a sideline from those of a more serious and weighty kind. A business that satisfies the commerciality test will be an important one. It will usually also exhibit some of such characteristics as size, depth, bulk, weight, seriousness, quality, intensity and prominence. [106]… that the primary production use to be engaged in ‘for the purpose of profit’ and accepts that the purpose may be satisfied whether or not a profit is actually made. 107] While the absence of a profit does not negate an engagement in a primary production use of land for the purpose of profit, a continuous pattern of a lack of profit may lead the court to question and, in appropriate cases, to reject evidence that the primary production use of the land was engaged in for the purpose of profit. Given the destruction of the business records, the evidence of Brown Cavallo was primarily provided in the form of statements from Mr Bennett. That evidence included that the cattle carrying capacity of the land was 4 to 6 cows. Expert evidence of the carrying capacity of the land was not provided. Other evidence included: 1.

2.

a letter from Ray Donovan, a stock and station agent who had conducted business with the Bennetts for approximately 25 years, in which Mr Donovan stated that finishing the cattle on the land had in the past received top price on the day of at the Grafton Sale; and a letter from Nathan Jennings of North Coast Local Land Services that stated that Brown Cavallo's conduct of its beef and farming enterprise across the three properties was very typical of beef production systems on the NSW north coast.

Issue Whether the land was entitled to a primary production land tax exemption for each tax year pursuant to s10AA Decision The Tribunal noted that it was necessary for Brown Cavallo to show that: 1. 2.

the dominant use of the land was the maintenance of beef cattle for the purpose of selling them or their natural increase or bodily produce; and such use of the land had a significant and substantial commercial purpose or character, and was engaged in for the purpose of profit on a continuous or repetitive basis (whether or not a profit was actually made).

Dominant use of the land The Tribunal rejected the Chief Commissioner's submission that there was a lack of evidence in relation to the overall operations of the business. The Tribunal noted that the evidence of Mr Bennett, Mr Donovan and Mr

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Monthly tax training – March 2017 Jennings all indicated that the land had been used to improve the condition of beef cattle for the purpose of the family cattle breeding and sale business for 40 years. In terms of the evidence of the carrying capacity of the land, whilst there was no independent evidence on this issue, the Tribunal was prepared to accept the evidence of Mr Bennett given that there was no evidence to the contrary and Mr Bennett’s undisputed experience in managing cattle. Isenberg SM also accepted Mr Bennett’s reasons for the lack of financial records. Commerciality test The Tribunal considered the following comments of White J in Vartuli v Chief Commissioner of State Revenue [2014] NSWSC 678 about the approach to be adopted when considering whether a block of land the dominant use of which was for the maintenance of animals for the purpose of selling them or their natural increase or bodily produce and which was one of several blocks of land used both in the wider enterprise, meets the commerciality test: 36 It is not appropriate to isolate the land in question. The tests posed by s 10AA(2) are whether the use of the land was engaged in for the purpose of profit on a continuous or repetitive basis and had a significant and substantial commercial purpose or character. The focus in s 10AA(2) is on the profitmaking purpose of the use of the land and therefore attention is directed to the purpose of the user or users and the profit or losses made from the use of the land, not the profits or losses made by the owner of the land. In deciding whether the use of the land was engaged in for the requisite profit-making purpose, and whether the use of the land had a significant and substantial commercial purpose or character, it is appropriate to consider the entirety of Sydrom's and Deemhire's primary production activities, whether conducted on the land or not. This is because the Edmondson Park land was only part of the land used as part of those companies' primary production activities. Those activities had the same purpose and character, irrespective of the particular parcels of land upon which the cattle grazed ... The profitability of those activities should be considered from the perspective of [the family and their companies], by consolidating their results, and excluding the internal agistment charges by which income from those activities was paid to [the family members] at those companies' expense The Tribunal considered that the commerciality test was satisfied for the following reasons: 1. 2. 3. 4.

5.

the business was being run in a way that was very typical of beef production systems on the NSW north coast; use of the land was responsible in the past for higher prices for sale of cattle, indicating the worth of the land to the business; that the land was important to the farming enterprise for practical management of its animals; the losses in the relevant years were explained as being due to increased interest costs on borrowing against the properties due to off-farm investment losses during the GFC. It was expected that the farming enterprise would return to profitability shortly due to increasing profitability of its cattle products; it accepted the explanation for the lack of financial records.

COMMENT

– this is a surprising decision given the state of the evidence and recent decisions concerning the commerciality test. The Tribunal was likely persuaded by the fact that the land had been used in the farming enterprise of the family for an extended period of time. Citation Brown Cavallo Pty Ltd v Chief Commissioner of State Revenue [2017] NSWCATAD 18 (Isenberg SM, Sydney) w http://www.austlii.edu.au/au/cases/nsw/NSWCATAD/2017/18.html 1.8

Leppington – land tax primary production exemption

Facts Leppington Pastoral Co Pty Ltd carries on one of the largest dairy businesses on various parcels of land in and around Western Sydney. Leppington grazes heifer cows on land at Oran Park that it refers to Farmland. The

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Monthly tax training – March 2017 Farmland was also used to produce fodder to feed the heifers on the Farmland and other cows in Leppington’s dairy business. Leppington purchased 665.9 hectares of land at Oran Park in 1984. The land is within an area formerly known as the South-West Growth Centre that, in 2005, was designated for long-term development to provide housing and employment. In 2008 Leppington entered into a Call Option Deed with Greenfields Development Corporation Pty Ltd, a related company, under which Leppington granted Greenfields an option to purchase land called ‘Project Land’. The land now referred to as the Farmland was included in the definition of ‘Project Land’. The Deed contemplated that Greenfields would undertake a development project on the Project Land with Leppington not having any entitlement to make decisions with respect to the project. In 2010 a further agreement was entered into between Leppington and Greenfield called a Development Rights Agreement. The Development Rights Agreement partially replaced the Call Option Deed and under it Leppington agreed to hold the Project Land subject to Greenfields rights under the Call Option Deed and related security documents. In the 2011 to 2014 land tax years Leppington, or a related company Greenfields Development Corporation Pty Ltd, or both, carried on a business of building a new township the Oran Park land. Leppington and Greenfields have gradually released Farmland for development, with the released land being referred to as Development Land. At some point Leppington disputed the Valuer-General’s determination that parts of the Oran Park land constituted a separate parcel of land. This dispute led to proceedings being commenced in the Land and Environment Court. On 11 December 2012 the Land and Environment Court made consent orders by which the Valuer-General and Leppington agreed that Leppington’s land was to comprise four parcels of land effective from 1 July 2010. The four parcels were given a description of ‘Farmland’, ‘Modified Raceway Development Lot 1’, ‘Development Lot 2’ and ‘Development Lot 3’. The areas and land values of the Farmland for each of the relevant years was as as follows: Land Tax Year

Area

Value

2011

508.18 hectares

$117,875,000

2012

436.68 hectares

$108,500,000

2013

409.76 hectares

$100,000,000

2014

395.15 hectares

$96,000,000

The activities on the Farmland were not consistent over the relevant years, although there was always some level of primary production use. The activities are as follows: 1.

2011 land tax year: (a) used in the farming enterprise for grazing cattle and to grow fodder to feed cattle on the Farmland and other land held by Leppington; (b) earthworks done in connection with development being undertaken on the Development Lands; and (c) to carry out tests by consultants to obtain consents for future residential or commercial development on the Farmland

2.

2012 and 2013 land tax year: (a) used in the farming enterprise for grazing cattle and to grow fodder to feed cattle on the Farmland and other land held by Leppington; and (b) to carry out tests by consultants to obtain consents for future residential or commercial development on the Farmland;

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3.

2014 land tax year: (a) used in the farming enterprise for grazing cattle and to grow fodder to feed cattle on the Farmland and other land held by Leppington; (b) earthworks done in connection with development being undertaken on the Development Lands; and (c) to carry out tests by consultants to obtain consents for future residential or commercial development on the Farmland.

The Commissioner issued assessments to Leppington in respect of each of the relevant years on the basis that Leppington was not entitled to the primary production exemption for the farmland. As the Farmland was not zoned rural, the land needed to be used for the dominant purpose of primary production and such use needed to have had a significant and substantial commercial purpose or character and be engaged in for the purpose of profit on a continuous or repetitive basis. The Commissioner accepted that in each of the years the land was used for primary production and that such use had a significant and substantial commercial purpose or character and was engaged in for the purpose of profit on a continuous or repetitive basis. However, the Commissioner contended that the primary production use was not the dominant use of the Farmland as there were three competing uses as follows: 1. 2. 3.

the earthworks use on the Farmland for the residential development on adjacent Development Land; the use of the land by consultants for existing and future residential development use, and a an intangible use of the land by reason of the Development Rights Agreement.

Leppington objected to the assessments and, when the objections were disallowed, appealed to the Supreme Court of New South Wales. Issues Was the primary production use of the land the dominant use of the land for each land tax year? Decision White J in the Supreme Court of New South Wales noted that land tax is assessed as at 31 December of each year and whilst he accepted that whether a state of affairs existed as a continuum, the circumstances before and after 31 December may assist in determining the position as at 31 December, it is still the circumstances as at 31 December that must be considered. White J observed Gzell J’s approach in Leda Manorstead Pty Ltd v Chief Commissioner of State Revenue (2010) 79 NSWLR 724 of considering the use of the land six months before and after the 31 December preceding the relevant land tax year. White J accepted that both the grazing of the cattle and growing of fodder on the Farmland to feed cattle on the Farmland and other land in Leppington's farming enterprise, where such cattle were held for the purpose of producing and selling milk, each constituted a use of the land for the ‘maintenance of animals … for the purpose of selling them or their natural increase or bodily produce’ and so as primary production use. White J noted that the Land Tax Management Act refers to land that is treated as a separate parcel of land by the Valuer-General. What is being tested is the use of the parcel of land subject to taxation, and not all of the land owned by the taxpayer. The Commissioner had no power to characterise land as a parcel of land where such land had not been treated as a parcel by the Valuer-General. White J considered that this meant that it ‘cannot be said that because the whole of the Project Land is devoted to the purpose of residential development, that a separate parcel, namely the Farmland, although devoted to that ultimate purpose, was for that reason used for that purpose in the relevant land tax years.’ White J then proceeded to consider the competing uses of the land for each of the years. White J’s conclusion was that in the years in which earthworks were conducted on the land, being the 2011 and 2014 land tax years, that the earthworks use was the dominant use of the land but when there were no earthworks being conducted, being the 2012 and 2013 land tax years, the dominant use was the primary production use. Accordingly, White J determined that the assessments for the 2012 and 2013 land tax years be revoked.

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COMMENT

– a significant implication from this decision is that for the purposes of the Land Tax Management Act 1956 (NSW) the Chief Commissioner has no power to treat separate parcels of land as one parcel or one parcel of land as separate parcels but must simply rely on the Valuer-General’s determination. The implication for this is that it may be necessary, when considering objecting to a land tax assessment, to also make an objection to the Valuer-General under the Valuation of Land Act 1916 (NSW). Citation Leppington Pastoral Co Pty Ltd v Chief Commissioner of State Revenue [2017] NSWSC 9 (White J, Sydney) w http://www.austlii.edu.au/au/cases/nsw/NSWSC/2017/9.html 1.9

Urmar – payroll tax grouping

Facts Urmar Pty Ltd is the sole trustee of the Ross Burton Family Trust and for the relevant period, did not act in any other capacity. NJW Contractors Pty Limited is a company which operates a fleet of trucks, which carts chicken feed for Ingham’s chickens. Ross Burton Transport Pty Ltd also operates a fleet of trucks, which is in the business of carting gyprock for CSR. During the relevant period, 1. 2. 3. 4. 5. 6. 7.

Mrs Burton was the sole director of NJW and Ross Burton Transport and owned all the shares in Urmar. Mrs Burton also a director of Urmar together with her daughter, Cindy Burton. Mr Burton was an alternate director of Urmar and acted in place of Cindy from April 2006 to December 2009. Under Urmar's constitution Mr Burton, whilst acting in the place of Cindy, and Mrs Burton had equal votes at directors meetings and each could veto the other vote. Urmar as trustee of the Ross Burton Family Trust owned all the shares of Ross Burton Transport and more than 95% of the shares of NJW. Mr Burton managed the business conducted by Ross Burton Transport. Mr Burton was also involved in the business conducted by NJW, including the hiring of managers.

Urmar provided finance for NJW, on-lending money to it that obtained borrowed from an external financier. The loan to NJW was on the same terms on which Urmar borrowed the money. Almost the whole of the Ross Burton Family Trust’s income was derived from NJW in the form of interest receipts. A substantial part of Urmar’s business involved the provision of finance for NJW’s business. One of the properties owned by Urmer as trustee for the Ross Burton Family Trust was provided rent-free to NJW to park its vehicles on, to use as an administrative office and as a workshop. On 17 October 2012, the Chief Commissioner issued 6 payroll tax assessment notices to Urmar as trustee of the Ross Burton Family Trust, following an audit for the period 1 July 2006 to 30 September 2011 on the basis that the Ross Burton Family Trust was grouped for payroll tax purposes with NJW and Ross Burton Transport. On 8 April 2014, the Chief Commissioner issued a notice to the Commonwealth Bank under s 46 of the Taxation Administration Act 1966 (Cth) requiring the CBA to pay $246,745.25 from Urmar's bank accounts (a garnishee notice). The CBA complied with the section 46 notice. On 4 June 2014 Urmar objected to the assessments, the decision of the Chief Commissioner not to exclude the Ross Burton Family Trust from the group and the decision to issue the s 46 notice. The objections to the assessments were disallowed in September 2014. The Chief Commissioner noted in its response that he had not considered the de-grouping issue and if Urmar wished to apply for de-grouping, it would need to submit a completed application form. Urmar filed an application with the Tribunal on 12 November 2014 to review this decision. In or about April 2015 Urmar lodged a second objection in relation to the Chief Commissioner's decision to not exclude the Ross Burton Family Trust from the group. The objection was disallowed. On 12 August 2015 Urmar applied for review of this decision.

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Monthly tax training – March 2017 The de-grouping decision involved a consideration of the current Payroll Tax Act 2007 (NSW), for the period of 1 July 2007 to 30 September 2011, and its predecessor, the Payroll Tax Act 1971 (NSW), for the period of 1 July 2006 to 30 June 2007. In these notes, we only consider the issues involving the 2007 Act. Section 79 of the Payroll Tax Act provides as follows: 79 Exclusion of persons from groups .... (2) The Chief Commissioner may only make such a determination if satisfied, having regard to the nature and degree of ownership and control of the businesses, the nature of the businesses and any other matters the Chief Commissioner considers relevant, that a business carried on by the person, is carried on independently of, and is not connected with the carrying on of, a business carried on by any other member of that group Urmar contended that it was operating a business substantially independently of the business of NJW for the following reasons: 1. 2. 3. 4.

Urmar's business was not substantially financially dependent on NJW during the period because even when NJW went into liquidation and the loans due from NJW were not repaid, Urmar continued to exist; Urmar carried on a business of a property owner (and deriving rent) whereas NJW carried on a business of carting chicken feed for Ingham's Chickens; the actions of NJW and its sole director, Mrs Burton, did not substantially influence the conduct of the business of Urmar; and Mr Burton was not involved in the business activities of NJW.

Urmar contended that the section 46 notice was void because it was based on the assumption that Urmar being properly grouped with NJW and Ross Burton transport, when it had not been. The Tribunal heard Urmar's appeal to both the first objection decision and the second objection decision together. Issues The issues for the Tribunal to consider were: 1.

2.

whether the Chief Commissioner should have exercised his discretion to exclude Urmar from the group comprised of NJW and Ross Burton Transport on the basis that the business carried on by Urmar was not substantially connected with the businesses carried on by each of NJW and Ross Burton Transport; and whether or not the section 46 notice was void.

Decision Should Urmar have been excluded from the group? The Tribunal considered that in respect of Urmar, both Mrs Burton and Mr Burton (while he was acting as an alternate director) could exercise substantial control over its business activities by reason of the terms of Urmar’s constitution. The Tribunal did not accept Urmar submissions that Mr Burton was not involved in NJW's business, noting that it was not satisfied that Mr Burton did not exercise overall control over that business. In respect of Urmar's contention that its main business activity was collecting rent and paying the expenses usually associated with property ownership, the Tribunal noted that previous tax returns tendered in evidence had described the main business activity of Umar in 2007 as ‘Road Freight Transport Service’, in 2008 as ‘property rental’ and in 2009 and 2011, as ‘Other Administrative Services N.e.c’. There was no reference in any of the financial statements or income tax returns to rental income. The Tribunal also rejected Urmar’s submission that its business was not substantially financially dependent on NJW during the relevant period. Mr Burton’s own evidence showed that almost the whole of the Ross Burton

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Monthly tax training – March 2017 Family Trust’s income was derived from NJW in the form of interest receipts. The Tribunal found that a substantial part of Urmar’s business involved the provision of finance for NJW’s business. In addition, Urmar owned all of the shares of Ross Burton Transport and 95% of the shares of NJW. NJW provided almost all of the income of Urmar. One of the properties owned by Urmer as trustee for the Ross Burton Family Trust was provided rent-free to NJW to park its vehicles on, to use as an administrative office and as a workshop. On these bases, the Court held that Urmar’s business was substantially concerned with providing financial and other assistance to NJW, and to a lesser extent to Ross Burton Transport. Accordingly, the Tribunal was not satisfied that the Chief Commissioner should have exercised its discretion to de-group Urmar from NJW and Ross Burton Transport. Validity of section 46 notice? The Tribunal rejected Urmar's submission that the section 46 notice was void because Urmar had not been properly grouped. The Tribunal noted that the grouping provisions operated by force of law and not through any exercise of discretion of the Chief Commissioner. It is only when entities are grouped, as a matter of law, that the Chief Commissioner has discretion to exclude entities from the group. Accordingly, even if the Chief Commissioner should have excluded Urmar from the group when it made such an application, at the time the section 46 notice was issued, it was not issued due to any improper decision by the Chief Commissioner.

TRAP

– the reference in this case to the description of business activity in tax returns, and in the continuity of ownership test case to the description of the business in financial statements means that describing what is done is more important than merely completing a field, or ensuring that a client is not flagged for a benchmarking review or audit. Citation Urmar Pty Ltd ATF Ross Burton Family Trust v Chief Commissioner of State Revenue [2017] NSWCATAD 54 (Senior Member Isenberg, Sydney) w http://www.austlii.edu.au/au/cases/nsw/NSWCATAD/2017/54.html 1.10 Uber – taxi services and GST Facts Uber provides platform by which a person, using a ‘Uber app’, can request one of three transportation services as follows: 1. luxury car hire (uberBLACK); 2. registered taxi hire (uberTAXI); and 3. private care hire (uberX). Uber provides an application (the Uber app) by which a person (referred as a Rider) could request transportation services from one of the categories. Uber also provided an app (the Uber Partner app) by which a person (referred as a Partner) who was registered to provide the services could accept a request for a transportation service. This case dealt with the uberX service. The uberX service operated as follows: 1. 2. 3. 4.

the services are provided in private vehicles; the Partners not require to hold a taxi license; bookings could only be made through the Uber app by registered users; the cost of the service is based on both the time taken and the distance covered for the trip.

It was accepted for the purpose of the case that the Partners did not wait at ranks or accept kerbside hails. The Partners also did not provide the riders with an ongoing tally of the cost, display a schedule of fares, wear a uniform, display a light to indicate availability or display any other signage to indicate that the vehicle was associated with Uber.

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Monthly tax training – March 2017 On 20 May 2015 the ATO issued pubic advice that ride-sourcing services are ‘taxi travel’ for the purposes of the GST Act. Under the GST Act enterprises with annual turnover under $75,000 do not need to register for GST purposes. However, section 144-5 of the GST Act provides an exception for enterprises supplying ‘taxi travel’. Such enterprises are required to register for GST regardless of their annual turnover. Section 195-1 of the GST Act defines ‘taxi travel’ to mean ‘travel that involves transporting passengers, by taxi or limousine, for fares’. Following this ruling, Uber applied to the Federal Court of Australia for a declaration that one of its Partners, Mr Brian Fine, did not supply taxi travel within the meaning of section 144-5 of the GST Act. Uber's submissions Uber submitted that there were three reasons why the uberX services were not taxi travel as follows: 1.

2.

3.

the fact that, generally a threshold of $75,000 for registration for GST applies, and that there is a specific exception for taxi travel, reflects a specific concern with taxi industry operators and that it should not be construed to extend to new modes of transportation services; the uberX services were not ‘travel that involves transporting passengers, by taxi’ as arrangements did not have the following features usually associated with taxis: (a) the vehicle is registered as a taxi; (b) the vehicle is marked with identification as a taxi; (c) the vehicle has a light to indicate availability; (d) the driver wears a uniform; (e) the vehicle is painted in approved colours; (f) the driver is not entitled to refuse a hire; (g) the driver must display certain information in the vehicle including maximum fare and charges; (h) the vehicle contains a taximeter. the uberX services were not ‘travel that involves transporting passengers, by limousine’ as arrangements did not have the following features usually associated with limousines: (a) the vehicle is a large, luxury hire car or a special occasion vehicle; (b) the service has a prestige or luxury quality, rather than as a regular mode of transportation; (c) the customer can choose their vehicle type at the time of booking; (d) the fares are fixed; (e) pre-booking is either required or standard; (f) the price is higher than other means of transportation; (g) the vehicles are purchased for commercial purposes.

The Commissioner's submissions The Commissioner submitted that Uber's construction of section 195-1 was mistaken because it should consider the meaning of taxi and limousine independently. Instead, the definition of taxi travel should be read as a whole and, given that two different forms of transportation were captured, the intent of the provision was transportation in which passengers are transported in a vehicle from one point to another at their direction. The Commissioner also referred to the dictionary definitions of taxi which, he submitted, suggest that taxi is simply a vehicle available for hire by the public and which transports a passenger at his or her direction for the payment of a fare that may or may not be calculated by reference to a taximeter. The Commissioner contended that method of calculation for a fare for uberX whilst not by taximeter was not dissimilar. The Commissioner also submitted that ‘limousine’ in section 195-1 of the GST Act refers to a vehicle for hire by the public, but only by pre-booking, to transport a passenger at his or her direction by reference to a fare that is not calculated by reference to a taximeter. He also argued for a broad definition of ‘taxi travel’, predicated on the ordinary meaning of the word. The Commissioner contended it was incorrect to rely on State and Territory regimes as the conceptual basis to put forth a regulatory concept of taxi.

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Monthly tax training – March 2017 The Commissioner put forth various dictionary meanings, defining the ordinary meaning of ‘taxi’ as ‘a person driving a private vehicle from one point to another at the passenger's direction and for a fare’. This was put forth as a preferred definition to Uber's trade-specific definition. Issue Whether, in carrying on their enterprises, uberX Partners supply ‘taxi travel’ under the GST Act? Decision Griffiths J refused to make the declarations sought by Uber. Griffiths J considered that the uberX services fell within the meaning of 'taxi travel' for the purposes of the GST Act for reasons that included the following: 1.

2.

3. 4.

the Explanatory Memorandum to the Bill which introduced Div 144 makes it clear that the exception for taxis was to address problems in overseas jurisdictions, which included unregistered drivers collecting GST and not remitting it, by requiring all persons who supplied ‘taxi travel’ to be registered for, and remit, GST. These circumstances supported construing ‘taxi travel’ broadly and not technically; a broad and non-technical meaning was consistent with the wider context of GST, which is a tax on a wide variety of transactions that require self-assessment and, therefore, the GST Act should be construed in a 'practical and common sense way and that, generally speaking, it should avoid interpretations which are unduly technical or overly meticulous and literal'; that the GST Act, in this context, should be construed as 'always speaking' meaning that its interpretation should accommodate new technologies that were not known at the time Division 144 was inserted; and whilst acknowledging the caution in using dictionary definitions, the ordinary meaning of ‘taxi’, as supported by the dictionary definitions, is a vehicle available for hire by the public and which transports a passenger at his or her direction for the payment of a fare that will often, but not always, be calculated by reference to a taximeter.

Accordingly, Griffiths J considered that Mr Fine, as the example uberX Partner, was supplying travel that involved transporting passengers by taxi for fares. Griffiths J rejected the Commissioner's submission that the term ‘limousine’ was not confined to luxury cars and noted that, as Mr Fine's Honda Civic was not a luxury car, it did not fall within the meaning of taxi travel on that basis.

COMMENT

– the ATO do not view a ride sharing vehicle as a taxi for the purposes of the FBT exemption in section 58Z of the FBT Act. The issue is that for FBT there is a definition of taxi (which there is not for GST purposes) that provides that ‘taxi means a motor vehicle that is licensed to operate as a taxi.’ In the November 2015 FBT States and Territory Industries Partnership meeting the minutes disclose that the ATO undertook to update the Fringe benefits tax: a guide for employers to include this advice. Citation Uber B.V. v Commissioner of Taxation [2017] FCA 110 (Griffiths J, Sydney) w http://www.austlii.edu.au/au/cases/cth/FCA/2017/110.html 1.11 Appeals Update 1.11.1 Metricon Our April 2016 tax training notes reported on the decision of the Supreme Court in Metricon Qld Pty Limited v Chief Commissioner of State Revenue (No. 2) [2016] NSWSC 332 that allowed the primary production exemption to apply to land which was then used for primary production but was being held for the future purpose of development. The Chief Commissioner appealed this decision to the NSW Court of Appeal. The NSW Court of Appeal has dismissed the Chief Commissioner's appeal. The Court of Appeal stated that ’use' for the purpose of the primary production exemption requires: physical deployment of Isaacs J’s ‘concrete physical mass’ in pursuance of a particular purpose of obtaining present benefit or advantage from it, with deployment understood as including not only activity

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Monthly tax training – March 2017 but also inactivity deliberately adopted as a means of obtaining such actual and present advantage from the land; and with purpose understood as objectively ascertained purpose. There is no requirement that immediate productive return be achieved, as long as some benefit or advantage accrues. The key takeaways from the decision are as follows 1.

the concept of 'use' and 'dominant use' are to be determined by reference to the land. It is not the necessarily the owner's use of the land that is considered. For example, where an owner leases out part of the land, the use to be considered is not the use of the owner to derive rent, but the use of the land by the tenant. This is a significant departure from the Chief Commissioner's previous approach. The following statement of Court of Appeal is illustrative of the correct approach: 63.In the judgment now under appeal, his Honour considered it meaningful to proceed in the manner adopted by the Administrative Decisions Tribunal in the proceedings that culminated in the appeal to this Court in the Ferella case, that is, by seeking to compare an alleged primary production use by an owner who kept a single horse on the land with that owner’s use of the house on the land ‘for rental purposes’ or ‘use as an investment property earning income from the letting’. On the construction I consider to be correct, the use that the Tribunal should have compared, for s 10AA purposes, with any primary production use involving the horse was simply use (in the form of physical deployment) of the house as a residence. As has been noted, the section is not concerned with the identity of a person who uses the land. The fact of use and the nature of that use are alone relevant.

2.

the Court of Appeal rejected an earlier view of the courts that the 'uses' to be considered for the purpose of determining what is the dominant use of land are not necessarily confined to physical uses of the land, but considered that physical use includes 'passive use' of the land, being a use where ‘immediate and present advantage is consciously and deliberately taken of land without physical activity on or affecting it’;

3.

inactivity on the land will only constitute a use where such inactivity is for a positive purpose of securing a present advantage. This is a significant departure from the Chief Commissioner's previous approach that you need to compare the asserted primary production use against the possibly that such use is so slight as to amount to non-use; and

4.

where land is held for some future use, such as occurs in land banking, it is necessary to consider the point in time in which the future use can be characterised as a current use. The following statement of the Court of Appeal demonstrates the correct approach: 67.If ‘land banking’ is understood as merely accumulating and holding a stock of land with a view to its future development, such ‘land banking’ cannot be regarded as being, of itself, use of the land. Inactivity in the form of mere holding, although accompanied by a present intention to subdivide and sell at some future point, is not the source of present benefit or advantage and therefore does not constitute a use for the purposes of s10AA(3). What is required is some physical activity that causes the land to be raised out of a state of non-use into one of actual deployment in pursuance of the purpose of deriving advantage through subdivision and sale.

Citation Chief Commissioner of State Revenue v Metricon Qld Pty Ltd [2017] NSWCA 11 (Macfarlan JA, Ward JA, Barrett AJA, Sydney) w http://www.austlii.edu.au/au/cases/nsw/NSWCA/2017/11.html

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2

Legislation

2.1 Progress of legislation

Title

Introduced House

Introduced Senate

Passed Senate

Assented

7/2

8/2

9/2

28/2

Passed House

Treasury Laws Amendment (Enterprise Tax Plan) 2016

1/9

Treasury Laws Amendment (2016 Measures No. 1) 2016

1/12

2/3

Treasury Laws Amendment (2017 Measures No. 1) 2017

16/2

2/3

Treasury Laws Amendment (Combating Multinational Tax Avoidance) 2017

9/2

Treasury Laws Amendment (GST Low Value Goods) 2017

16/2

Tax and Superannuation Laws Amendment (2016 Measures No. 2) 2016

14/9

Treasury Laws Amendment (Working Holiday Maker Employer Register) 2017

16/2

Income Tax Rates Amendment (Working Holiday Maker Reform) 2016

12/10

17/10

7/11

Superannuation (Objective) 2016

9/11

22/11

23/11

2.2

State taxes amendments

The State Revenue Legislation Amendment Bill 2017 (NSW) was passed by the lower house of the NSW Parliament on 8 March 2017. The Bill makes a number of amendments to various state tax laws as set out below. Duties Act The Bill amends the Duties Act. The key amendments are as follows: 1.

digital instruments: The Bill makes amendments to clarify that duty can be imposed on a dutiable transaction where the instrument is in digital form.

2.

transfer not in conformity with agreement: The Bill extends of the nominal duty of $10, as opposed to ad valorem rate, that is chargeable for certain transfers not in conformity with an agreement for sale or transfer of property on which duty has already been paid. Prior to the Bill, the concession applied where the purchaser of a property in the contract for sale of land wished to nominate: (a) (b)

in all cases, a related person, where the purchaser is a trustee, a related person of a beneficiary,

for the property to be transferred upon settlement. The amendments provided the concession applies where the person under the sale contract is the trustee of a self managed superannuation fund and the transferee is the custodian of the trustee. 3.

duty on change of trustee: the Bill amends section 54(3) of the Duties Act, which applies to provide a concessional rate of duty of $50 where dutiable property of a trust is transferred to a new trustee. The concessional rate only applies where certain conditions are met. Importantly, in order to obtain the concession, the new trustee or any continuing trustee(s) cannot be, and are not able to become, a beneficiary of the trust. A further condition is that the transfer cannot be 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

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Monthly tax training – March 2017 detriment of the beneficial interest or potential beneficial interest of any person.’ The Bill amends this condition to read as follows: ‘the transfer is not part of a scheme to avoid duty that involves conferring an interest, in relation to the dutiable trust property, on a new trustee or any other person (whether or not as a beneficiary) so as to cause any person to cease holding the whole or any part of a beneficial interest (or potential beneficial interest) in that property.’ The explanatory statement to the Bill does not provide an explanation for the reason for this change but it appears on the words that the changes are intended to make this condition more limited. The current condition merely requires that it be to the detriment of a person's beneficial interest, whereas the new wording requires the person to cease holding the beneficial interest. 4.

marriage and other relationship breakdowns: the Bill extends the duty exemption for breakdowns of marriages and other relationships so that the exemption applies where the dutiable property is transferred to a bankruptcy trustee of the estate of either parties of the marriage or relationship that has broken down.

5.

relevant acquisition for landholder duty: the Bill modifies the provisions concerning when a person makes a ‘relevant acquisition’ for the purpose of landholder duty. Generally, duty is no longer charged in NSW on a transfer of shares in a company or units in a trust. The exception to this is for a company or a unit trust scheme that is a landholder (has land holdings in NSW with an unencumbered value as assessed by the Valuer-General exceeding $2,000,000 – noting there are different rules for primary production land). Duty is payable in relation to landholders where a person makes a ‘relevant acquisition’. A relevant acquisition is one that results in the person's interest, aggregated with an interest(s) of an associated person, being a 'significant interest' in the entity. For private landholders a 'significant interest' is 50%. The Bill makes amendments to the provisions of the Duties Act to require you to aggregate an interest 'with other interests in the landholder acquired by the person or other persons under acquisitions that form, evidence, give effect to or arise from what is substantially one arrangement between the acquirers.' That is, aggregation is no longer limited to the interests of associated persons. The legislation sets out the matters to consider in determining whether acquisitions are substantially one arrangement as follows: (a) (b) (c) (d) (e) (f)

whether any of the acquisitions are conditional on entry into, or completion of, any of the other acquisitions; whether the parties to any of the acquisitions are the same; whether any party to an acquisition is an associated person of another party to any of the other acquisitions; the period of time over which the acquisitions take place; whether, before or after the acquisitions take place, the interests were, are or will be used together or dependently with one another, and any other relevant circumstances.

The Bill also amends the definition of significant interest to provide that a person's interest is determined without regard to any liabilities of the landholder. 6.

linked entities for landholder duty: the Bill modifies the ‘linked entity’ provisions for landholder duty. The linked entity provisions are relevant to determining whether the land holdings of unit trust schemes and companies in NSW exceed the $2 million threshold. Currently, entities are linked if they are part of a chain of persons where a link exists between each person in the chain. A link exists between two persons where one of them is entitled to receive not less than 50% of the unencumbered value of the property of the other person in the event of a distribution of all the property of that person. The Bill extends these provisions by providing that a linked entity of a private unit trust scheme or private company will include all entities in a chain starting with the principal entity where the principal entity would, in the event of a distribution of all the property of entities in the chain, be entitled to receive not less than 50% of the value of that property. The Bill also provides that, in determining a person's entitlement to receive the value of the property of an entity, you disregard any liabilities of the entity.

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Monthly tax training – March 2017 There are similar amendments to the landholder provisions concerning public unit trusts and listed companies. 7.

primary production exemption: the Bill extends the exemption for transfers of primary production land. Currently, land that has been used for primary production in connection with a business carried on by the transferee, lessee or assignee, or by a family member of the transferee, lessee or assignee is exempt. The Bill extends the exemption to land that has been used for primary production in connection with a business carried on by a company, or under a trust, controlled by the transferee, lessee or assignee, or by a family member of the transferee, lessee or assignee.

8.

general anti-avoidance rule: the Bill amends the general anti-avoidance provision in the Duties Act. Currently, the amount of duty avoided by the person is the amount that would have been payable, or that it is reasonable to expect would have been payable, by the person if the tax avoidance scheme had not been entered into or made. The proposed amendments provide that the amount that it is reasonable to expect would have been payable by the person is determined on the assumption that a reasonable alternative to enter into or making the scheme would have been adopted. In other words, it will no longer be sufficient to assert that the transaction would not have proceeded in another form to overcome the operation of the antu-avoidance rule.

Payroll Tax Act The Bill makes amendments to the employment agency provisions in the Payroll Tax Act. The employment agency provisions operate to include as taxable wages for payroll tax amounts paid by an ‘employment agent’, being a person who the procures the services of another person for a client of the first, under an employment agency contract, being a contract that governs the procurement of the services. There is currently a gap in the law in that amounts are included as taxable wages under the employment agency provisions that would be exempt if the person provided the services to the client as their common law employee. The Bill amends the Payroll Tax Act to treat wages paid to a common law employee by an employment agent as exempt when the wages would have been exempt had they been paid to the employee as common law employee of the client.

TRAP – care should be exercised when changing shareholders of a corporate trustee where the trust holds land in NSW with a unencumbered land tax value that exceeds $2,000,000. If the trustee is able to benefit under the trust, then the transfer of more than 50% of the shares in the corporate trustee will be a "relevant acquisition" for landholder duty. You would then need to rely on the Chief Commissioner of State Revenue's discretion under section 163H of the Duties Act 1997 (NSW) to grant a full or partial exemption of landholder duty where it is not just and reasonable to impose landholder duty in the circumstances. w https://www.parliament.nsw.gov.au/bills/Pages/bill-details.aspx?pk=3371 2.3

Treasury Law Amendment (2017 Measures No. 1) Bill 2017

National Innovation and Science Agenda measures The Bill makes minor changes to provisions of the ITAA 1997 to ensure that the National Innovation and Science Agenda measures operate in accordance with the original policy intent. National Innovation and Science Agenda measures, contained in the Tax Laws Amendment (Tax Incentives for Innovation) Act 2016, were as follows: 1. 2.

concessional tax treatment for investments in innovative, high-growth potential startups; and reform of the tax arrangements for venture capital limited partnerships to improve access to capital, and make the regime more user-friendly and more internationally competitive.

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Monthly tax training – March 2017 The effect of the current provisions is that investors who invest through an interposed trust into entities that meet the conditions for the concessions, are not able to access the capital gain concession. This was because where an investor invests through a trust, CGT event E4 would potentially apply to claw back the disregarded or exempt capital gain. CGT event E4 operates where a capital payment is made to a person in respect of their interest in a trust. Where CGT event E4 happens, the person's cost base in respect of their interest is reduced by the amount of the payment that is ‘non-assessable’. Where the effect of this is that the cost base is less than zero, the person makes a capital gain. As the concessional amount of the gain of an investment in an entity entitled to the above measures would be included in the non-assessable part for the purposes of CGT even E4, the benefit of the concession is lost to the investor. To overcome this, the Bill amends section 104-71 of the ITAA 1997 by including the amount of gain disregarded or exempt under the measures is excluded from being included in the non-assessable part for the purposes of CGT event E4. The amendments apply from 1 July 2016, the date when the measures first commenced. ASIC measures The Bill amends the ASIC Act to specify that the sharing of confidential ASIC information with the Commissioner of Taxation is authorised use and disclosure of that information. Currently, ASIC is prohibited from sharing confidential information with the Commissioner of Taxation, unless the Chairperson of ASIC, or their delegate, is satisfied that the information will enable or assist the Commissioner to perform or exercise their functions or powers. The amendments add the Commissioner to the entities listed in subsection 127(2A) of the ASIC Act to which disclosure of confidential information is authorised. ASIC will be authorised to disclose information to the Commissioner following the commencement of the Schedule, in relation to any information held by ASIC at that time regardless of whether it was obtained before or after the amendment commences. w http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fbillhome%2Fr5814 %22 2.4

Correcting GST errors Amendment Determination 2017 (No. 1)

The Deputy Commissioner of Taxation has issued a legislative instrument on 9 January 2017 in relation to correcting GST errors on BAS. This is the determination that allows debit and credit errors to be corrected in a later BAS. For debit errors to be corrected the correction needs to be done within a time limit corresponding to your GST turnover:

Current GST turnover

Debit error time limit

Debit error value limit

Less than $20 million

The error must be corrected Less than $10,000 in a GST return that is lodged within 18 months of the due date of the GST return for the tax period in which the error was made.

$20 million to less than $100 The error must be corrected Less than $20,000 million in a GST return that is lodged within 12 months of the due date of the GST return for the tax period in

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Monthly tax training – March 2017 which the error was made. $100 million to less than $500 million

The error must be corrected Less than $40,000 in a GST return that is lodged within 12 months of the due date of the GST return for the tax period in which the error was made.

$500 million to less than $1 billion

The error must be corrected Less than $80,000 in a GST return that is lodged within 12 months of the due date of the GST return for the tax period in which the error was made.

$1 billion and over

The error must be corrected Less than $450,000 in a GST return that is lodged within 12 months of the due date of the GST return for the tax period in which the error was made.

General application The determination is designed to achieve two things: 1. To not allow an error from an earlier BAS (BAS A) to be corrected by amending a later BAS (BAS B); and 2. To allow errors from the earlier BAS to be corrected in a later BAS but only if the later BAS is lodged before the earlier BAS's period of review – i.e. BAS B must be lodged within 4 years from the time BAS A was lodged. Previously, an error from an earlier BAS could corrected with a later BAS if the due date of the later BAS was within four years from the date on which the earlier BAS was lodged. This enabled the time to make an adjustment to the earlier BAS to be extended by deferring the lodgement of later BAS. Date of effect The determination instrument takes effect from 1 March 2017 and applies to any BAS reporting period commencing on or after that date. This means it will apply to any monthly Activity Statement from March 2017, and any quarterly Activity Statement from the April-June 2017 quarter.

COMMENT

– the purpose of this Determination is to allow corrections of BAS errors by making the adjustments in later BASs, without the need to amend the earlier incorrect BAS, while still limiting the period allowed to correct such errors to the normal BAS review period (4 years). Citation Correcting GST Errors Amendment Determination 2017 (No.1) w https://www.legislation.gov.au/Details/F2017L00143/6eb215e1-b95c-4e3a-aa3f-c495bbfd5e07 (Determination) w https://www.legislation.gov.au/Details/F2017L00143/ffcbcea2-de91-4885-8038-cd5d653b6209 (Explanatory Statement) 2.5

GST on low value goods

On 16 February 2017 Treasury Laws Amendment (GST Low Value Goods) Bill 2017 was introduced into Parliament. The Bill amends the GST Act to ensure that GST is payable on certain supplies of low value goods that are purchased by consumers and are imported into Australia.

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Monthly tax training – March 2017 The effect of the amendments is that where a supplies of goods having a customs value of $1,000 or less at the time of sale (low value goods) are brought into the indirect tax zone with the assistance of the supplier such supplies are treated as being connected with the indirect tax zone and therefore subject to GST. Current, supplies of goods are connected with the indirect tax zone if the goods are: 1. 2. 3.

delivered in or made available in the indirect tax zone; removed from the indirect tax zone as part of the supply; or brought to the indirect tax zone and the supplier is the importer.

Low value goods (most goods with a customs value equal to or less than the prescribed amount of $1,000 (low value goods) are also not taxed as ‘taxable importations’ as they are treated as ‘non-taxable importations’. The Bill makes the following changes to the GST Act: 1.

in general terms it makes supplies of low value goods connected with the indirect tax zone if the goods are: purchased by consumers and are brought to the indirect tax zone with the assistance of the supplier. The following is an example from the Explanatory Memorandum of ‘assistance’: Example 1.1: Assistance in bringing goods to the ITZ Mugs Co operates an internet business selling custom-designed mugs based principally out of Norway. John purchases a selection of mugs for delivery to Sydney, Australia. Mugs Co packages and posts the mugs. This constitutes assisting in bringing the mugs to the ITZ.

2.

treat the operator of an electronic distribution platform as the supplier of low value goods if the goods are purchased through the platform by consumers and brought to the indirect tax zone with the assistance of either the supplier or the operator;

3.

treat redeliverers as the suppliers of low value goods if the goods are delivered outside the indirect tax as part of the supply and the redeliverer assists with their delivery into the indirect tax zone as part of, broadly, a shopping or mailbox service that it provides under an arrangement with the consumer;

4.

allow non-resident suppliers of low value goods that are connected with the indirect tax zone only because of these amendments to elect to be limited registration entities; and

5.

prevent double taxation by making importations of goods non-taxable importations if the supply of the goods is a taxable supply only as a result of these amendments and notice is provided in the approved form.

Determining GST payable While the customs value is used to determine whether the goods are low value goods, it is not used to determine GST payable. Generally, the value of a supply is based on the total consideration paid for the supply (GST value of the goods supplied and other costs such as transport and insurance). Consumer The new rules only apply to supplies to consumers. A person will be a consumer where they are not able to receive an input tax credit for the acquisition. Multiple supplies The legislation addresses where a number of goods are supplied as part of one supply. The $1,000 threshold test applies individually to each of the separate goods that are supplied so that:

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Monthly tax training – March 2017 1. 2.

if individual goods have a customs value of $1,000 or less, the part of the supply made up of these goods is treated as a supply of low value goods, regardless of the total value of the supply; and to the extent the supply also includes goods individually valued at more than $1,000, that part of the supply is not a supply of low value goods.

Safe Harbour The Bill recognises that suppliers will need to rely on information provided by the recipient. For this reason, the Bill provides for a safeguard where a supplier reasonably believes that the recipient of the supply is not a consumer and has: 1. 2.

obtained the recipient’s ABN or similar identifier prescribed by the Commissioner; and received a declaration or other information from the recipient indicating the recipient is registered for GST.

Reasonable belief of taxable importation A supply of goods will not be connected with the indirect tax zone if the supplier: 1. 2.

has taken reasonable steps to obtain information about whether the importation is a taxable importation; and after taking these steps, reasonably believes that they will be imported as a taxable importation.

w http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fbillhome%2Fr5819 %22

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3 3.1

Rulings Transitional CGT relief for Superannuation Funds

The Commissioner released Draft Law Companion Guide LCG 2016/D8 (LCG 2016/D8) on 24 November 2016. This LCG provides guidance on the transitional CGT relief provisions contained in the Income Tax (Transitional Provisions) Act 1997. As part of the Federal Government's superannuation reforms, a 'transfer balance cap' of $1.6m applies from 1 July 2017, effectively limiting the amount a superannuation member may have in their pension accounts. In order to comply with this cap, many members will have to transfer funds from their pension accounts back to their accumulation account, making a greater portion of the fund subject to taxation without an exemption (on the basis of supporting a pension). For pension assets with unrealised gains (market value greater than cost base), funds could dispose of such pension assets tax-free (or partly tax free) if they were disposed of prior to 1 July 2017. From 1 July 2017, these same assets will be subject to tax entirely, or subject to tax on a greater proportion if pension balances are commuted back to accumulation balances. To allow funds to retain the tax benefit of exempt gains accruing up to 30 June 2017, CGT relief has been extended to such affected funds. CGT relief mechanism The way the CGT relief will operate will be to deem a disposal by the pension account and an acquisition by the accumulation account, both at market value. This, conceptually, will make the gain exempt (pension account) and allow a reset cost base to avoid tax on the unrealised gain later. Funds using segregated method in 2016-17 Fund continues with segregated method from 1 July 2017 If there are no members with total super balances exceeding $1.6m, the fund may continue to use the segregated method in 2017-18. Therefore, if the fund wishes to remain segregated, the asset transferred from pension phase to accumulation phase moves from being a 'current pension asset' to a 'non-current segregated asset'. There will be a deemed sale from the pension account to the accumulation account and any accrued capital gain will simply be an exempt CGT gain to the pension account and a market value cost base to the accumulation account, of the entire asset. That asset will then be subject to ordinary CGT rules in the superannuation accumulation environment. If the fund does not wish to continue using the segregated method, and commences using the proportionate method, then the next section applies. Fund commences using the proportionate Method If there is at least one member with a total super balance exceeding $1.6m, the fund cannot use the segregated method from 1 July 2017. Additionally, a fund with no member balances exceeding $1.6m may still choose to start using the proportionate method before 1 July 2017. The time the segregated method is ceased and the proportionate method is first used, which occur simultaneously, is called the 'cessation time'. Under this alternative, the pension account is deemed to sell the asset and it is reacquired by the fund for market value. As it is now subject to the proportionate rules, the capital gain (sale proceeds less market value cost base at 'cessation time') on a future CGT event by the fund will be taxable, but proportionately exempted at the exempt current pension asset proportion at the time of the later CGT event (e.g. sale).

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Monthly tax training – March 2017 Example (from LCG) Sue and Ben are both 67 and are the only members of their SMSF. They are both retired and do not meet the work test. The SMSF’s assets are segregated current pension assets given its members are only receiving account-based pensions. On 1 July 2017, Ben expects to have a transfer balance account balance of $1.8m and Sue a transfer balance account balance of $600,000. The SMSF has three assets supporting Sue and Ben’s pensions, each with a market value of $800,000 that are owned by the SMSF throughout the pre-commencement period. Ben transfers $200,000 to the accumulation phase in anticipation of the transfer balance cap start date. The trustee considers it undesirable to sell any of the SMSF’s assets. None of the SMSF’s assets can be classified as a segregated non-current asset to support the transfer. Therefore, to give effect to the transfer and to maximise the exemption period, the SMSF starts using the proportionate method on 30 June 2017. In this example, the SMSF starts using the proportionate method in the 2016–17 year as a result of Ben complying with the start of the transfer balance cap reforms. The trustee may choose CGT relief for any, or all, of its CGT assets, because they all stopped being segregated current pension assets on 30 June 2017. There is no evidence that the fund has contrived circumstances to access the relief. The relief is still available, even though the fund will, nonetheless, have to use the proportionate method from the 2017–18 year. This is because Ben has a total superannuation balance exceeding $1.6m on 30 June 2017, and the other conditions referred to in paragraph 25 of this draft Guideline are satisfied. Funds using Proportionate Method in 2016-17 Fund chooses CGT relief but does not defer the Capital Gain Under this method, an asset is deemed to be sold on 30 June 2017 and re-acquired on 1 July 2017 for its market value immediately before 1 July 2017. The exempt portion for the fund for 2016-17 is then applied to the otherwise-taxable gain and the non-exempt portion of the gain is taxable in 2016-17 under the normal CGT rules. Fund chooses CGT relief and defers the Capital Gain Essentially, the gain that would otherwise be taxable in the previous section is deferred under this alternative. Recognising the Deferred Gain The deferred gain will be recognised at the time a 'realisation event' occurs (being a later CGT event in respect of the asset, such as an actual sale). The deferred gain is added to the otherwise-taxable gain accrued to the asset from 1 July 2017. As the deferred gain has already been calculated allowing for the CGT discount and the exempt portion, those reductions can not be applied to the deferred gain in the CGT realisation event year. There is no such restriction on applying any available capital losses in the realisation event year. Choosing CGT relief CGT relief is not automatic. The trustee of the fund must choose for the relief to apply in the approved form. The approved form is not yet available at the time of writing. The choice is irrevocable and must be made before the due date of the fund's 2016–17 income tax return (approximately May 2018). Any choice is made on an asset-by-asset basis, not on an asset-class basis. The fund must also retain sufficient records of the choice and the associated calculations.

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Monthly tax training – March 2017 Fund does not choose CGT relief If the fund does not choose CGT relief the assets are subject to the ordinary CGT rules, based on their original cost base and acquisition date (for discount purposes, for example). When a CGT realisation event (e.g. sale) occurs in respect of the asset, the ordinary CGT rules will apply, with a reduction in the taxable portion based on the fund's exempt portion in the CGT realisation event year. Part IVA The ATO state that Part IVA may be applicable to schemes where: 1. they place the taxpayer in a position to make the choice 2. they go further than is necessary to provide temporary relief from CGT because members comply with the reforms, and 3. they exhibit contrivance of manner, a lack of correspondence of form with substance, or other matters relevant under section 177D of the ITAA 1936, that point to the purpose of avoiding tax. As an example of such a scheme they outline a position where a fund is not segregated in 2017, but then becomes segregated so that an asset with a large unrealised gain can be notionally transferred back to accumulation phase so that its cost base is reset. ATO Reference Draft Law Companion Guide LCG 2016/D8 w https://www.ato.gov.au/law/view/pdf/cog/lcg2016-008.pdf

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4

Determinations

4.1

GST and second hand goods

The Commissioner has issued a draft determination (GSTD 2017/D1) providing guidance on what is excluded from being second-hand goods by paragraph (b) of the definition of that term in Division 195 of the GST Act. A second hand dealer is able to claim input tax credits in connection with an acquisition of certain second hand goods under the GST Act. Under the Act however, second-hand goods does not include: (a) precious metal; or (b) goods to the extent that they consist of gold, silver, platinum, or any other substance which, if it were of the required fineness, would be precious metal (animals and plants are also excluded). Precious metal is itself defined in section 195-1 to mean: • • • •

gold (in an investment form) of at least 99.5% fineness; or silver (in an investment form) of at least 99.9% fineness; or platinum (in an investment form) of at least 99% fineness; or any other substance (in an investment form) specified in the regulations of a particular fineness specified in the regulations.

The determination sets out that in the Commissioner’s view, metal does not need to be in an investment form to be excluded from being second hand goods under paragraph (b) of the definition of second hand goods. Apparently some have taken the view that the reference to a precious metal needing to be of investment form, means that second hand precious metal that is not in investment form (e.g. a gold ring) cannot be precluded from being second-hand goods. The ATO view is that investment form means a form that: • • •

is capable of being traded on the international bullion market, that is, it must be a bar, wafer or coin bears a mark or characteristic accepted as identifying and guaranteeing its fineness and quality, and is usually traded at a price that is determined by reference to the spot price of the metal it contains.

The Commissioner has provided the following guidance: 1. if an item is not traded at a price referrable to the spot price of the metal, it is ‘not being traded for its metal value only’; 2. if the object being traded has a value substantially more than the spot price of the constituent metal (ie a gold watch or collector's coins), the goods are not excluded from the definition of ‘second-hand goods’; and 3. if items are acquired for a price referrable to two components – being the spot price of the metal and the value of another component (ie a precious stone), the consideration will need to be apportioned between these two parts. Example (from GSTD) John is a pawnbroker registered for GST. He buys a small gold bar from an unregistered person. Testing shows that the bar is about 85% gold. John calculates the intrinsic value of the gold in the bar using a widely available gold melt value calculator, which reflects daily market prices. John buys the gold bar, intending to re-sell it at a small profit. The value of this acquisition lies very largely in the gold content. Although the gold bar is not 'precious metal' as defined, paragraph (b) of the definition of second-hand goods excludes the gold bar from being second-hand goods, to the extent that it is comprised of gold. If the remaining components of the gold bar have any real 6 value , John needs to apportion the consideration he paid for the gold bar between the value of the gold component and the value of the remaining components in order to properly calculate his input tax credit entitlement. Example (from GSTD) Jenny's Gold Shop (Jenny) offers a service of buying unwanted gold and silver jewellery from private individuals. When a customer brings jewellery into the shop, Jenny tests the jewellery on the premises and pays around 80%

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Monthly tax training – March 2017 of the prevailing spot price of the gold or silver contained in the jewellery. Jenny on-sells the gold and silver to another registered gold dealer at a modest mark-up. Jenny cannot claim an input tax credit in relation to the gold or silver jewellery acquired from private individuals because this is excluded from being second-hand goods for the purposes of Division 66.

TIP – note that the supply of precious metal is input taxed.

The first supply after refinement is GST-free.

ATO reference GSTD 2017/D1 w http://law.ato.gov.au/atolaw/view.htm?docid=%22DGD%2FGSTD2017D1%2FNAT%2FATO%2F00001%22

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5 5.1

ATO materials Trust income reduction arrangements

The ATO had issued a Taxpayer Alert (TA 2016/12) setting out that it is reviewing arrangements that it considers are designed to exploit the proportionate approach to the taxation of trust income. The ATO is considering arrangements that seek to ensure that a substantial portion of the economic benefit of the trust income is not included in the taxable income of the trust. The ATO notes that the arrangements provide for the taxable income of the trust to be assessed to a presently entitled beneficiary (with a lower rate of tax) but the economic benefits are either retained in the trust or passed to a different beneficiary in a tax free form. The ATO considers that such arrangements have one or more of the following features: 1.

the trustee deliberately creates a difference between trust and tax income through one of the following methods: (a) using a power in the trust deed to determine that trust law income is an amount less than tax law income; (b) amending the trust deed definition of income or the trustee’s power to determine income; (c) taking other steps to reduce trust income.

2.

the beneficiary who is made presently entitled to the trust income: (a) pays little or no tax on the net income to which is presently entitled (b) is a private company, so that tax is imposed at 30%, but with an increase in accumulated profits of the company deliberately limited so as to minimise the need to extract profits in the form of taxable dividends.

3.

The trust retains the economic benefit, being the difference between the trust income and tax law income, with that benefit then extracted in a tax free form, at a reduced rate, by a different beneficiary.

The ATO provides four examples of such arrangements as follows: Example 1 - trustee purports to make trust income 30% of taxable net income The taxable net income of a discretionary trust for 2015-16 is $1,000,000 which relates wholly to business income. The accounting records of the trust show a profit of a similar amount. The trustee determines the trust income for the 2015-16 year to be 30% of the taxable net income of the trust. The trustee cites a power in the deed in support of this determination. The trustee treats the remaining $700,000 as trust capital. But for this determination, the trust income would have been $1,000,000. The trustee resolves to make a company presently entitled to all of the trust income ($300,000). The company returns all of the taxable net income of the trust ($1,000,000) as assessable income, and uses the whole of its trust income entitlement of $300,000 to meet its tax liability on this amount. The trustee later distributes the capitalised amount of $700,000 to an individual beneficiary. The individual treats the distribution as tax-free in its hands. The asserted result is tax of $300,000 is payable on the net income of the trust rather than tax on the net income at the individual's marginal tax rate. Example 2 - value strip creating an unrealised loss In the 2015-16 year, a discretionary trust makes a $210,000 capital gain and invests $200,000 in acquiring units in a related hybrid trust entitling the trustee of the discretionary trust to receive, among other things, discretionary distributions from the hybrid trust. The hybrid trust uses the proceeds from the unit subscription to make a $200,000 capital distribution to a discretionary object of that trust.

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Monthly tax training – March 2017 As a result of the capital distribution, the discretionary trust writes down the value of its investment in the hybrid trust, and recognises a $200,000 accounting loss for the year. The accounting loss does not affect the calculation of the taxable net income of the discretionary trust for 201516, which is $210,000. The trustee of the discretionary trust resolves that the $200,000 accounting loss is to be made good out of the $210,000 capital gain. The trustee cites a power in the deed in support of this resolution and determines that the trust income of the discretionary trust in 2015-16 is $10,000. But for the events described above, the trust income would have been $210,000 (i.e., would have included the full amount of the capital gain). The trustee resolves to make a company presently entitled to all of the trust income ($10,000). The company therefore includes all of the trust's taxable net income ($210,000) in its assessable income for the year. The company made a genuine business loss in 2015-16 and deducts that loss against its share of the trust's taxable net income, resulting in it having nil taxable income. The discretionary object of the hybrid trust to whom the $200,000 capital distribution was made, treats the receipt as tax-free in its hands. The asserted result is that no tax is payable on the net income of the discretionary trust even though $200,000 of the capital gain made by the trust has been received by the individual. Example 3 - in-specie capital distribution purportedly charged against income A discretionary trust receives a $700,000 franked dividend in 2015-16, of which $650,000 is used to purchase a residential property. In the same income year, the trustee transfers the residential property to an individual beneficiary as an in-specie capital distribution. The trustee determines that the in-specie distribution causes a $650,000 loss to the trust to be made good out of income, and that the trust income for 2015-16 is therefore $50,000. The trustee cites a power in the deed in support of this determination. But for the determination, the trust income would have been $700,000 (i.e. would have included the full amount of the franked dividend). The trustee resolves to make a company presently entitled to all of the trust income ($50,000). The company returns assessable income of $1,000,000 (being the total of the $700,000 dividend and $300,000 franking credit gross up amount) in its income tax return and applies $300,000 in franking credit offsets against its tax payable. The individual beneficiary treats the transfer of the residential property as a tax-free receipt in its hands. The asserted result is that no tax is payable on the net income of the discretionary trust beyond the imputed 30%, even though $650,000 of the franked distribution received by the trust has been applied to benefit the individual. Example 4 - share revaluation and subsequent dividend creating accounting loss The trust property of a discretionary trust includes shares in Company A which were acquired for $2. In 2014-15, the trustee revalues the shares from $2 to $1,400,002 in the trust accounts in recognition of the company having accumulated profits of $1,400,000. The trustee then, purportedly in accordance with the terms of the trust deed, creates a $1,400,000 capital entitlement (sourced from the asset revaluation reserve) in favour of an individual beneficiary (who controls both the discretionary trust and Company A). The entitlement is not paid during the year. In 2015-16, the trust receives a fully franked $1,400,000 dividend from Company A, and $1,000 in interest income. The taxable net income of the trust in 2015-16 is $2,001,000. This is the sum of the interest, dividends and a $600,000 franking credit gross up amount.

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Monthly tax training – March 2017 In the trust accounts for the 2015-16 year, the trustee records the dividend and interest as income and further records a reduction in the book value of the shares in Company A, which is accounted for as a $1,400,000 loss made good out of income. The trustee determines that the trust income is $1,000. The trustee cites a power in the deed in support of this determination. If the trustee had not revalued the shares, the trust income would have been $1,401,000 (ie the interest income and full amount of the dividend). The trustee of the discretionary trust resolves to make Company B presently entitled to all of the trust income ($1,000), causing its assessable income to include all of the discretionary trust's taxable net income for 2015-16 ($2,001,000). However, because Company B is entitled to the franking credit offset, it only pays $300 in tax (30% x $1000). The trustee of the discretionary trust uses the $1,400,000 dividend income to satisfy the individual beneficiary's entitlement to the $1,400,000 capital distribution created in the 2014-15 income year. The individual beneficiary treats the amount as a tax free distribution in its hands. The asserted result is that no tax is payable on the net income of the discretionary trust beyond the imputed 30% even though the entire $1.4m franked distribution received by the trust has been paid to the individual. The ATO concerns about such arrangements include the following: 1. 2. 3. 4.

the trustee does not have the power to determine income under the trust deed or a matter of trust law; the person to whom income is appointed is not a beneficiary of the trust; the arrangement to create the present entitlement is a sham; a deemed dividend arises under Division 7A of the ITAA 1946 where there is an unpaid present entitlement to a company; 5. that the arrangement will prevent the trust from recouping prior year losses under Schedule 2F of the ITAA 1936; 6. the arrangement amounts to a reimbursement agreement under section 100A of the ITAA 1936; and 7. the arrangement is one to which Part IVA might apply.

ATO reference TA 2016/12 W https://www.ato.gov.au/law/view/view.htm?docid=%22TPA%2FTA201612%2FNAT%2FATO%2F00001%22 5.2

Transfer pricing record keeping

The Commissioner has issued Practical Compliance Guideline PCG 2017/2 containing simplified record keeping options available to some taxpayers in relation to the transfer pricing regime, in order to lessen the administrative burden under subdivision 284-E of Schedule 1 to the TAA. The guidelines set out 8 simplified record keeping options, and the dates for effect for each option. These options will be available on an ongoing basis, subject to the finalization of the review in September 2017. The options are available to companies, trusts and partnerships, that meet the eligibility criteria. The eligibility criteria are specific to each option. An entity that chooses to use a simplified record keeping option will indicate this election in the International Dealings Schedule. The Commissioner provides assurance that if a taxpayer applies the options set out in the guideline, the ATO will only review that taxpayer's eligibility to use the option which was applied. The taxpayer will still need to keep contemporaneous documents in order to be able to demonstrate its eligibility for the option and the taxpayer is still required to comply with the general record-keeping requirements in the ITAA 1936. ATO reference PCG 2017/2 w https://www.ato.gov.au/law/view/document?DocID=COG/PCG20172/NAT/ATO/00001

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Monthly tax training – March 2017 5.3

TA 2017/1 – ATO concerns regarding infrastructure groups

The ATO is reviewing arrangements where integrated trading businesses have been fragmented ‘in order to recharacterise trading income into more favourably taxed passive income’. Commonly known as stapled structures, if the dominant purpose of such an arrangement is to obtain a tax benefit, the arrangement may contravene Part IVA. Stapled structures operate as follows: •

There is a company or a corporate tax entity that carries on a trading business (Operating Entity) that is subject to the corporate tax rate.

•

The Operating Entity claims deductions in respect of payments made to a flow-through trust (Asset Trust).

•

Income received by the Asset Trust is subject to a rate of tax that is lower than the corporate rate.

The alert identifies the following structures as exceptions: 1. 2.

Australian real estate investment trusts that derive all or most of its rental income from unrelated third party tenants and have not entered into any of the abovementioned structures. Privatisations of businesses which are effectively land based or heavily reliant on particular land holdings or related improvements.

The ATO state that they will provide separate general guidance in relation to these exceptions. ATO reference TA 2017/1 w https://www.ato.gov.au/law/view/document?DocID=TPA/TA20171/NAT/ATO/00001 5.4

R&D Tax Incentive taxpayer alerts

The ATO and Ausindustry have released two new taxpayer alerts (TA 2017/4 and 2017/5) concerning the Research & Development (R&D) Tax Incentive. Farming activities The ATO is concerned abut entities engaged in agricultural activities, such as those operating orchards, vineyards, olive groves, forestry operations and fibre growing businesses, may be inappropriately claiming the R&D Tax Incentive. The ATO is looking at arrangements with some or all of the following features: 1. 2. 3. 4. 5. 6. 7.

an agricultural business is being carried on, often by an entity that is not eligible for the R&D Incentive, for example a family trust. the operators of the agricultural business are approached by a promoter/R&D consultant advising that the farming activities that are being carried on are eligible for the R&D Tax Incentive; where necessary, a new special purpose R&D company may be incorporated in order that the activities are conducted by an entity that is able to claim the R&D tax offset; a company registers one or more activities for the R&D Tax Incentive; the registered activities involve the application of farm products or practices across all or a significant part of a farm or farms; some or all of the registered activities have the character of ordinary farming activities whose main purpose is the production of crops; and the company claims the R&D Tax Incentive for expenditure that is not on eligible R&D activities.

The ATO's concerns are as follows: 1. 2.

activities may not fit within the stringent requirements of the laws that govern the R&D Tax Incentive; expenditure claimed may not relate to eligible R&D activities; and

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taxpayers may not be applying adequate levels of governance and review to the registered activities and the claims made for the R&D Tax Incentive.

Software development The ATO and AusIndustry are reviewing the arrangements of companies that are claiming the R&D Tax Incentive on software development projects. The ATO is looking at arrangements with some or all of the following features: 1.

a company undertakes a software development project that involves one or more of the following: (a) developing new software (b) modifying, customising or upgrading existing software, and (c) acquiring and modifying off-the-shelf software;

2.

the software development project includes one or more of the following: (a) undertaking activities that use existing software development knowledge and expertise to achieve the required technical outcomes (b) undertaking activities that involve business risk rather than technical uncertainty (c) undertaking activities to replace manual work processes using software technologies that are available in the market and adapted to the requirements of the company, and (d) using existing software technologies as they were intended to be used;

3.

some or all of the registered R&D activities are broadly described and non-specific;

4.

all of the project, or a substantial part of it, is registered as R&D activities; and

5.

the company includes the whole, or a large proportion, of their expenditure on the software development project in the calculation of their R&D Tax Incentive claim.

The ATO's concerns are as follows: 1. 2. 3.

activities may not fit within the stringent requirements of the laws that govern the R&D Tax Incentive. expenditure claimed may not relate to eligible R&D activities. taxpayers may not be applying adequate levels of governance and review to the registered activities and the claims made for the R&D Tax Incentive.

ATO reference TA 2017/4 and 2017/5 w https://www.ato.gov.au/law/view/document?LocID=%22TPA%2FTA20174%2FNAT%2FATO%22&PiT=99991231 235958 w https://www.ato.gov.au/law/view/document?LocID=%22TPA%2FTA20175%2FNAT%2FATO%22&PiT=99991231 235958

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6 Other materials 6.1

TPB Practice Note: cloud computing

The TPB has issued a Practice Note concerning permissibility of cloud computing under the Code of Professional Conduct contained in section 30-10 of the Tax Agents Services Act. The Practice Note outlines the factors that may need to be considered when entering into cloud computing arrangements, including: 1. 2. 3. 4. 5. 6.

whether, and to what extent, there is any limitation of the service providers’ liability under the agreement to provide the cloud computing services; how is the information stored; whether information is held offshore and the consequences, including legislative requirements; what process are in place to back up data; what security controls are in place; and what controls are in place to prevent access to the service from being disrupted.

The Practice Note considers the relevant obligations under the Code of Professional Conduct and reminds practitioners of Code Item 6 which provides that a registered practitioner must not disclose any information relating to a client’s affairs to a third party without the client’s permission, unless there is a legal duty to do so. The Practice Note makes the following observations: 1. 2. 3. 4.

a third party is any entity other than the client and the registered practitioner, including entities that maintain offsite data storage systems; the obligation arises in relation to information that relates to the affairs of a client – that is, the informstion does not have to belong to the client, or have been directly provided by the client. registered practitioners must obtain permission from each client prior to divulging client information to a third party and it is recommend that the client bee clearly informed about the proposed disclosure; client permission may be by way of a signed letter of engagement or a signed consent.

The Practice Notice states if the TPB considers that a practitioner has inadequate arrangements, itmay impose one or more administrative sanctions, including issuing a written caution or order or suspending or termination of a registered practitioner’s registration. TPB reference TPB(PN) 1/2017 w https://www.tpb.gov.au/tpbpn-012017-cloud-computing-and-code-professional-conduct

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